PACTIV CORP - 10-Q Quarterly Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------

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 JUNE 30, 2003

OR

[ ] 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 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

---------------------

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: 157,496,591 as of July 31, 2003. (See Notes to Financial
Statements.)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

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

2

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED STATEMENT OF INCOME

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

3

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.

5

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The Consolidated Statement of Income for the three- and six-month periods
ended June 30, 2003, and 2002, the Condensed Consolidated Statement of Financial
Position at June 30, 2003, and the Condensed Consolidated Statement of Cash
Flows for the six-month periods ended June 30, 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 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 (pro
forma), as prescribed in Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation."

6

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 and requires that
these assets be reviewed at least annually for possible impairment. The
company's annual review for possible impairment of goodwill and indefinite-lived
intangibles is conducted in the quarter ending December 31, or earlier as
warranted by events or changes in circumstances. Possible impairment of goodwill
is determined using a two-step process. The first step requires that the fair
value of individual reporting units be compared with their respective carrying
values. If the carrying value of a reporting unit exceeds its fair value, a
second step is performed to measure the amount of impairment, if any. This
second step requires the company to allocate the fair value of a reporting unit
to all of the assets and liabilities of that unit, including definite- and
indefinite-lived intangibles. Any remaining fair value is the implied goodwill
of the reporting unit, which is then compared to its carrying value to determine
possible impairment. In determining the fair value of tangible assets, the
company obtains appraisals from independent valuation firms. Similarly, the
impairment test for definite- and indefinite-lived intangible assets requires
that their fair values be compared with their carrying values. If the carrying
value of an intangible asset exceeds its fair value, an impairment equal to the
excess is recognized. Estimates of fair value used in testing goodwill and
indefinite-lived assets for possible impairment are primarily determined using
projected discounted cash flows along with other publicly available market
information. These approaches use estimates and assumptions including the amount
and timing of projected cash flows, discount rates reflecting the risk inherent
in future cash flows, perpetual growth rates, and determination of appropriate
market comparables. 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 Interpretation (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
will consolidate the VIE associated with the properties covered by its
synthetic-lease facility (see note 12 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 will 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 will negatively impact net income in the
third quarter of 2003 by approximately $10 million, or $0.06 per share. On a
going-forward basis, consolidation of the VIE is expected to 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 sale
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

7

(99 positions -- $2 million); and (3) asset writedowns related to the exit of a
North American product line ($1 million).

In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to the reversal of a
previously recorded restructuring charge (netted against fixed assets),
primarily as a result of incurring a lower-than-anticipated loss on the sale of
a noncore European business.

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. Appraisals of the fair-market value of the assets and liabilities
acquired were finalized during the second quarter of 2003, resulting in related
goodwill being reduced by $14 million and property, plant, and equipment and
intangible assets both being increased by $7 million.

On October 21, 2002, Pactiv purchased a 70% interest in the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar), a leading thermoformer of
high-impact polystyrene (HIPS) cold cups and plates and polystyrene foam
foodservice/food packaging. For this interest, Pactiv paid $31 million to the
shareholders of Jaguar and made a $20 million equity investment in Jaguar. At
June 30, 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 upon receipt of final appraisals. See note 16
to the financial statements for further information.

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

On January 1, 2002, the company adopted SFAS No. 142. Following the
adoption of this standard, the company reviewed recorded goodwill for possible
impairment by comparing the fair value and carrying value of goodwill for each
reporting unit. 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.
Faced with increased competition, these businesses experienced lower operating
margins, and, as a result, the company recorded a goodwill-impairment charge of
$83 million, $72 million after tax, or $0.45 per share, in the first quarter of
2002. The company subsequently completed impairment testing in the fourth
quarter of 2002 and determined that goodwill was not impaired further.

8

Changes in the carrying value of goodwill for the six months ended June 30,
2003, by operating segment are shown in the following table.

Trademarks and other intangible assets at June 30, 2003, are shown in the
following table.

Amortization expense for intangible assets subject to amortization was $4
million and $8 million for the three- and six-month periods ended June 30, 2003,
respectively. Amortization expense is estimated to total $15 million, $13
million, $13 million, $12 million, and $12 million for years 2003, 2004, 2005,
2006, and 2007, respectively.

NOTE 7. PROPERTY, PLANT, AND EQUIPMENT, NET

9

NOTE 8. 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. These shares were issued
to the trust in January 2000. This so-called "rabbi trust" is designed to assure
payment of deferred compensation and supplemental pension benefits. These shares
are not considered to be outstanding for purposes of financial reporting.

NOTE 9. SEGMENT INFORMATION

The company has 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.

10

The following table sets forth certain segment information.

- ---------------
(a) Includes restructuring and other credits of $4 million.

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

(c) Includes assets related to pension plans and administrative-service
operations.

NOTE 10. 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 $30 million and $35 million at June 30, 2003,
and June 30, 2002, respectively. 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 by operating activities in the statement of cash
flows. Discounts and fees related to these sales were immaterial in the second
quarter of 2003 and 2002, and were included in other expense in the consolidated
statement of income. In the event that either Pactiv or the third-party
purchaser of the trade receivables were to discontinue this program, the
company's debt would increase, or its cash balance would decrease, by an amount
corresponding to the level of sold receivables at such time.

11

NOTE 11. OTHER CURRENT LIABILITIES

Components of other current liabilities are shown in the following table.

NOTE 12. 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.

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 note 3 to the financial statements for further information
concerning VIEs.

NOTE 13. COMPREHENSIVE INCOME

Details of total comprehensive income for the three- and six-month periods
ended June 30, 2003, and 2002, were as follows:

The increase in currency translation gains in 2003 was attributable to the
appreciation of foreign currencies (mainly the euro) versus the U.S. dollar and
the resulting impact on the company's net investment in foreign countries.

NOTE 14. 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
subsidiaries failed to satisfy their obligations under such guarantees. At June
30, 2003, amounts outstanding under these lines of credit were not material.

12

NOTE 15. CONTINGENCIES

Litigation

In May 1999, Tenneco, Pactiv (through Tenneco's former paperboard-packaging
operations), and a number of other containerboard manufacturers were named as
defendants in a consolidated class-action complaint brought on behalf of
purchasers of corrugated containers that alleged a civil violation of Section I
of the Sherman Act. The company was also named as a defendant in a related
class-action antitrust lawsuit. Tenneco sold its containerboard business in
April 1999, prior to the spin-off of Pactiv in November 1999. In connection with
the spin-off, Pactiv was assigned responsibility for defending related claims
against Tenneco and for any liability resulting therefrom.

The lawsuits (In re: Linerboard Litigations U.S.D.C., E.D. of Pennsylvania,
MDL no. 1261) allege that the defendants, during the period October 1, 1993,
through November 30, 1995, conspired to limit the supply of linerboard, and that
the purpose and effect of the alleged conspiracy was to artificially increase
prices of corrugated containers and corrugated sheets. The lawsuits seek treble
damages of unspecified amounts, plus attorneys' fees.

The class has been certified to include all persons in the United States
who purchased corrugated containers/sheets directly from any of the defendants
during the above period, excluding those who purchased corrugated products
pursuant to contracts in which the price of such products was not tied to the
price of linerboard. The deadline for class members to opt out of the classes
was June 9, 2003. Several entities have opted out of the classes, and
approximately 10 direct-action complaints have been filed in various federal
courts across the country by opt-out entities. These cases effectively have been
consolidated for pretrial purposes before the Federal District Court in the
Eastern District of Pennsylvania overseeing the class actions, and it is
expected that they soon will be transferred formally to that court. All of the
opt-out complaints included allegations against the defendants that were
substantially similar to those made in the class actions.

The class actions are currently set to come to trial in September 2004. No
schedule has yet been established for any of the direct-action cases. Pactiv's
management believes that the allegations have no merit and is vigorously
defending against the claims.

The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made.

Management believes that the outcome of all of these legal matters,
individually and in the aggregate, will not have a material adverse effect on
the company's financial position.

Environmental Matters

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and is
currently in discussion with that agency regarding the appropriate actions to be
taken to address this matter. The company expects to resolve this matter through
discussions with the agency and does not believe that the costs involved,
including any monetary sanctions, will have a material adverse effect on the
company's financial position.

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Pactiv
establishes related reserves where it is probable that liabilities exist and
where reasonable estimates of such liabilities can be made. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs and the expense and
effectiveness of alternative clean-up methods. However, management believes that
any additional costs that may be incurred as more information becomes available
will not have a material adverse effect on the financial condition of the
company.

13

NOTE 16. SUBSEQUENT EVENT

On August 8, 2003, the company acquired the remaining 30 percent of the
stock of Jaguar, making it a wholly-owned subsidiary of Pactiv. For this
interest, the company paid $22 million to the minority interest shareholders of
Jaguar. See note 5 to the financial statements for further information.

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

14

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 sale
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).

In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to the reversal of a
previously recorded restructuring charge (netted against fixed assets),
primarily as a result of incurring a lower-than-anticipated loss on the sale of
a noncore European business.

THREE MONTHS ENDED JUNE 30, 2003, COMPARED WITH THREE MONTHS ENDED JUNE 30, 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.

At the end of the second quarter of 2003, industry prices for polystyrene
were approximately 4% higher than at the end of the first quarter of 2003, while
industry prices for polyethylene fell by approximately 6% over the same period.
Overall resin prices were roughly 30% higher than in the year-ago period, driven
principally by higher oil and natural-gas costs. As a result, the company's
second-quarter 2003 gross margin fell to 29.5% from 32.1% last year.

The company increased selling prices in many areas of its business in
response to the higher resin costs. Certain pricing actions took effect late in
the first quarter and benefited all of the second quarter, while others were
implemented during the second quarter. Second-quarter 2003 gross margin rose to
29.5% from 29.1% in the first quarter of 2003. The company's pricing actions,
coupled with an anticipated moderation of plastic-resin costs as energy markets
return to a more normal state, are expected to improve the company's gross
margin in the second half of the year.

15

Sales

Total sales increased $82 million, or 11.3%, over 2002. Excluding the
positive impact of foreign-currency exchange rates ($20 million), sales grew 8%,
driven by 5% volume growth and 3% price improvement.

Sales in the Consumer and Foodservice/Food Packaging segment increased $66
million, or 12.7%, from 2002. Volume in this business grew 8.4%, with 1.2%
coming from the base business and 7.2% from acquisitions, while pricing actions
increased sales by 4.1%. Hefty(R) consumer products had strong sales growth, led
by increases in tableware and food bags. Rollout of four new Hefty(R) products
launched this year continues on track and is meeting the company's targets for
distribution. In addition, products introduced in the past two years (namely,
Hefty(R) The Gripper(TM) tall kitchen waste bags and Hefty(R) Zoo Pals(TM)
disposable children's plates) continued to grow well. Sales growth in the
Foodservice/Food Packaging business primarily reflected the impact of 2002
acquisitions and price increases, reduced somewhat by lower volume. Acquisitions
accounted for $39 million in sales in the quarter, compared with $2 million last
year.

Sales of protective- and flexible-packaging products increased $16 million,
or 7.7%, compared with 2002. Excluding the positive impact of foreign-currency
exchange rates ($19 million), sales for this segment declined 1%, primarily
because of lower worldwide volume, offset partially by the impact of
selling-price increases in North America.

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

Total operating income was $120 million in 2003, a decline of $5 million,
or 4.0%, from 2002. The decrease was driven principally by lower pension income,
higher raw-material costs, and a $4 million reversal in 2002 of a previously
recorded restructuring charge, somewhat offset by increased volume and selling
prices and ongoing benefits from the company's productivity and procurement
initiatives.

Operating income for the Consumer and Foodservice/Food Packaging segment
increased $7 million, or 7.6%, in 2003, primarily as a result of volume growth
(including acquisitions), increased selling prices, and productivity
improvements, offset partially by the impact of higher raw-material costs.

Operating income for the Protective and Flexible Packaging segment in 2003
was down $7 million, or 35.0%, versus last year, reflecting a decline in volume
because of soft economic conditions worldwide, as well as higher raw-material
costs. Also, last year's results for the segment included the aforementioned $4
million reversal of a previously recorded restructuring charge. Somewhat
offsetting these factors was improved pricing in the North American market;
however, overall pricing in Europe did not improve because of weak demand.

Operating income for the Other segment decreased $5 million from last year,
mainly because of a decline in pension income (from $27 million in 2002 to $15
million in 2003), offset partially by administrative productivity and
procurement savings.

16

Income Taxes

The company's effective tax rate for 2003 was 38.0%, compared with 40.0%
for 2002, reflecting the positive impact of tax-reduction actions implemented in
the United States and Europe.

Income from Continuing Operations

The company recorded net income from continuing operations of $59 million,
or $0.37 per share, in 2003, compared with $60 million, or $0.38 per share, last
year. Included in 2003 net income was pension income of $9 million after tax, or
$0.06 per share. Net income for 2002 included pension income of $17 million
after tax, or $0.10 per share, and $2 million after tax, or $0.02 per share,
from the aforementioned reversal of a previously recorded restructuring charge.

SIX MONTHS ENDED JUNE 2003, COMPARED WITH SIX MONTHS ENDED JUNE 2002

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales increased $152 million, or 11.1%, versus last year. Excluding
the positive impact of foreign-currency exchange rates ($40 million), sales
increased 7.9% over last year.

Sales for the Consumer and Foodservice/Food Packaging segment increased
$110 million, or 11.3%, from last year. Volume in the segment grew 9.8%, with
2.4% coming from the base business and 7.4% from acquisitions. Hefty(R) consumer
products growth was led by increases in tableware and food bags, along with
continued contributions from products introduced in the past two years. Sales
growth in the Foodservice/Food Packaging business primarily reflected the impact
of the last year's acquisitions and 2003 price increases, reduced somewhat by
lower volume. Acquisitions accounted for $74 million in sales in 2003, compared
with $2 million last year.

Sales of protective- and flexible-packaging products increased $42 million,
or 10.6%, compared with 2002. Excluding the positive impact of foreign-currency
exchange rates ($39 million), sales for this segment were essentially flat
compared with last year, as lower worldwide volume was offset by the impact of
price increases.

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

Total operating income was $215 million in 2003, a decline of $3 million,
or 1.4%, from 2002, driven by a $30 million decline in pension income, higher
raw-material costs, and a $4 million reversal in 2002 of a previously recorded
restructuring charge, largely offset by higher volume, increased selling prices,
and ongoing benefits of the company's productivity and procurement initiatives.

17

Operating income for the Consumer and Foodservice/Food Packaging segment
increased $13 million, or 8.2%, in 2003, driven principally by volume growth
(including acquisitions), increased selling prices, and productivity
improvements, offset partially by higher raw-material costs.

Operating income for the Protective and Flexible Packaging segment
decreased $7 million, or 20.6%, from 2002, as higher selling prices were more
than offset by lower volume, higher raw-material costs, and the aforementioned
$4 million reversal in 2002 of a previously recorded restructuring charge.

Operating income for the Other segment was down $9 million or 36.0%, from
last year, mainly because of a decline in pension income (from $54 million in
2002 to $30 million in 2003), offset partially by administrative productivity
and procurement savings.

Income Taxes

The company's effective tax rate for 2003 was 38.0%, compared with 40.0%
for 2002, reflecting the positive impact of tax-reduction actions implemented in
the United States and Europe.

Income from Continuing Operations

The company recorded net income from continuing operations of $103 million,
or $0.64 per share, in 2003, compared with $102 million, or $0.64 per share, in
2002. Included in 2003 net income was pension income of $19 million after tax,
or $0.12 per share. Net income in 2002 included pension income of $33 million
after tax, or $0.20 per share, and $2 million after tax, or $0.02 per share,
from the aforementioned reversal of a previously recorded restructuring charge.

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." In
this connection, 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. Faced with increased
competition, these businesses 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 in the first quarter of 2002.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The company's ratio of debt to total capitalization was 54.0% and 57.4% at
June 30, 2003, and December 31, 2002, respectively.

Shareholders' equity increased $111 million in the first six months of
2003, as a result of recording net income of $103 million, booking a favorable
currency translation adjustment totaling $36 million, and issuing company stock
of $16 million, offset partially by the repurchase of $44 million of Pactiv
stock.

18

Cash Flows

Cash provided by operating activities was $155 million in 2003 versus $175
million last year. The $20 million decrease was driven mainly by an increase in
working capital, primarily reflecting higher raw-material costs.

Investing activities used cash aggregating $50 million in 2003 and $139
million in 2002. The $50 million use of cash in 2003 primarily reflected outlays
for capital items ($51 million). The $139 million use of cash is 2002
principally reflected outlays for acquisitions ($92 million) and capital items
($53 million).

Cash used by financing activities was $65 million in 2003, primarily for
the repurchase of company stock ($44 million) and the early retirement of
joint-venture debt ($28 million). Cash used by financing activities was $40
million in 2002, principally for the repurchase of company stock.

Capital Commitments

Open commitments for authorized expenditures totaled approximately $86
million at June 30, 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

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
June 30, 2003. At the end of the second 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 $30 million and $35
million at June 30, 2003, and June 30, 2002, respectively. 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 June 30, 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 (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 does not permit
goodwill and indefinite-lived intangibles to be amortized and requires that
these assets be reviewed at least annually for possible impairment. The
company's annual review for possible impairment of goodwill and indefinite-lived
intangibles is conducted in the quarter
19

ending December 31, or earlier as warranted by events or changes in
circumstances. Possible impairment of goodwill is determined using a two-step
process. The first step requires that the fair value of individual reporting
units be compared with their respective carrying values. If the carrying value
of a reporting unit exceeds its fair value, a second step is performed to
measure the amount of impairment, if any. This second step requires the company
to allocate the fair value of a reporting unit to all of the assets and
liabilities of that unit, including definite- and indefinite-lived intangibles.
Any remaining fair value is the implied goodwill of the reporting unit, which is
then compared to its carrying value to determine possible impairment. In
determining the fair value of tangible assets, the company obtains appraisals
from independent valuation firms. Similarly, the impairment test for definite-
and indefinite-lived intangible assets requires that their fair values be
compared with their carrying values. If the carrying value of an intangible
asset exceeds its fair value, an impairment equal to the excess is recognized.
Estimates of fair value used in testing goodwill and indefinite-lived assets for
possible impairment are primarily determined using projected discounted cash
flows along with other publicly available market information. These approaches
use estimates and assumptions including the amount and timing of projected cash
flows, discount rates reflecting the risk inherent in future cash flows,
perpetual growth rates, and determination of appropriate market comparables.
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 Interpretation (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
will 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 VIE also will 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 will negatively
impact net income in the third quarter of 2003 by approximately $10 million, or
$0.06 per share. On a going-forward basis, consolidation of the VIE is expected
to 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 ($30 million and $54 million for the six months
ended June 30, 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. The drop in
pension income reflects 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 from 9.5% to 9%.

20

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 1975, 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 (approximately 6.75% at the September 30, 2002, measurement
date) that have the second-highest credit rating from recognized rating
agencies. 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 the
smoothed and actual market value of assets 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 June 30, 2003. Termination of the lease
agreement, either before or at expiration, would require the company to make a
termination payment ($169 million at June 30, 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.

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

21

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
"Critical Accounting Principles."

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

22

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 and were not material in the three- and six-month periods
ended June 30, 2003, and were included in other expense on the statement of
income.

In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at June 30, 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 June 30, 2003) that bears interest at a floating rate based on LIBOR.
In addition, the company has issued public-debt securities ($1,179 million at
June 30, 2003) 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. The fair value of long-term debt at June 30, 2003, and
December 31, 2002, was approximately $1,469 million and $1,427 million,
respectively, compared with its recorded amount of $1,209 million and $1,224
million, respectively.

The following table provides information about Pactiv's financial
instruments that are sensitive to interest-rate risks.

In the first quarter of 2001, the company entered into interest-rate swap
agreements to convert floating-rate debt on its synthetic-lease obligations to
fixed-rate debt. This action was taken to reduce the company's exposure to
interest-rate risk. During the first quarter of 2002, the company exited these
swap agreements, and the resulting accumulated net losses ($2 million at June
30, 2003) is being expensed over the remaining life of the underlying
obligation.

23

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 July
30, 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.

24

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation

In May 1999, Tenneco, Pactiv (through Tenneco's former paperboard-packaging
operations), and a number of other containerboard manufacturers were named as
defendants in a consolidated class-action complaint brought on behalf of
purchasers of corrugated containers that alleged a civil violation of Section I
of the Sherman Act. The company was also named as a defendant in a related
class-action antitrust lawsuit. Tenneco sold its containerboard business in
April 1999, prior to the spin-off of Pactiv in November 1999. In connection with
the spin-off, Pactiv was assigned responsibility for defending related claims
against Tenneco and for any liability resulting therefrom.

The lawsuits (In re: Linerboard Litigation U.S.D.C., E.D. of Pennsylvania,
MDL no. 1261) allege that the defendants, during the period October 1, 1993,
through November 30, 1995, conspired to limit the supply of linerboard, and that
the purpose and effect of the alleged conspiracy was to artificially increase
prices of corrugated containers and corrugated sheets. The lawsuits seek treble
damages of unspecified amounts, plus attorneys' fees.

The class has been certified to include all persons in the United States
who purchased corrugated containers/sheets directly from any of the defendants
during the above period, excluding those who purchased corrugated products
pursuant to contracts in which the price of such products was not tied to the
price of linerboard. The deadline for class members to opt out of the classes
was June 9, 2003. Several entities have opted out of the classes, and
approximately 10 direct-action complaints have been filed in various federal
courts across the country by opt-out entities. These cases effectively have been
consolidated for pretrial purposes before the Federal District Court in the
Eastern District of Pennsylvania overseeing the class actions, and it is
expected that they soon will be transferred formally to that court. All of the
opt-out complaints included allegations against the defendants that are
substantially similar to those made in the class actions.

The class actions are currently set to come to trial in September 2004. No
schedule has yet been established for any of the direct-action cases. Pactiv's
management believes that the allegations have no merit and is vigorously
defending against the claims.

The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made.

Management believes that the outcome of all of these legal matters,
individually and in the aggregate, will not have a material adverse effect on
the company's financial position.

Environmental Matters

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and is
currently in discussion with that agency regarding the appropriate actions to be
taken to address this matter. The company expects to resolve this matter through
discussions with the agency and does not believe that the costs involved,
including any monetary sanctions, will have a material adverse effect on the
company's financial position.

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Pactiv
establishes related reserves where it is probable that liabilities exist and
where reasonable estimates of such liabilities can be made. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs and the expense and
effectiveness of alternative clean-up methods. However, management believes that
any additional costs that may be incurred as more information becomes available
will not have a material adverse effect on the financial condition of the
company.

25

ITEMS 2-3. NONE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The company's 2003 Annual Meeting of Shareholders was held on May 16, 2003,
for the purpose of (1) electing directors, (2) ratifying the appointment of
Ernst & Young LLP as independent public accountants for the year 2003, and (3)
acting upon such other matters as might be properly brought before the meeting
or any adjournment or postponement thereof.

At the meeting, the following persons were elected to the company's Board
of Directors, each for a term to expire at the company's 2004 Annual Meeting of
Shareholders:

The shareholders ratified the appointment of Ernst & Young LLP as the
company's independent auditors for the year 2003, with 144,281,386 votes cast
for ratification, 1,709,936 votes cast against ratification, and 978,958
abstentions.

ITEM 5. NONE

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

(A) EXHIBITS

- -------------------------
* Filed herewith

** Furnished herewith

(B) REPORTS ON FORM 8-K

On April 23, 2003, the company filed a Form 8-K (amended on June 30, 2003)
regarding the press release announcing the company's first quarter 2003
earnings.

29

SIGNATURES

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

PACTIV CORPORATION

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

Date: August 14, 2003

30