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 SEPTEMBER 30, 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: 157,241,738 as of October 31, 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

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.

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The Consolidated Statement of Income for the three- and nine-month periods
ended September 30, 2003, and 2002, the Condensed Consolidated Statement of
Financial Position at September 30, 2003, and the Condensed Consolidated
Statement of Cash Flows for the nine-month periods ended September 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.

Segment Reporting

The company reports the results of its segments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." During the third quarter of
2003, the company revised its segment reporting by separating its previously
aggregated Consumer and Foodservice/Food Packaging segment. Accordingly, the
company now has four reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fibre,
pressed-paperboard, and aluminum packaging products such as waste bags,
tableware, food-storage bags, and cookware for consumer markets such as grocery
stores, mass merchandisers, and discount chains; Foodservice/Food Packaging,
which relates primarily to the manufacture and sale of various disposable
plastic, molded-fibre, pressed-paperboard, and aluminum packaging products for
foodservice and food-packaging markets such as restaurants and other
institutional foodservice outlets, food processors, and grocery chains;
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. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used. Previously reported
segment information has been restated to conform to the current year's
presentation. See Note 9 for additional information concerning the company's
reporting segments.

Stock-Based Compensation

In accounting for stock-based employee compensation, the company uses the
intrinsic-value method specified in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Shown below are net income
and basic and diluted earnings per share as reported and adjusted to

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reflect the use of the fair-value method in determining stock-based compensation
costs (pro forma), as prescribed in 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 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 that the fair value of a reporting unit be allocated 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 the carrying value of goodwill
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 intangible 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 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

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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 were
originally supposed to apply to existing VIEs in the first fiscal year or
interim period ending after June 30, 2003; however, the FASB recently deferred
the effective date for existing VIEs to the first fiscal year or interim period
ending after December 15, 2003. Certain of the disclosure requirements apply to
financial statements issued after January 31, 2003, regardless of when VIEs were
created. Upon Pactiv's December 31, 2003, adoption of FIN No. 46, the company
will consolidate a VIE associated with 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 $150 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
December 31, 2003, which will negatively impact net income in the fourth quarter
of 2003 by approximately $12 million, or $0.07 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 the 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.

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

As of September 30, 2003, all restructuring activity related to the above
programs was concluded.

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.

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In January 2002, the company purchased the assets of two 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., 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. On
August 8, 2003, the company acquired the remaining 30% of the stock of Jaguar
for $22 million, making it a wholly-owned subsidiary of Pactiv. At September 30,
2003, the allocation of the purchase price to the net assets of Jaguar and the
related recognition of $15 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.

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.

On September 23, 2003, Pactiv entered into an agreement to purchase the
plastic-packaging assets of Rock-Tenn Company, which are used in the manufacture
of APET and polypropylene products for food packaging. The transaction closed
effective October 27, 2003. See Note 16 for further information.

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.

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

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

Amortization expense for intangible assets subject to amortization was $3
million and $11 million for the three- and nine-month periods ended September
30, 2003, respectively. Amortization expense is estimated to total $14 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

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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.

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NOTE 9. SEGMENT INFORMATION

During the third quarter of 2003, the company amended its segment
reporting. Previously reported segment information has been restated to conform
to the current year's presentation. The following table sets forth certain
segment information, as amended. See Note 2 for further information.

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

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

(c) Includes restructuring and other credits of $4.

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 $15 million at September 30, 2003, and
September 30, 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 by operating activities in the statement of cash flows. Discounts and
fees related to these sales were immaterial in the third quarter of 2003 and
2002, and were included in other income and 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.

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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 nine-month periods
ended September 30, 2003, and 2002, were as follows:

The increase in currency translation gains in the nine months ended
September 30, 2003, and 2002, 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 that 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.

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Performance under the guarantees would be required if subsidiaries failed to
satisfy their obligations under such guarantees. At September 30, 2003, amounts
outstanding under these lines of credit were not material.

NOTE 15. CONTINGENCIES

Litigation

In May 1999, Tenneco, Pactiv (through Tenneco's former containerboard
business), 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 also was 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) alleged that the defendants, during the period from 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
sought treble damages of unspecified amounts, plus attorneys' fees.

Several entities have opted out of the classes, and the company has been
named as a defendant in 12 direct-action complaints that 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, which is overseeing the
class actions, and it is expected that they 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.

On November 3, 2003, the company reached an agreement to settle the
class-action lawsuits. The settlement, which must be approved by the court,
resulted in the company recording a charge of $56 million pretax, $35 million
after tax, or $0.22 per share, in the third quarter of 2003. This charge
includes the establishment of a reserve for the estimated liability associated
with the opt-out complaints. Actual amounts paid in settlement of these opt-out
liabilities, if any, may differ from the amount of the established reserve. No
trial date has been set for any of the opt-out lawsuits.

The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

Environmental Matters

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and is
currently in discussions with that agency regarding the appropriate actions to
be taken to address the 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, results of operation, or cash flows.

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, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations.
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However, management believes that any additional costs that may be incurred as
more information becomes available will not have a material adverse effect on
the company's financial position, although such costs could have a material
effect on the company's results of operations or cash flows in a particular
period.

NOTE 16. SUBSEQUENT EVENTS

Effective October 27, 2003, the company completed its purchase of the
plastic packaging assets of Rock-Tenn Company for $60 million. These assets are
used in the manufacture of APET and polypropylene products for food packaging.

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 reports the results of its segments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." During the third quarter of
2003, the company revised its segment reporting by separating its previously
aggregated Consumer and Foodservice/Food Packaging segment. Accordingly, the
company now has four reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fibre,
pressed-paperboard, and aluminum packaging products such as waste bags,
tableware, food-storage bags, and cookware for consumer markets such as grocery
stores, mass merchandisers, and discount chains; Foodservice/Food Packaging,
which relates primarily to the manufacture and sale of various disposable
plastic, molded-fibre, pressed-paperboard, and aluminum packaging products for
foodservice and food-packaging markets such as restaurants and other
institutional foodservice outlets, food processors, and grocery chains;
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. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used. Previously reported
segment information has been restated to conform to the current year's
presentation.

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 the 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.

As of September 30, 2003, all restructuring activity related to the above
programs was concluded.

THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002

RESULTS OF CONTINUING OPERATIONS

Significant Trends

Approximately 80% of Pactiv's sales is related to products made from
different types of plastics. The principal raw materials used to manufacture
these products are plastic resins, including polystyrene, polyethylene,
polypropylene, polyvinyl chloride, and amorphous polyethylene terephthalate
(APET). 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.

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At the end of the third quarter of 2003, industry prices for polystyrene
had declined by approximately 2% versus the end of the second quarter of 2003,
while industry prices for polyethylene had fallen by between 4% and 5% over the
same period. Compared with the third quarter of 2002, industry prices for
polystyrene rose by approximately 12%, driven principally by higher oil prices,
while industry prices for polyethylene were 12% to 15% higher than in 2002
(depending on the type of resin purchased), fueled by higher natural gas prices.

In response to the increase in resin costs, the company raised selling
prices in many areas of its business in the first half of 2003. These price
increases contributed to the company's ability to increase its gross margin to
30.6% in the third quarter of 2003 from 29.5% in the previous quarter. However,
the third-quarter 2003 gross margin was 0.8 percentage points lower than the
prior year, in that the impact of 2003 price increases was less than the
year-over-year effect of higher resin costs.

Additional selected selling-price increases, particularly in the company's
Consumer Products segment, were implemented near the end of the third quarter
and will benefit all of the fourth quarter; however, resin suppliers have
announced additional price increases effective in the fourth quarter which may
limit further expansion of the company's gross margin in the second half of
2003.

Sales

Total sales increased $66 million, or 9.1%, over 2002. Excluding the
positive impact of foreign-currency exchange rates ($13 million) and
acquisitions ($23 million), sales grew 4%, driven primarily by volume growth of
2% in the base businesses, and price improvement of 2%.

Sales for the Consumer Products business of $224 million increased $13
million, or 6.2%, from $211 million last year, reflecting strong volume growth
in tableware and waste bags. Rollout of four new Hefty(R) products launched this
year continues on track and the products have been well received. In addition,
sales of products introduced in the past two years (principally, Hefty(R) The
Gripper(TM) tall kitchen waste bags and Hefty(R) Zoo Pals(TM) disposable
children's plates) continue to be strong.

Foodservice/Food Packaging segment sales of $351 million rose $44 million,
or 14.3%, from 2002, driven by acquisitions ($22 million), favorable pricing,
and volume growth in the base business. Growth in home meal replacement
products, processor trays, aluminum products, and APET products led to the
increase.

Sales of protective- and flexible-packaging products of $218 million
increased $9 million, or 4.3%, compared with last year. Excluding the positive
impact of foreign-currency exchange rates ($12 million) and acquisitions ($1
million), sales for this segment declined $4 million, or 1.8% from a year ago,
primarily because of lower volume in Europe, offset partially by higher volume
in North America and Asia.

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Operating Income

Total operating income was $122 million in 2003, unchanged from 2002.
Operating margin was 15.4%, compared with 16.8% last year, reflecting the impact
of higher raw-material costs and lower noncash pension income, offset partially
by higher volume. On a sequential basis, operating margin advanced 0.6
percentage points from the second quarter of 2003.

Operating income for the Consumer Products business of $48 million
decreased $2 million, or 4.0%, from last year, principally because price
increases to offset higher resin costs will not be fully effective until the
fourth quarter. Operating margin was 21.4% compared with 23.7% last year. The
decrease was attributable principally to higher resin costs.

Operating income for the Foodservice/Food Packaging segment of $53 million
rose $10 million, or 23.3%, from 2002, primarily as a result of volume growth
(including acquisitions), price increases to offset higher resin costs,
productivity improvements, and lower logistics costs. Operating margin was 15.1%
compared with 14.0% last year.

Operating income for the Protective and Flexible Packaging segment was $15
million, an increase of $1 million, or 7.1%, from 2002. Operating margin was
6.9% compared with 6.7% last year, reflecting the impact of productivity
initiatives and volume growth in key segments of the business, including
protective packaging in North America.

Operating income for the Other segment was $6 million, a decrease of $9
million, or 60.0%, from last year, mainly because of a decline in pension income
(from $27 million in 2002 to $15 million in 2003), offset partially by the
impact of administrative productivity improvement and procurement savings.

Tenneco Packaging Litigation Settlement and Other

In the third quarter of 2003, the company reached an agreement to settle a
civil, class-action lawsuit filed in 1999 against Tenneco Inc., Tenneco
Packaging, and Packaging Corporation of America, Tenneco's former containerboard
business (Tenneco Packaging litigation). The settlement, which must be approved
by the court, resulted in Pactiv recording a pretax charge of $56 million ($35
million after tax, or $0.22 per share). This charge includes the establishment
of a reserve for the estimated liability associated with lawsuits filed by
certain members of the original class action who opted out and filed their own
lawsuits. While it is not possible to predict the outcome of any of these
proceedings, the company's management, based on its assessment of the facts and
circumstances now known, does not believe that any of these proceedings,
individually or in the aggregate, will have a material adverse effect on the
company's financial position. However, actual outcomes may be different than
expected and could have a material effect on the company's results of operations
or cash flows in a particular period.

Income Taxes

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

18

Income from Continuing Operations

The company recorded net income from continuing operations of $26 million,
or $0.16 per share, in 2003, compared with $59 million, or $0.37 per share, last
year. Included in 2003 net income was the impact of the Tenneco Packaging
litigation settlement of $35 million after tax, or $0.22 per share, and pension
income of $10 million after tax, or $0.06 per share. Net income for 2002
included pension income of $16 million after tax, or $0.10 per share.

NINE MONTHS ENDED SEPTEMBER 2003, COMPARED WITH NINE MONTHS ENDED SEPTEMBER 2002

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales were $2,320 million, an increase of $218 million, or 10.4%,
versus last year. Excluding the positive impact of foreign-currency exchange
rates ($53 million) and acquisitions ($98 million), sales increased 3.1% over
last year, driven by favorable pricing and volume growth in the base business.

Sales for the Consumer Products segment of $645 million increased $33
million, or 5.4%, from last year, primarily due to volume growth in tableware
and wastebags, along with continued volume contributions from products
introduced in the past two years.

Sales for the Foodservice/Food Packaging segment were $1,017 million, an
increase $134 million, or 15.2%, from last year, primarily reflecting the impact
of the last year's acquisitions, 2003 price increases, and higher volume in the
base business.

Sales of protective- and flexible-packaging products of $658 million
increased $51 million, or 8.4%, compared with 2002. Excluding the positive
impact of foreign-currency exchange rates ($51 million) and acquisitions ($4
million), sales for this segment fell by $4 million, or 0.6%, versus last year,
as lower worldwide volume was offset partially by the impact of price increases.

Operating Income

Total operating income was $337 million, a decline of $3 million, or 0.9%,
from 2002, driven by a $36 million decline in pension income, higher
raw-material costs, and a $4 million reversal in 2002 of a previously recorded
restructuring charge, offset by the impact of higher volume, increased selling
prices, and the ongoing benefits of the company's productivity and procurement
initiatives.

19

Operating income for the Consumer Products segment was unchanged from last
year, as the effect of volume growth, lower advertising and promotion expenses,
and productivity improvements offset higher raw-material costs.

Operating income for the Foodservice/Food Packaging segment increased $21
million, or 18.4%, from a year ago, primarily driven by increased selling
prices, volume growth (including acquisitions), and productivity improvements,
offset partially by higher raw-material costs.

Operating income for the Protective and Flexible Packaging segment
decreased $6 million, or 12.5%, from 2002, as the impact of productivity
improvements 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 declined $18 million, or 45.0%, from
last year, mainly because of a decline in pension income (from $81 million in
2002 to $45 million in 2003), offset partially by the impact of administrative
productivity improvement and procurement savings.

Tenneco Packaging Litigation Settlement and Other

In the third quarter of 2003, the company reached an agreement to settle a
civil, class-action lawsuit filed in 1999 against Tenneco Inc., Tenneco
Packaging, and Packaging Corporation of America, Tenneco's former containerboard
business (Tenneco Packaging litigation). The settlement, which must be approved
by the court, resulted in Pactiv recording a pretax charge of $56 million ($35
million after tax, or $0.22 per share). This charge includes the establishment
of a reserve for the estimated liability associated with lawsuits filed by
certain members of the original class action who opted out and filed their own
lawsuits. While it is not possible to predict the outcome of any of these
proceedings, the company's management, based on its assessment of the facts and
circumstances now known, does not believe that any of these proceedings,
individually or in the aggregate, will have a material adverse effect on the
company's financial position. However, actual outcomes may be different than
expected and could have a material effect on the company's results of operations
or cash flows in a particular period.

Income Taxes

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

Income from Continuing Operations

The company recorded net income from continuing operations of $129 million,
or $0.80 per share, in 2003, compared with $161 million, or $1.01 per share, in
2002. Included in 2003 net income was the impact of the Tenneco Packaging
litigation settlement of $35 million after tax, or $0.22 per share, and pension
income of $29 million after tax, or $0.18 per share. Net income in 2002 included
pension income of $49 million after tax, or $0.30 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. 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.

20

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The company's ratio of debt to total capitalization was 53.2% and 57.4% at
September 30, 2003, and December 31, 2002, respectively.

Shareholders' equity increased $124 million in the first nine months of
2003, as a result of recording net income of $129 million, booking a $32 million
favorable currency-translation adjustment, and issuing company stock totaling
$22 million, offset partially by the purchase of $59 million of Pactiv stock.

Cash Flows

Cash provided by operating activities was $275 million versus $306 million
last year. The $31 million decrease was driven mainly by an increase in working
capital, primarily reflecting higher raw-material costs.

The $103 million of cash used by investing activities in 2003 primarily
represented outlays for capital items ($81 million) and acquisitions ($22
million), while the $169 million use of cash in 2002 principally represented
spending on acquisitions ($90 million) and capital items ($87 million).

The $115 million used in connection with financing activities in 2003
primarily was driven by the repurchase of company stock ($59 million) and the
early retirement of debt ($67 million). Cash used by financing activities of $46
million in 2002 principally was related to the purchase of company stock.

Capital Commitments

Open capital commitments totaled approximately $81 million at September 30,
2003. It is anticipated that the majority of these expenditures will be funded
over the next 12 months using existing cash, short-term investments, and
internally generated cash.

Liquidity

The company uses various sources of funding to satisfy liquidity needs,
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 no balance was outstanding at
September 30, 2003. At the end of the third quarter of 2003, the company was in
full compliance with financial and other covenants included in the
revolving-credit agreement.

21

Off-balance-sheet financing consists of an asset-securitization program and
a synthetic-lease facility. The asset-securitization balance totaled $15 million
at September 30, 2003, and September 30, 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 September 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.

The company has pension plans that cover substantially all of its
employees. Cash-funding requirements for the plans are governed primarily by the
Employee Retirement Income Security Act (ERISA). Based on preliminary long-term
projections of the company's actuary at September 30, 2003, no cash
contributions to the plans will be required under ERISA regulations through at
least the year 2013. For further information regarding the company's projected
cash funding requirements under ERISA, see Exhibit 99.2 attached to this Form
10-Q.

In the third quarter of 2003, the company reached an agreement to settle a
civil, class-action lawsuit filed in 1999 against Tenneco Inc., Tenneco
Packaging, and Packaging Corporation of America, Tenneco's former containerboard
business (Tenneco Packaging litigation). The settlement, which must be approved
by the court, resulted in Pactiv recording a pretax charge of $56 million ($35
million after tax, or $0.22 per share). Once approved, a substantial portion of
this settlement is expected to be paid out within the next 12 months. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

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 SFAS No. 142.
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. The second step requires that the fair value of a
reporting unit be allocated 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 the
carrying value of goodwill 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 asset 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 intangible 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 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-
22

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.

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 were
originally supposed to apply to existing VIEs in the first fiscal year or
interim period ending after June 30, 2003; however, the FASB deferred the
effective date for existing VIEs to the first fiscal year or interim period
ending after December 15, 2003. Certain of the disclosure requirements apply to
financial statements issued after January 31, 2003, regardless of when VIEs were
created. Upon Pactiv's December 31, 2003, adoption of FIN No. 46, the company
will consolidate a VIE associated with 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 $150 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
December 31, 2003, which will negatively impact net income in the fourth quarter
of 2003 by approximately $12 million, or $0.07 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, "Employers' Accounting for Pensions." Pension-plan income ($45
million and $81 million for the nine months ended September 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%.

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 securities.
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 $25
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

23

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. Pactiv's actuary recently completed its
valuation of pension-plan assets and liabilities as of the company's annual
September 30 measurement date. The company's actuary projects that pension
income for 2004 will be approximately $49 million pretax, or $11 million less
than in 2003.

For further information concerning the company's projected pension income
and ERISA funding requirements for the next ten years, see Exhibits 99.1 and
99.2 attached to this Form 10-Q.

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 September 30, 2003. Termination of the
lease agreement, either before or at expiration, would require the company to
make a termination payment ($169 million at September 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 VIEs, including the company's synthetic-lease
agreement. See "Changes in Accounting Principles" for further information
concerning VIEs.

24

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

Certain statements included in this Quarterly Report on Form 10-Q,
including statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and Exhibits 99.1 and 99.2
referenced therein 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 customer
concentration and 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. Similarly, the actual
return on pension assets will affect the company's 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."

- Competition from producers located in countries which have lower labor
and other costs.

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

25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS

The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with the company's 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 nine-month periods
ended September 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 September 30, 2003, all of which will mature in 2003.

Interest Rates

The company has issued public-debt securities ($1,174 million at September
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. In addition, the company has other fixed-rate debt totaling $2
million at September 30, 2003. The fair value of total long-term debt at
September 30, 2003, and December 31, 2002, was approximately $1,384 million and
$1,427 million, respectively, compared with its recorded amount of $1,168
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 loss ($1 million at September
30, 2003) is being expensed over the remaining life of the underlying
obligation.

26

Commodity Derivatives

During the third quarter of 2003, the company entered into natural-gas
forward contracts to hedge its exposure to adverse changes in the price levels
of natural gas during the period from November 2003 to March 2004. These
instruments limit the upside risk on purchases of natural gas used in the
production process at certain of the company's plants. In this connection, the
company paid an option premium that will be amortized over the November
2003-March 2004 period. The option does not obligate the company to purchase
natural gas, but limits upward price exposure, while allowing the company to
benefit fully from downward price movements.

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
November 10, 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.

27

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation

In May 1999, Tenneco, Pactiv (through Tenneco's former containerboard
business), 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 also was named as a defendant in a related
class-action antitrust lawsuit related to sales of corrugated sheets. 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) alleged that the defendants, during the period from 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
sought treble damages of unspecified amounts, plus attorneys' fees.

Several entities have opted out of the classes, and the company has been
named as a defendant in 12 direct-action complaints that 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, which is overseeing the
class actions, and it is expected that they 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.

On November 3, 2003, the company reached an agreement to settle the class
action lawsuits. The settlement, which must be approved by the court, resulted
in the company recording a charge of $56 million pretax, $35 million after tax,
or $0.22 per share, in the third quarter of 2003. This charge includes the
establishment of a reserve for the estimated liability associated with the
opt-out complaints. Actual amounts paid in settlement of these opt-out
liabilities, if any, may differ from the amount of the established reserve. No
trial date has been set for any of the opt-out lawsuits.

The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

Environmental Matters

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and is
currently in discussion with that agency regarding the appropriate actions to be
taken to address the 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, results of operation, or cash flows.

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, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes

28

available will not have a material adverse effect on the company's financial
position, although such costs could have a material effect on the company's
results of operations or cash flows in a particular period.

ITEMS 2-5. NONE

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

(A) EXHIBITS

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

** Furnished herewith

(B) REPORTS ON FORM 8-K

On July 23, 2003, the company filed a Form 8-K regarding the press release
announcing the company's second quarter 2003 earnings.

31

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: November 14, 2003

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