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 JUNE 30, 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: 150,290,236 as of July 31, 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.

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 six-month periods
ended June 30, 2004, and 2003, the Condensed Consolidated Statement of Financial
Position at June 30, 2004, and the Condensed Consolidated Statement of Cash
Flows for the six-month periods ended June 30, 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 Principals 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
delineated in Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation."

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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 June 30, 2004, and $30 million
at June 30, 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 second quarter
and first six months 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 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 program
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 first quarter and
$14 million, $8 million after tax, or $0.06 per share, in the second quarter of
2004. The principal strategic objectives of the program are to (1) rationalize
inefficient manufacturing assets, primarily certain molded-fiber facilities in
North America and the United Kingdom; (2) reduce overhead in several areas of
the business, thereby 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(R) brand. Implementation of the program resulted in the
elimination of approximately 1,000 salaried and hourly positions worldwide. The
total cost of the restructuring program 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-fiber facility in the United Kingdom. The majority of the program
was executed in the second quarter of 2004, with the balance expected to be
completed by December 31, 2004. Pretax annualized savings from the program 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 and $12 million in the first and second quarter of 2004,
respectively, and are expected to total $36 million for full 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-fiber
facility in the United Kingdom.

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. Appraisals of the fair-market value of the assets
acquired were finalized during the second quarter of 2004, resulting in related
goodwill being reduced by $6 million, and property, plant, and equipment and
intangible assets being increased by $5 million and $1 million, respectively.

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying value of goodwill for the six months ended June 30,
2004, by operating segment are shown in the following table.

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Intangible assets at June 30, 2004, are summarized in the following table.

Amortization expense for intangible assets subject to amortization was $4
million and $8 million for the three- and six-month periods ended June 30, 2004,
respectively. 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 second quarter of 2004, the company acquired 3.8 million shares of
its common stock at an average price of $23.22 per share, a total outlay of $88
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-fiber,
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-fiber, 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-fiber 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.

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The following table sets forth certain segment information.

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(a) Includes restructuring and other charges of $7 million and $26 million in
the three and six months ended June 30, 2004, respectively.

(b) Includes restructuring and other charges of $6 million and $53 million in
the three and six months ended June 30, 2004, respectively.

(c) Includes restructuring and other charges of $1 million in the three and six
months ended June 30, 2004, respectively.

(d) Includes restructuring and other charges of $4 million in the six months
ended June 30, 2004.

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

NOTE 9. COMPREHENSIVE INCOME

Details of total comprehensive income (loss) for the three- and six-month
periods ended June 30, 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 June 30, 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 expects that its plans are not likely to qualify
for the federal subsidy, and therefore the Act will not have any impact on the
company's accounting for its postretirement-benefit costs and accumulated
benefit obligation.

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 is
currently a defendant in 11 direct-action complaints that have been filed in
various federal courts across the United States by opt-out entities. These
class-action 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. Recently, a related class-action complaint was filed in
Canada against the same defendants.

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

12

paid in settlement of the 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, entered into a settlement agreement with that agency, which is
subject to the approval of the U.S. Environmental Protection 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 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.

NOTE 13. SUBSEQUENT EVENT

On August 4, 2004, the company's board of directors authorized it to
repurchase up to 5 million shares of its common stock. The purchases will be
made from time to time, based on market conditions, and the shares may be
purchased in open market or privately negotiated transactions. The company has
repurchased 8.4 million shares of its common stock in 2004.

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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-fiber,
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-fiber, 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-fiber 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 program
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 first quarter and
$14 million, $8 million after tax, or $0.06 per share, in the second quarter of
2004. The principal strategic objectives of the program are to (1) rationalize
inefficient manufacturing assets, primarily certain molded-fiber facilities in
North America and the United Kingdom; (2) reduce overhead in several areas of
the business, thereby 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(R) brand. Implementation of the program resulted in the
elimination of approximately 1,000 salaried and hourly positions worldwide. The
total cost of the restructuring program 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-fiber facility in the United Kingdom. The majority of the program
was executed in the second quarter of 2004, with the balance expected to be
completed by December 31, 2004. Pretax annualized savings from the program 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 and $12 million in the first and second quarter of 2004,
respectively, and are expected to total $36 million for full 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-fiber
facility in the U.K.

THREE MONTHS ENDED JUNE 30, 2004, COMPARED WITH THREE MONTHS ENDED JUNE 30, 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 13% higher in the second quarter of
2004 than in the same period of 2003, while average industry prices for
polyethylene rose by approximately 8% in the second quarter of 2004 compared
with the same period in 2003. 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. However, these price increases were
only partially effective in offsetting the impact of the resin-cost increases in
the second quarter, as evidenced by the decline in the company's gross margin to
28.8% in 2004 from 29.5% last year.

The volatility of raw-material costs continues to be a source of
uncertainty. Oil prices, because of concerns over supply disruptions, are very
high. Chemical intermediates, particularly benzene which is used in the
manufacture of polystyrene, have risen recently to unprecedented levels. As a
result, polystyrene suppliers have announced substantial price increases
effective in the third and fourth quarters of 2004. The company has responded by
announcing selling-price increases for its polystyrene-based products effective
in the third quarter.

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Sales

Total sales increased $48 million, or 5.9%, over 2003. Excluding the
positive impact of foreign-currency exchange rates ($9 million), and
acquisitions ($18 million), sales grew 2.6%, driven principally by volume
growth.

Sales for the Consumer Products business increased $5 million, or 2.2%,
from 2003, reflecting a 7-percent volume increase, offset partially by higher
promotional spending. As previously announced, the company increased promotional
support in this business during the quarter. This additional spending, a portion
of which was deducted from sales, drove healthy volume gains in all major
product lines and should also have a positive effect on growth in the second
half. Volume growth occurred in waste bags, driven partially by strength in
Hefty(R) CinchSak(R) Ultra tall kitchen and large trash bags and Hefty(R)
HandySaks(TM) convenience bags, which were launched earlier this year. Likewise,
tableware volume increased in both the branded and private-label businesses, and
food-bag volume was strong. In addition, the company introduced cups to the
market in May, and this product line is performing as expected.

Sales in the Foodservice/Food Packaging business increased $30 million, or
8.5%, from 2003. Excluding the positive impact of acquisitions ($18 million),
and the negative impact of foreign-currency exchange rates ($1 million), sales
increased $13 million, or 3.7%. The segment posted solid volume gains driven by
strength in most product lines, particularly foodservice foam, agricultural, and
home meal replacement products. In the first quarter of 2004, the company
introduced new products for the fast food industry, and sales of those items
continued to benefit the second quarter.

Sales of protective- and flexible-packaging products increased $13 million,
or 5.8%, compared with 2003. Excluding the positive impact of foreign-currency
exchange rates ($10 million), sales for this segment increased $3 million, or
1.3%. The impact of higher North American protective-packaging volume more than
offset the effect on sales of closing a molded fiber plant in the United
Kingdom, as announced in March. North American volume growth reflected strong
demand in inflatables, polyethylene foam items, and air-cushioning products.

Operating Income

Total operating income was $107 million in the second quarter of 2004, a
decrease of $13 million, or 10.8%, from last year, driven primarily by the
recording of restructuring and other charges of $14 million in the current
period. Compared with last year, the positive effect of volume growth,
restructuring benefits, and the company's ongoing productivity efforts
essentially offset the impact of higher energy-related costs, increased
marketing-support expenditures in Consumer Products, and lower noncash pension
income.

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

The company's management believes that providing operating income excluding
the effect 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 an ongoing effect on the company, and
to consider such charges as being only applicable to the second quarter of 2004
might make the company's operating performance in that quarter more difficult to
evaluate, particularly when compared with other periods in which there were no
such 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.

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

Total operating income excluding restructuring and other charges was $121
million in the second quarter of 2004, an increase of $1 million from last year,
as volume growth, restructuring benefits, and productivity gains offset higher
energy-related costs, increased marketing-support costs in Consumer Products,
and lower noncash pension income.

Operating income for the Consumer Products business was $48 million, a
decrease of $1 million from last year, as higher advertising and promotional
spending and increased energy-related costs were essentially offset by volume
growth and productivity benefits.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $50 million, even with 2003. The
benefits of higher volume, productivity improvements, and pricing actions offset
higher energy-related costs.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $20 million, an increase of $7
million, or 53.8%, from last year, primarily reflecting higher North American
volume, restructuring-program benefits, and ongoing productivity improvements,
offset partially by lower European pricing.

Operating income excluding restructuring and other charges for the Other
segment was $3 million, a decrease of $5 million, or 62.5%, from a year ago,
principally because of a decline in noncash pension income and higher
share-based compensation costs.

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Income from Continuing Operations

The company recorded net income from continuing operations of $52 million,
or $0.33 per share in the second quarter of 2004, compared with $59 million, or
$0.37 per share, last year. Second quarter 2004's results included the impact of
restructuring and other charges of $8 million, or $0.06 per share, and noncash
pension income of $7 million, or $0.05 per share, which was $0.01 per share
lower than the previous year.

SIX MONTHS ENDED JUNE 30, 2004, COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales increased $106 million, or 6.9%, over 2003. Excluding the
positive impact of foreign-currency exchange rates ($30 million), and
acquisitions ($35 million), sales grew 2.6%, driven mainly by higher volume.

Sales in the Consumer Products business increased $16 million, or 3.8%,
over last year driven by volume growth, offset partially by an increase in the
portion of promotional spending that is deducted from sales. Tableware volume
increased in both the branded and private-label businesses. Waste-bag volume
grew, driven partially by Hefty(R) CinchSak(R) Ultra tall kitchen and large
trash bags and Hefty(R) HandySaks(TM) convenience bags, which were launched
earlier this year.

Sales in the Foodservice/Food Packaging business increased $64 million, or
9.6%, from 2003. Excluding the impact of acquisitions ($35 million), sales grew
4.4%, driven primarily by volume growth in almost every key product line,
particularly foodservice foam and home meal replacement products. In addition,
several new products for the fast-food industry were introduced during the first
half of the year and related sales contributed to the sales growth.

Sales of protective- and flexible-packaging products increased $26 million,
or 5.9%, compared with 2003. Excluding the positive impact of foreign-currency
exchange rates ($30 million), sales declined 0.9%, reflecting the effect on
sales of closing a molded fiber plant in the United Kingdom and weakness in
sales volumes elsewhere in Europe, offset partially by economy-driven volume
growth in North American protective packaging.

Operating Income

Total operating income was $132 million in 2004, a decrease of $83 million,
or 38.6%, from last year, driven primarily by the recording of restructuring and
other charges of $84 million in the first half of 2004.

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Compared with last year, the positive impact of higher volume,
restructuring-program benefits, and productivity gains essentially offset the
effect of higher energy-related costs, increased marketing-support expenditures,
and lower noncash pension income.

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

The company's management believes that providing operating income excluding
the effect 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 an ongoing effect on the company, and
to consider such charges as being only applicable to the first half of 2004
might make the company's operating performance in that period more difficult to
evaluate, particularly when compared with other periods in which there were no
such 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.

The following table summarizes operating income excluding restructuring and
other charges for the six-month period ending June 30, 2004 and 2003,
respectively.

Total operating income excluding restructuring and other charges was $216
million, essentially even with last year, as higher volume, restructuring
savings, and productivity gains were offset by increased energy-related costs,
higher marketing support expenditures, and lower noncash pension income.

Operating income excluding restructuring and other charges for the Consumer
Products business was $89 million, down 1.1% compared with 2003, as higher
advertising and promotional expenses and increased energy-related costs were
mostly offset by higher volume and productivity gains.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $85 million, up 3.7% from a year ago.
The increase was driven principally by volume growth, restructuring benefits,
and productivity improvements, offset partially by lower spread (the difference
between selling prices and raw-material costs).

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $33 million, up 22.2% from last
year, primarily reflecting North American volume growth, restructuring benefits,
and productivity gains, offset partially by a decline in European volume and
lower spread.

Operating income for the Other segment decreased 43.8% from last year,
principally because of a decline in noncash pension income.

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Income from Continuing Operations

The company recorded net income from continuing operations of $52 million,
or $0.33 per share for the six months ended June 30, 2004, compared with $103
million, or $0.64 per share, last year. Current-period results included the
impact of restructuring and other charges of $52 million, or $0.34 per share,
and noncash pension income of $15 million, or $0.10 per share, which was $0.02
per share lower than the previous year.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The ratio of debt to total capitalization rose to 58.3% at June 30, 2004,
from 55.6% at December 31, 2003, as a result of a decline in shareholders'
equity.

Shareholders' equity decreased $112 million in the first six months of
2004, driven by the repurchase of $171 million of Pactiv common stock and the
recording of an unfavorable currency-translation adjustment of $18 million,
offset partially by the recording of $52 million of net income and the issuance
of $25 million of company common stock.

Cash Flows

Cash provided by operating activities was $169 million in 2004, up $14
million from the same period last year, reflecting better working-capital
management and higher cash earnings.

Investing activities used $36 million and $50 million of cash in 2004 and
2003, respectively, primarily for the acquisition of property, plant, and
equipment.

Cash used by financing activities was $153 million in 2004, primarily
reflecting the repurchase of company common stock ($171 million), offset
partially by the issuance of company stock ($19 million) in connection with the
administration of employee-benefit plans. Cash used by financing activities was
$65 million in 2003, principally reflecting the early retirement of debt ($28
million) and the repurchase of company stock ($44 million), offset partially by
the issuance of company stock ($8 million) in connection with the administration
of employee-benefit plans.

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $92
million at June 30, 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.

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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. For the
first six months of 2004, cash flow from operations was $169 million, an
increase of $14 million, or 9%, from the same period in 2003, providing a
substantial source of liquidity to the company. Additionally, effective May 27,
2004, the company's revolving-credit facility was renewed for an additional five
years, with total availability under the facility of $600 million (which may be
increased by $150 million at the request of the company). There were no
outstanding borrowings under this revolving line of credit at June 30, 2004. The
company was in full compliance with financial and other covenants of its
revolving-credit agreement at the end of the second quarter of 2004. The company
also utilizes an asset-securitization program which represents off-balance-sheet
financing. Amounts securitized under this program were $10 million and $30
million at June 30, 2004, and June 30, 2003, respectively. 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 board of directors approved a plan for the company to
repurchase up to 5 million shares of its common stock using open-market or
privately-negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. In March 2004, the board of directors
approved a plan for the company to repurchase an additional 5 million shares of
its common stock under terms and conditions similar to those included in the
December 2003 plan. Pursuant to these authorizations, the company acquired 3.8
million shares during the second quarter of 2004 at an average price of $23.22
per share, or a total outlay of $88 million. For the first half of 2004, the
company acquired 7.6 million shares at an average cost of $22.48 per share, or a
total outlay of $171 million. See Part II, Item 2 for additional information.

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

21

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.

22

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

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

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

- Material substitutions and changes in the cost 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, natural gas, and various chemical intermediates. 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. The
price of chemical intermediates can be affected by planned and unplanned
refining outages.

- 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 price of raw materials
and the cost of manufacturing.

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

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

- 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.

23

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 June 30, 2004, all of which will mature later in 2004.

Interest Rates

The company has issued public-debt securities ($1,174 million at June 30,
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 $1
million and floating-rate debt of $169 million at June 30, 2004. The fair-value
of long-term debt at June 30, 2004, and December 31, 2003, was approximately
$1,506 million and $1,535 million, respectively, compared with recorded amounts
of $1,336 million at both dates.

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

24

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 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 related accumulated net loss ($1 million at June 30,
2004), is being expensed over the remaining life of the underlying obligation.

ITEM 4. CONTROLS AND PROCEDURES

The company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the company in the reports it files
or submits under the Securities Exchange Act is recorded, processed, summarized,
and reported within the appropriate time periods. The company, under the
supervision and with the participation of its management, including the
company's principal executive officer and principal financial officer, has
evaluated the effectiveness of its disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 July
28, 2004.

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.

25

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 board of directors approved a plan for the company to
repurchase up to 5 million shares of its common stock using open-market or
privately negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. As of April 30, 2004, all shares under
this authorization were acquired at an average price of $22.02 per share.

In March 2004, the board of directors approved a plan for the company to
repurchase an additional 5 million shares of its common stock under terms and
conditions similar to those included in the December 2003 plan. As of June 30,
2004, the company had purchased 3,566,700 shares of its common stock under this
authorization at an average price of $23.28 per share.

The following table summarizes Pactiv stock purchases made during the
second quarter of 2004 under the December 2003 and March 2004 authorizations and
4,036 shares acquired by the company in connection with the exercises of stock
options under the company's employee benefit plans.

- ---------------
(1) 223,600 shares purchased during April of 2004 were acquired pursuant to the
December 2003 authorization, completing that authorization.

(2) Represents the remaining number of shares that may be purchased under the
March 2004 authorization as of June 30, 2004.

ITEM 3. NONE

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

The company's 2004 annual meeting of shareholders was held on May 14, 2004,
for the purpose of (1) electing directors, (2) ratifying the appointment of
Ernst & Young LLP as independent public accountants for the year 2004, and (3)
acting upon such other matters as might be properly brought before the meeting
or any adjournment or postponement thereof.

At the meeting, the following persons were elected to the company's board
of directors, each for a term to expire at the company's 2005 annual meeting of
shareholders:

26

The shareholders ratified the appointment of Ernst & Young LLP as the
company's independent auditors for the year 2004, with 141,494,173 votes cast
for ratification, 2,053,214 votes cast against ratification, and 981,257
abstentions.

ITEM 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 April 22, 2004, the company filed a Form 8-K regarding the press release
announcing the company's first quarter 2004 earnings.

29

SIGNATURES

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

PACTIV CORPORATION

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

Date: August 5, 2004

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