PACTIV CORP - 10-Q Quarterly Report

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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 MARCH 31, 2004

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: 153,181,785 as of April 30, 2004. (See Notes to Financial
Statements.)

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.

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CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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

4

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

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

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The Consolidated Statement of Income for the three-month period ended March
31, 2004, and 2003, the Condensed Consolidated Statement of Financial Position
at March 31, 2004, and the Condensed Consolidated Statement of Cash Flows for
the three-month period ended March 31, 2004, and 2003, 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, 2003, 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, 2003, 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 Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Shown below are net income and basic
and diluted earnings per share as reported and adjusted to reflect the use of
the fair-value method in determining stock-based compensation costs, as
encouraged by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation."

ACCOUNTS AND NOTES RECEIVABLE

On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $10 million at both March 31, 2004, and March
31, 2003. Such sales, which represent a form of off-balance-sheet financing, are
recorded as a reduction of accounts and notes receivable in the statement of
financial position, and related proceeds are included in cash provided (used) by
operating activities in the statement of cash flows. Discounts and fees related
to these sales were immaterial in the first quarter of 2004 and 2003 and were
included in other expense in the statement of income. In the event that either
Pactiv or the third-party purchaser of the

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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.

CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the Financial Accounting Standards Board issued Financial
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) companies consolidate VIEs if they are required to
recognize the majority of such entities' gains and losses and (2) disclosures be
made regarding VIEs that companies are not required to consolidate but in which
they have a significant variable interest. Consolidation requirements apply
immediately to VIEs created after January 31, 2003, and to existing VIEs in 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 consolidated a VIE associated with
properties covered by its synthetic-lease facility, 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 required 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, of $19 million, $12 million after tax, 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 3. RESTRUCTURING AND OTHER

In the first quarter of 2004, the company announced a restructuring plan to
rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. In
this connection, the company recorded restructuring and other charges totaling
$70 million, $44 million after tax, or $0.28 per share, in the quarter. The
principal strategic objectives of the plan are to (1) rationalize inefficient
manufacturing assets, primarily certain molded fibre facilities in North America
and Europe; (2) reduce overhead in several areas of the business, thereby
simplifying and eliminating non-value-added activities; (3) increase the number
of new product launches over the next several years; and (4) increase the value
of the Hefty brand. Implementation of the plan is expected to result in the
elimination of approximately 1,000 salaried and hourly positions worldwide. The
total cost of the restructuring plan is expected to be approximately $96
million, $60 million after tax, or $0.39 per share, covering severance, asset
write-offs, and other, which consists principally of asset removal costs,
including asbestos insulation abatement and associated expenses at the company's
closed molded-fibre U.K. facility. The majority of the plan will be executed in
the second quarter of 2004, with the balance expected to be completed by
December 31, 2004. Pretax annualized savings from the plan are anticipated to
total $45 million, principally from reductions in salaried and hourly employee
costs and depreciation expense. The company intends to spend approximately $25
million of the annualized savings on additional marketing support and new
product-development activities.

After-tax cash payments related to the restructuring and other actions
totaled $9 million in the first quarter of 2004 and are expected to total $12
million in the second quarter of 2004 and $36 million for total year 2004.

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The following summarizes actual and expected impacts of restructuring and
related actions.

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(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fibre U.K.
facility.

NOTE 4. ACQUISITIONS

On October 27, 2003, Pactiv purchased, for $60 million, the
plastic-packaging assets of Rock-Tenn Company (Rock-Tenn), which are used in the
manufacture of amorphous polyethylene terephthalate (APET) and polypropylene
products for food packaging. At March 31, 2004, the allocation of the purchase
price to the net assets of Rock-Tenn 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.

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying value of goodwill for the three months ended March
31, 2004, are shown in the following table.

Intangible assets at March 31, 2004, are summarized in the following table.

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Amortization expense for intangible assets was $4 million for the three
months ended March 31, 2004. Amortization expense is estimated to total $15
million, $15 million, $13 million, $13 million, and $12 million for years 2004,
2005, 2006, 2007, and 2008, respectively.

NOTE 6. PROPERTY, PLANT, AND EQUIPMENT, NET

NOTE 7. COMMON STOCK

EARNINGS PER SHARE

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

In the first quarter of 2004, the company acquired 3.8 million shares of
its common stock at an average price of $21.74 per share for a total outlay of
$83 million.

GRANTOR TRUST

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 8. SEGMENT INFORMATION

The company has 4 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

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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.

The following table sets forth certain segment information.

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

(b) Includes restructuring and other charges of $19 million.

(c) Includes restructuring and other charges of $47 million.

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

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

NOTE 9. COMPREHENSIVE INCOME (LOSS)

Details of total comprehensive income (loss) for the three-month period
ended March 31, 2004, and 2003, were as follows:

NOTE 10. LINES OF CREDIT AND GUARANTEES

The company, from time to time, utilizes various lines of credit, backed by
payment and performance guarantees, to finance operations of its foreign
subsidiaries. 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 such
subsidiaries were sold, dissolved, or otherwise failed to discharge their
related obligations. At March 31, 2004, available lines of credit totaled $26
million; however, no amounts were borrowed against those lines at that date.

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NOTE 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The impact of pension plans on pretax income from continuing operations was
as follows:

The company has postretirement health-care and life-insurance plans that
cover certain of its salaried and hourly employees who retire in accordance with
the various provisions of such plans. Benefits may be subject to deductibles,
copayments, and other limitations. The company reserves the right to change such
postretirement plans, which are not funded. The Medicare Prescription Drug,
Improvement, and Modernization Act ("the Act"), which was signed into law on
December 8, 2003, provides prescription-drug benefits under Medicare Part D and
a federal subsidy to sponsors of retiree health-care benefit plans that provide
benefits that are at least actuarially equivalent to those provided under
Medicare Part D. The company is currently studying the impact of the Act on its
plans. Authoritative accounting guidance for the federal-subsidy feature of the
Act is pending and, upon issuance, may require modification of amounts reported
for postretirement-benefit costs and accumulated projected benefit obligations.

NOTE 12. CONTINGENCIES

LITIGATION

In May 1999, Tenneco Inc. (Tenneco), Pactiv's former parent, 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 has been 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
included the establishment of a reserve for the estimated liability associated
with the opt-out complaints. Actual amounts

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paid in settlement of these opt-out liabilities, if any, may be different than
amounts reserved. 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, effective
November 2003, has entered into a settlement agreement with that agency
regarding the appropriate actions to be taken to address the matter, which
settlement agreement is subject to the approval of the U.S. Environmental
Protection Agency. 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 operations, 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. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. 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 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.

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. All per-share information is presented on a diluted basis unless
otherwise noted.

The company has 4 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.

RESTRUCTURING AND OTHER

In the first quarter of 2004, the company announced a restructuring plan to
rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. In
this connection, the company recorded restructuring and other charges totaling
$70 million, $44 million after tax, or $0.28 per share, in the quarter. The
principal strategic objectives of the plan are to (1) rationalize inefficient
manufacturing assets, primarily certain molded fibre facilities in North America
and Europe; (2) reduce overhead in several areas of the business, thereby
simplifying and eliminating non-value-added activities; (3) increase the number
of new product launches over the next several years; and (4) increase the value
of the Hefty brand. Implementation of the plan is expected to result in the
elimination of approximately 1,000 salaried and hourly positions worldwide. The
total cost of the restructuring plan is expected to be approximately $96
million, $60 million after tax, or $0.39 per share, covering severance, asset
write-offs, and other, which consists principally of asset removal costs,
including asbestos insulation abatement and associated expenses at the company's
closed molded-fibre U.K. facility. The majority of the plan will be executed in
the second quarter of 2004, with the balance expected to be completed by
December 31, 2004. Pretax annualized savings from the plan are anticipated to
total $45 million, principally from reductions in salaried and hourly employee
costs and depreciation expense. The company intends to spend approximately $25
million of the annualized savings on additional marketing support and new
product-development activities.

After-tax cash payments related to the restructuring and other actions
totaled $9 million in the first quarter of 2004 and are expected to total $12
million in the second quarter of 2004 and $36 million for total year 2004.

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The following summarizes actual and expected impacts of restructuring and
related actions.

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(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fibre U.K.
facility.

THREE MONTHS ENDED MARCH 31, 2004, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003

RESULTS OF CONTINUING OPERATIONS

Significant Trends

The principal raw materials used to manufacture the company's products are
plastic resins, principally polystyrene and polyethylene. Average industry
prices for polystyrene were approximately 18% higher in the first quarter of
2004 than in the same period of 2003, driven principally by higher oil prices,
while average industry prices for polyethylene rose by approximately 15% in the
first quarter of 2004 compared with the same period in 2003, fueled by higher
natural-gas prices. In response to increases in resin costs, the company raised
selling prices in many areas of its business during 2003 and again late in the
first quarter of 2004. These price increases offset most of the impact of the
resin-cost increases, as evidenced by the modest decline in the company's gross
margin from 29.1% in 2003's first quarter to 28.8% in the current quarter.

Major plastic-resin suppliers have announced additional price increases for
2004, reflecting the continued volatility in energy markets. Suppliers' success
in raising plastic-resin prices would likely have a near-term dilutive effect on
the company's gross margin until resin prices decline or the company is able to
raise selling prices correspondingly. However, moderation of energy prices, weak
market demand, or excess plastic-resin manufacturing capacity may limit resin
suppliers' ability to implement the latest announced price increases, thereby
enhancing the company's ability to maintain or improve its gross margin.

Sales

Total sales increased $58 million, or 8.1% versus the prior year. Excluding
the positive impact of foreign-currency exchange rates ($21 million) and
acquisitions ($17 million), sales grew by 2.7%.

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Sales for the Consumer Products business increased $11 million, or 5.8%,
from the first quarter of 2003, reflecting improved pricing and volume gains.
Tableware volume increased significantly for both branded and private-label
products. Likewise, sales grew in waste bags, partially driven by Hefty(R)
CinchSak(R) Ultra tall kitchen and large trash bags and Hefty(R) HandySaks(TM)
convenience bags, which were launched early in the quarter. The Hefty(R)
ZooPals(TM) line of children's plates continued to perform well and has expanded
its offering.

Sales in the Foodservice/Food Packaging business increased $34 million, or
10.9%, from last year driven by volume growth in the base business and
acquisitions. Excluding the positive impact of acquisitions ($17 million) and
foreign-currency exchange rates ($1 million), sales increased $16 million, or
5.1%, driven by volume growth in almost every key product line and the positive
impact of 2003 selling price increases. In addition, the company introduced
several new products for the fast-food industry during the quarter.

Sales of Protective- and Flexible-Packaging products increased $13 million,
or 6.0%, compared with 2003. Excluding the positive impact of foreign-currency
exchange rates ($20 million), sales decreased $7 million, or 3.0%, as a result
of weakness in European volume, offset partially by an economy-driven
improvement in volume in North America.

Operating Income

Total operating income was $25 million in the first quarter of 2004, a
decrease of $70 million, or 73.7%, from last year, primarily driven by the
recording of restructuring and other charges of $70 million in the current
period. Compared with last year, the positive impact of increased volume,
improved spread (the difference between selling prices and raw-material costs),
and productivity gains was offset by lower noncash pension income and higher
depreciation and amortization expense.

The following table summarizes by segment the impacts of restructuring and
other charges in the first quarter of 2004.

The company's management believes that providing operating income excluding
the effects of restructuring and other charges presents a useful alternative
depiction of the company's operating results. The restructuring and other
charges relate to actions that will have a long-term effect on the company, and
to consider such charges as being only applicable to the first quarter might
make the company's operating performance in that quarter more difficult to
evaluate, particularly as compared with other periods in which there were no
comparable charges. The company's management uses operating income excluding
restructuring and other charges to evaluate operating performance, to value
various business units, and, along with other factors, in determining management
compensation.

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The following table summarizes operating income excluding restructuring and
other charges for the first quarter of 2004 and 2003.

Total operating income excluding restructuring and other charges was $95
million in the first quarter of 2004, even with last year, as increased volume,
improved spread, and productivity gains were offset by lower noncash pension
income and higher depreciation and amortization costs.

Operating income excluding restructuring and other charges for the Consumer
Products business was $41 million, even with last year, as the benefits of
improved volume and favorable pricing were offset by higher advertising and
promotion expenses and higher energy-related costs.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $35 million, an increase of $3 million,
or 9.4%, from 2003. In this connection, pricing and productivity improvements
were offset partially by higher energy-related expenses and integration costs
associated with the fourth-quarter 2003 acquisition of the plastic-packaging
assets of Rock-Tenn Corporation.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $13 million, down $1 million, or
7.1%, from last year, primarily because of lower European volume and lower
spread, offset partially by higher North American protective-packaging volume.

Operating income for the Other segment decreased $2 million from last year,
principally because of a decline in noncash pension income.

Income from Continuing Operations

The company recorded zero net income from continuing operations in the
first quarter of 2004, compared with $44 million, or $0.27 per share, last year.
First quarter 2004's results included the impact of restructuring and other
charges totaling $44 million, or $0.28 per share, and noncash pension income of
$8 million, or $0.05 per share, which was $0.01 per share lower than the
previous year.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The ratio of debt to total capitalization rose to 57.7% at March 31, 2004,
from 55.6% at December 31, 2003, primarily because of the decline in
shareholders' equity resulting from the repurchase of $83 million of company
stock during the first quarter of 2004.

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Cash Flows

Cash provided by operating activities was $83 million in the first quarter
of 2004, up $27 million from the same period last year, primarily reflecting
better working-capital management and higher cash earnings.

Investing activities used $18 million and $27 million of cash in the first
quarter of 2004 and 2003, respectively, primarily for the acquisition of
property, plant, and equipment.

Cash used by financing activities was $78 million in the first quarter of
2004, primarily reflecting the repurchase of company stock ($83 million), offset
partially by issuances of company stock ($6 million) in connection with the
administration of employee-benefit plans. Cash used by financing activities was
$22 million in 2003, primarily reflecting the early retirement of debt.

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $78
million at March 31, 2004. It is anticipated that the majority of these
expenditures will be funded over the next 12 months from existing cash and
short-term investments and internally generated cash.

Contractual Obligations

There have been no material changes in the company's aggregate contractual
obligations since the end of 2003.

Liquidity and Off-Balance-Sheet Financing

The company uses various sources of funding to manage liquidity. Sources of
liquidity include cash flow from operations and a 5-year, $750 million
revolving-credit facility, none of which was outstanding at March 31, 2004. The
company was in full compliance with financial and other covenants of its
revolving-credit agreement at the end of the first quarter of 2004. The company
also utilizes an asset-securitization program as off-balance-sheet financing.
Amounts securitized under this program were $10 million at both March 31, 2004,
and March 31, 2003. 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 long-term projections
at December 31, 2003, no cash contributions to the U.S. plans will be required
through at least 2013.

In December 2003, the company's board of directors approved a plan to
repurchase up to 5 million shares of Pactiv common stock using open-market or
privately-negotiated transactions, with repurchased shares to be held in
treasury for general corporate purposes. The company acquired 3.8 million shares
($83 million) under this authorization during the first quarter of 2004,
bringing the total number of shares repurchased at March 31, 2004, under the
December 2003 authorization to 4.8 million ($105 million). Early in the second
quarter of 2004, the company purchased all of the remaining shares authorized
under the December 2003 plan. In March 2004, the company's board of directors
approved a plan to repurchase an additional 5 million shares of common stock
under terms and conditions similar to those included in the December 2003 plan.
As of March 31, 2004, the company had not purchased any common stock under the
March 2004 authorization.

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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 January 2003, the Financial Accounting Standards Board issued Financial
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) companies consolidate VIEs if they are required to
recognize the majority of such entities' gains and losses and (2) disclosures be
made regarding VIEs that companies are not required to consolidate but in which
they have a significant variable interest. Consolidation requirements apply
immediately to VIEs created after January 31, 2003, or in 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 consolidated a 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 $150 million,
respectively. Consolidation of the VIE also required 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, of $19 million,
$12 million after-tax, 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
Statement of Financial Accounting Standards (SFAS) No. 87. Pension-plan income
($12 million and $15 million for the three months ended March 31, 2004, and
2003, 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 decline to approximately $49 million in
2004, from $64 million in 2003, principally reflecting the amortization of
unrecognized actuarial losses and a one-half percentage point decline (from
6.75% to 6.25%) in the discount rate used to measure pension obligations.

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 projects future returns on various asset classes, risk-free
rates of return, and long-term inflation rates. Since inception in 1971, the
pension plans' annual rate of return on assets has averaged 10.9%. Historically,
approximately 65% of assets have been invested in equity securities and 35% in
fixed-income investments. After consideration of all of these factors, the
company concluded that a 9% rate of return on assets assumption was appropriate
for 2004 and 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 that are assigned the second-highest credit rating by recognized
rating agencies (approximately 6.25% at the September 30, 2003 measurement
date). Consequently, the company lowered its discount-rate assumption for 2004
to 6.25% from 6.75% in 2003. 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.
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The company utilizes a market-related method for calculating the value of
plan assets. This method recognizes the difference between actual and expected
returns on plan assets over 5 years. Resulting unrecognized gains or losses,
along with other actuarial gains and losses, are amortized using the "corridor
approach" outlined in SFAS No. 87.

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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 often 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 some of the 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, differences
between actual and assumed rates of return on pension assets affect the
company's net income and possibly 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 products manufactured in countries that 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.

- The company's ability to execute its restructuring plan announced on
March 15, 2004, and to achieve the savings expected to be derived from
this plan.

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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 related policies and procedures. The
company does not use hedging instruments for trading purposes and is not a party
to any transactions involving leveraged derivatives.

Foreign-Currency Exchange

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

In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at March 31, 2004, all of which will mature later in 2004.

Interest Rates

The company has issued public-debt securities ($1,174 million at March 31,
2004,) 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 had other fixed-rate debt totaling $2
million and floating-rate debt of $169 million at March 31, 2004. The fair-value
of long-term debt at March 31, 2004, and December 31, 2003, was approximately
$1,561 million and $1,535 million, respectively, compared with recorded amounts
of $1,336 million at both dates.

21

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

Prior to the spin-off, the company entered into an interest-rate swap to
hedge its exposure to interest-rate movements. The company settled this swap in
November 1999, incurring a $43 million loss, which is being recognized as
additional interest expense over the average life of the underlying debt.

In the first quarter of 2001, the company entered into interest-rate swap
agreements to covert floating-rate debt on its synthetic-lease obligations to
fixed-rate debt. This action was taken to reduce the company's exposure to
interest-rate risk. During the first quarter of 2002, the company exited these
swap agreements, and the related accumulated net loss ($1 million at March 31,
2004), is being expensed over the remaining life of the underlying obligation.

Commodity Derivatives

During the third quarter of 2003, the company entered into natural-gas
forward contracts to hedge its exposure to adverse changes in 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 was amortized over the November 2003 to
March 2004 period. The option did not obligate the company to purchase natural
gas, but limited upward price exposure, while allowing the company to benefit
fully from downward price movements. Changes in the market value of these
natural-gas hedges were recorded in other comprehensive income on the balance
sheet.

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-15(e) and 15d-15(e)), 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
April 28, 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.

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PART II -- OTHER INFORMATION

ITEM 1. NONE

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES

In December 2003, the company's board of directors approved a plan to
repurchase up to 5 million shares of Pactiv common stock using open-market or
privately negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. During December 2003, the company
purchased 945,600 shares at an average price of $23.11 per share pursuant to
that authorization.

The following table summarizes purchases made during the first three months
of 2004 under the December 2003 authorization.

- ---------------
(1) All shares purchased during the first three months of 2004 were acquired
pursuant to the December 2003 authorization.

(2) Remaining number of shares that may be purchased under the December 2003
authorization.

Early in the second quarter of 2004, the company purchased all of the
remaining shares authorized under the December 2003 plan.

In March 2004, the company's board of directors approved a plan to
repurchase an additional 5 million shares of Pactiv common stock under terms and
conditions similar to those included in the December 2003 plan. As of March 31,
2004, the company had not purchased any common stock under the March 2004
authorization.

ITEMS 3-5. NONE

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

(A) EXHIBITS

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

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

** Furnished herewith

(B) REPORTS ON FORM 8-K

On January 22, 2004, the company filed a Form 8-K regarding the press
release announcing the company's fourth quarter 2003 earnings. On March 15,
2004, the company filed a Form 8-K regarding (1) the approval of a
productivity/long-term growth program, consolidating certain manufacturing
facilities and eliminating excess capacity and low value-added activities; (2)
board authorization to repurchase an additional 5 million shares of Pactiv
common stock; and (3) its 2004 earnings outlook.

26

SIGNATURES

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

PACTIV CORPORATION

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

Date: May 10, 2004

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