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 SEPTEMBER 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: 148,429,229 as of October 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 nine-month periods
ended September 30, 2004, and 2003, the Condensed Consolidated Statement of
Financial Position at September 30, 2004, and the Condensed Consolidated
Statement of Cash Flows for the nine-month periods ended September 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 September 30, 2004, and $15
million at September 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
third quarter and first nine 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
$84 million, $58 million after tax, or $0.34 per share, in the first six months
of 2004, and $2 million, $1 million after tax, or $0.01 per share, in the third
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 in the first half of 2005.

After-tax cash payments related to the restructuring and other actions
totaled $20 million in the first nine months of 2004, and are expected to total
$25 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.

On October 21, 2002, Pactiv purchased a 70% interest in the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar), a leading thermoformer of
high-impact polystyrene (HIPS) cold cups and plates and polystyrene foam
foodservice/food packaging. For this interest, Pactiv paid $31 million to the
shareholders of Jaguar and made a $20 million equity investment in Jaguar. On
August 8, 2003, the company acquired the remaining 30% of the stock of Jaguar
for $22 million, making it a wholly-owned subsidiary of Pactiv. At December 31,
2003, the allocation of the purchase price to the net assets of Jaguar and the
related recognition of $12 million of goodwill were based on preliminary
estimates of the fair market value of the assets and liabilities acquired, and,
therefore, were subject to revision upon receipt of final appraisals. Appraisals
of the fair-market value of the assets acquired were finalized during the third
quarter of 2004, resulting in related goodwill being increased by $9 million,
and property, plant, and equipment being decreased by $9 million.

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NOTE 5. GOODWILL AND INTANGIBLE ASSETS

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

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

Amortization expense for intangible assets subject to amortization was $4
million and $13 million for the three- and nine-month periods ended September
30, 2004, respectively. Amortization expense is estimated to total $17 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

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NOTE 7. COMMON STOCK

EARNINGS PER SHARE

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

In the third quarter of 2004, the company acquired 2.5 million shares of
its common stock at an average price of $23.42 per share, a total outlay of $59
million. For the nine-month period ended September 30, 2004, the company
acquired 10.1 million shares of its common stock at an average price of $22.71
per share, a total outlay of $230 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 $4 million in the nine months
ended September 30, 2004.

(b) Includes restructuring and other charges of $1 million and $27 million in
the three and nine months ended September 30, 2004, respectively.

(c) Includes restructuring and other charges of $53 million in the nine months
ended September 30, 2004.

(d) Includes restructuring and other charges of $1 million and $2 million in
the three and nine months ended September 30, 2004, respectively.

(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 nine-month
periods ended September 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 September 30, 2004, available lines of credit totaled
$20 million; however, amounts borrowed against those lines at that date were not
material.

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NOTE 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The impact of pension plans on operating income 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 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. 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.

Several entities have opted out of the classes, and the company has been
named as a defendant in 11 direct-action complaints that have been filed in
various federal courts across the United States and in Canada by opt-out
entities. All of the opt-out complaints included allegations 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 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 operating results 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, operating results, 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 operating results 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-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,
$14 million, $8 million after tax, or $0.06 per share, in the second quarter and
$2 million, $1 million after tax, or $0.01 per share, in the third 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 in the first half of 2005. 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 $20 million in the first nine months of 2004, and are expected to total
$25 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 SEPTEMBER 30, 2004, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003

OPERATING RESULTS

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 35% higher in the third quarter of
2004 than in the same period of 2003, while average industry prices for
polyethylene rose by approximately 7% in the third 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 in the first
nine months of 2004. However, these price increases were only partially
effective in offsetting the impact of the resin-cost increases in the same
periods.

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. Strong
Asian market demand for polyethylene coupled with the high cost of oil used in
the Asian production of polyethylene have made Asia an attractive export market
for U.S. polyethylene producers. As a result, polystyrene and polyethylene
suppliers have announced substantial price increases effective in the fourth
quarter of 2004. The company has responded by announcing additional
selling-price increases for its polystyrene- and polyethylene-based products
effective in the third and fourth quarter.

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Sales

Total sales increased $72 million, or 9.1%, over 2003. Excluding the
positive impact of foreign-currency exchange rates ($10 million), and
acquisitions ($20 million), sales grew 5.2%, driven principally by volume growth
and pricing.

Sales for the Consumer Products business increased $14 million, or 6.3%,
from 2003, reflecting strong volume growth. The company experienced volume
increases in all product lines, led by gains in tableware and waste bags. Roll
out of Hefty(R) Ultra Flex(TM), the company's new strong and stretchable waste
bag, is on track, and advertising and promotion support will begin in November.
In the quarter, Hefty(R) Consumer Products also extended its Hefty(R) Zoo
Pals(R) line of plates with the introduction of bowls and utensils.

Sales in the Foodservice/Food Packaging business increased $35 million, or
10%, from 2003. Excluding the positive impact of acquisitions ($20 million), and
the negative impact of foreign-currency exchange rates ($1 million), sales
increased $16 million, or 4.6%, driven by pricing gains. The sales growth was
led by increases in foodservice foam, agricultural products, home meal
replacement items, and processor trays.

Sales of protective- and flexible-packaging products increased $23 million,
or 10.6%, compared with 2003. Excluding the positive impact of foreign-currency
exchange rates ($11 million), sales for this segment increased $12 million, or
5.2%, driven by volume and price increases in North America, and volume growth
in Europe. Demand gains were broad-based, including strong growth in
inflatables, air cushioning, polyethylene foam, and micro-foam products.

Operating Income

Total operating income was $114 million in the third quarter of 2004, a
decrease of $8 million, or 6.6%, from last year, reflecting the impact of higher
plastic resin and other energy-related costs, restructuring and other charges,
and lower noncash pension income, offset partly by the positive effect of volume
growth, restructuring benefits, and productivity gains.

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

The company's management believes that showing 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 third 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 third quarter of 2004 and 2003.

Total operating income excluding restructuring and other charges was $116
million in the third quarter of 2004, a decrease of $6 million from last year,
as higher plastic resin and other energy-related costs, and lower noncash
pension income were only partly offset by volume growth, restructuring benefits,
and productivity gains.

Operating income excluding restructuring and other charges for the Consumer
Products business was $44 million, a decrease of $4 million from last year,
primarily driven by higher plastic resin and other energy-related costs, offset
partially by volume growth and productivity benefits.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $46 million, a decrease of $7 million
from last year, as higher plastic resin and other energy-related costs were only
partially offset by the favorable effect of 2004 price increases and
productivity improvements.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $23 million, an increase of $8
million, or 53.3%, from last year, as volume and pricing gains, and the impact
of restructuring initiatives more than offset higher plastic resin and other
energy-related costs.

Operating income excluding restructuring and other charges for the Other
segment was $3 million, a decrease of $3 million, or 50%, from a year ago,
principally because of a decline in noncash pension income.

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Net Income

The company recorded net income of $56 million, or $0.37 per share, in the
third quarter of 2004, compared with $26 million, or $0.16 per share, last year.
Third quarter 2004's results included the impact of restructuring and other
charges of $1 million, or $0.01 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. Third quarter 2003 results included a charge of $35 million, or $0.22 per
share, for the Tenneco Packaging litigation settlement and related matters.

NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003

OPERATING RESULTS

Sales

Total sales increased $178 million, or 7.7%, over 2003. Excluding the
positive impact of foreign-currency exchange rates ($40 million), and
acquisitions ($55 million), sales grew 3.5%, driven mainly by higher volume and
pricing.

Sales in the Consumer Products business increased $30 million, or 4.7%,
over last year driven by volume growth. Tableware volume increased in both the
branded and private-label businesses. Waste-bag volume grew, driven partially by
Hefty(R) Ultra Flex(TM) 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 $99 million, or
9.7%, from 2003. Excluding the impact of acquisitions ($55 million) and
foreign-currency exchange rates ($1 million), sales grew 4.4%, driven primarily
by volume growth in several key product lines and selling price increases.
Volume growth was particularly strong in foodservice foam and home meal
replacement products, which included new products introduced during the first
half of the year for the fast-food industry.

Sales of protective- and flexible-packaging products increased $49 million,
or 7.4%, compared with 2003. Excluding the positive impact of foreign-currency
exchange rates ($41 million), sales increased 1.1%, reflecting strong volume
growth in North America, offset by lower volume in Europe, primarily driven by
the effect of closing a molded fiber plant in the United Kingdom.

Operating Income

Total operating income was $246 million in 2004, a decrease of $91 million,
or 27%, from last year, driven primarily by the recording of restructuring and
other charges of $86 million in the nine-month period ended

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September 30, 2004. Compared with last year, the unfavorable effect of higher
energy-related costs, increased marketing-support expenditures, and lower
noncash pension income was offset partially by the positive impact of higher
volume, restructuring-program benefits, and productivity gains.

The following table summarizes by segment the impact of restructuring and
other charges for the nine-month period ended September 30, 2004.

The company's management believes that showing 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 nine months 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 nine-month period ended September 30, 2004 and 2003,
respectively.

Total operating income excluding restructuring and other charges was $332
million, down $5 million versus last year, as increased plastic resin and other
energy-related costs, higher marketing-support expenses, and lower noncash
pension income were only partially offset by higher volume, restructuring
savings, and productivity gains.

Operating income excluding restructuring and other charges for the Consumer
Products business was $133 million, down 3.6% compared with 2003, as higher
plastic resin and other energy-related costs and increased advertising and
promotional expenses were only partly offset by higher volume and productivity
gains.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $131 million, down 3% from a year ago,
reflecting the unfavorable impact of higher plastic resin and other
energy-related costs, offset, in part, by increased volume, higher selling
prices, and productivity improvements.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $56 million, up 33.3% from last
year, primarily reflecting volume growth in North America, restructuring
benefits, and productivity gains.

19

Operating income excluding restructuring and other charges for the Other
segment decreased 45.5% from last year, principally because of a decline in
noncash pension income.

Net Income

The company recorded net income from continuing operations of $108 million,
or $1.05 per share, for the nine months ended September 30, 2004, compared with
$129 million, or $0.80 per share, last year. Current-period results included the
impact of restructuring and other charges of $54 million, or $0.35 per share,
and noncash pension income of $23 million, or $0.15 per share, which was $0.03
per share lower than the previous year. Net income for the nine months ended
September 30, 2003, included a charge of $35 million, or $0.22 per share, for
the Tenneco Packaging litigation settlement and related matters.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The ratio of debt to total capitalization rose to 57.9% at September 30,
2004, from 55.6% at December 31, 2003, as a result of a decline in shareholders'
equity.

Shareholders' equity decreased $95 million in the first nine months of
2004, driven by the repurchase of $230 million of Pactiv common stock and the
recording of an unfavorable currency-translation adjustment of $5 million,
offset partially by the recording of $108 million of net income and the issuance
of $32 million of company common stock.

Cash Flows

Cash provided by operating activities was $313 million in 2004, up $38
million from the same period last year, reflecting better working-capital
management and higher cash earnings.

Investing activities used $66 million and $103 million of cash in 2004 and
2003, respectively, primarily for the acquisition of property, plant, and
equipment.

Cash used by financing activities was $206 million in 2004, primarily
reflecting the repurchase of company common stock ($230 million), offset
partially by the issuance of company stock ($24 million) in connection with the
administration of employee-benefit plans. Cash used by financing activities was
$115 million in 2003, principally reflecting the early retirement of debt ($67
million) and the repurchase of company stock ($59 million), offset partially by
the issuance of company stock ($12 million) in connection with the
administration of employee-benefit plans.

20

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $140
million at September 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.

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 nine months of 2004, cash flow from operations was $313 million, an
increase of $38 million, or 14%, 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 September 30,
2004. The company was in full compliance with financial and other covenants of
its revolving-credit agreement at the end of the third 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 $15 million at September 30, 2004, and September 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. In August 2004, the board of directors approved a plan for
the company to repurchase a third tranche of 5 million shares of its common
stock under terms and conditions similar to those included in the December 2003
and March 2004 plans. Pursuant to these authorizations, the company acquired 2.5
million shares during the third quarter of 2004 at an average price of $23.49
per share, or a total outlay of $59 million. For the nine-month period ended
September 30, 2004, the company acquired 10.1 million shares at an average cost
of $22.71 per share, or a total outlay of $230 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

21

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.

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

Interest Rates

The company has issued public-debt securities ($1,174 million at September
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 September 30, 2004. The
fair-value of long-term debt at September 30, 2004, and December 31, 2003, was
approximately $1,553 million and $1,535 million, respectively, compared with
recorded amounts of $1,336 million at both dates.

24

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 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 September
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
November 3, 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 up to 5 million shares of its common stock under terms and conditions
similar to those included in the December 2003 plan. As of August 30, 2004, all
shares under this authorization were acquired at an average price of $23.31 per
share.

In August 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 September
30, 2004, the company had purchased 1,094,100 shares of its common stock under
this authorization at an average price of $23.49 per share.

The following table summarizes Pactiv stock purchases made during the third
quarter of 2004 under the March 2004 and August 2004 authorizations and 1,455
shares acquired by the company in connection with stock-option exercises under
the company's employee benefit plans.

- ---------------
(1) Represents the remaining number of shares that may be purchased under the
August 2004 authorization as of September 30, 2004.

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 July 22, 2004, the company filed a Form 8-K regarding the press release
issued to announce the company's second quarter 2004 earnings.

On September 20, 2004, the company issued a press release announcing the
company's lower outlook for third quarter and full year 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: November 9, 2004

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