PACTIV CORP
ITEM 1.
Business.
Overview
Pactiv Corporation is a leading producer of consumer and foodservice/food packaging products. With one of the broadest product lines in the specialty packaging industry, we derive more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market share position. Our business operates 43 manufacturing facilities in North America, and 1 in Germany. We also have 2 joint-venture interests in China. In 2009, 96% of our $3.4 billion in sales was generated in North America.
We have three reporting segments:
•
Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.
•
Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
•
Other includes corporate and administrative service operations and retiree benefit income and expense.
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
Our company was incorporated in the state of Delaware in 1965 under the name of Packaging Corporation of America, operating as a subsidiary of Tenneco Inc. (Tenneco). In November 1995, we changed our name to Tenneco Packaging Inc. In November 1999, we were spun-off from Tenneco as an independent company, and changed our name to Pactiv Corporation.
In this report, we sometimes refer to Pactiv Corporation and its subsidiaries as “Pactiv” or the “company.”
Products and Markets
Consumer Products
We manufacture, market, and sell consumer products such as plastic storage bags for food and household items; plastic waste bags; aluminum cookware; and foam, pressed paperboard, plastic, and molded fiber tableware. These products are typically used by consumers in their homes and are sold through a variety of retailers, including supermarkets and mass merchandisers. Many of these products are sold under such recognized brand names as:
• Hefty®
• Hefty®
Ultra Flex®
• Hefty®
Hearty Mealstm
• Hefty®
Baggies®
• Hefty®
Cinch Sak®
• Hefty®
Elegantware®
• Kordite®
• Hefty®
The Gripper®
• Hefty®
Zoo Pals®
• Hefty®
OneZip®
• Hefty®
Kitchen Fresh®
• Hefty®
Easy Grip®
• Hefty®
Odor Block®
• Hefty®
Renew®
• Hefty®
EZ Foil®
In 2009, Consumer Products accounted for 38% of our sales.
Foodservice/Food Packaging
We are a leading provider of packaging products to the foodservice, supermarket, restaurant, and food packaging markets. Our products are designed to protect food during distribution, aid retailers in merchandising food products, and help customers prepare and serve meals in their homes.
In 2009, Foodservice/Food Packaging accounted for 62% of our sales.
Foodservice customers use our products to merchandise and sell food products on their premises and for takeout meals. Products include tableware items, such as plates, bowls, and cups, and a broad line of takeout service containers, made from clear plastic, microwaveable plastic, foam, molded fiber, paperboard, and aluminum.
Food packaging products for supermarkets include clear rigid-display packaging for produce, delicatessen, and bakery applications; microwaveable containers for prepared, ready-to-eat meals; and foam trays for meat and produce. We also manufacture plastic zipper closures for a variety of other packaging applications.
Food processor products include dual-ovenable paperboard containers, molded fiber egg cartons, meat and poultry trays, and aluminum containers.
Business Strategy
Our business strategy is to grow by expanding our existing businesses and by making strategic acquisitions. Through our broad product lines and custom-design capability, we offer customers a range of products to fit their needs. As a result, we are a primary supplier to several national retailers, restaurant chains, and distributors, and have developed long-term relationships with key participants in the packaging and foodservice distribution markets. These relationships enable us to better identify and penetrate new markets.
Market Presence
Many of our products have strong market share positions, including those in key markets such as zipper bags, tableware, foam trays, foodservice foam containers, clear rigid-display packaging, and aluminum cookware. In 2009, we derived more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market share position. This is a reflection of the:
•
Strength of our Hefty®
brands
•
Breadth of our product lines
•
Ability to offer “one-stop shopping” to our customers
•
Strength of our supply chain capabilities
New Products
Successful development of new products and value-added product line extensions are essential to our continued growth. Our acquisition of Prairie Packaging, Inc. (Prairie) has broadened our product offering, particularly in the area of cups and cutlery. We spent $33 million on research and development activities in 2009, $32 million in 2008, and $35 million in 2007.
Service Capabilities
The Foodservice/Food Packaging segment’s “one face to the customer” strategy continues to deliver positive results. The systems and information management infrastructure and distribution network supporting this customer-linked manufacturing process help us to reduce supply chain costs, enhance customer service, and improve productivity.
Productivity/Cost Reduction
Our continued focus on productivity enhancements and manufacturing and logistics cost reductions is key to improving our profitability. In 2009, approximately 20% of our research and development spending and 15% of our capital spending was devoted to efforts to reduce costs and improve manufacturing and distribution efficiency.
Strategic Acquisitions
Strategic acquisitions have been an important element of our growth strategy. Since the beginning of 2000, $1.3 billion has been invested to acquire businesses that complement and/or expand our core businesses, including $1 billion in 2007 for Prairie. We focus on products that have strong growth characteristics and attractive margins, which provide the opportunity to leverage our existing distribution channels and core capabilities.
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina.
Marketing, Distribution, and Customers
We have a sales and marketing staff of approximately 500 people. Our consumer products are sold through a direct sales force and a national network of brokers and manufacturers’ representatives. We primarily use a direct sales force to sell to our foodservice and food packaging customers.
Wal-Mart Stores, Inc., which accounted for approximately 21% of our consolidated sales in 2009 and in 2008, was the only customer that accounted for more than 10% of our sales. Our backlog of orders is not material.
Analysis of Sales
The following table sets forth information regarding sales from continuing operations.
See Note 14 to the financial statements for additional segment and geographic information.
Competition
Our businesses face significant competition in all of our product lines from numerous national and regional companies of various sizes. Many of our competitors, particularly in the foodservice industry, are significantly smaller and have lower fixed costs. Certain competitors offer a more specialized variety of packaging materials and concepts and may serve more geographic regions through various distribution channels. Our success in obtaining business is driven primarily by our price, quality, product features, and service.
Raw Materials
The principal raw materials we use are plastic resins, aluminum, paperboard, and recycled paper. More than 80% of our sales were from products made from different types of plastics, including polystyrene, polyethylene, polypropylene, and amorphous polyethylene terephthalate. These raw materials are readily available from a wide variety of suppliers. Our overall supply of raw materials was adequate in 2009, and we believe that our raw material supply will remain adequate in 2010.
Environmental Regulation
We are subject to a variety of environmental and pollution control laws and regulations. Costs to continually monitor our compliance with these laws and regulations are a recurring part of our operations. These costs are not a significant percentage of total operating costs. We do not expect continued compliance to have a material impact on our results of operations, financial condition, or cash flows.
Change in Accounting Method
In 2009, we changed our method of accounting for inventory from a combination of the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method to the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. In accordance with Accounting Standards Codification (ASC) 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. The cumulative effect of the change in accounting principle on periods prior to those presented has been reflected as an adjustment to the opening balance of retained earnings as of January 1, 2005. For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the years ended December 31, 2008, and 2007, see Note 2 to the financial statements. For a summary of the effect on the unaudited interim quarters of 2009, see Note 16 to the financial statements.
Other
At December 31, 2009, we employed approximately 12,000 people, including persons employed by our Asian joint ventures. Our relations with employees remain satisfactory.
We own a number of U.S. and foreign patents, trademarks, and other intellectual property that are significant with regard to the manufacture, marketing, and distribution of certain products. We also use numerous software licenses. The intellectual property and licensing rights we hold are adequate for our business.
Available Information
Our website address is www.pactiv.com. Our investor relations link on this website has the following information available free of charge:
•
Annual reports on Form 10-K
•
Quarterly reports on Form 10-Q
•
Current reports on Form 8-K
•
Amendments to these reports
•
Code of business conduct/ethics
•
Code of ethical conduct for financial managers
•
Certain other corporate governance documents
Investor relations information is updated on our website as soon as reasonably practical after we electronically file or furnish information to the Securities and Exchange Commission. In addition, copies of our annual report on Form 10-K are made available, free of charge, upon request.
ITEM 1A.
Risk Factors.
General economic conditions affect demand for our products and impact our production and selling costs. Listed below are some of the factors that may impact our results and cause our performance to differ materially from the results we may project. These are in addition to general economic factors and other items discussed elsewhere in this report (for example, in the Management’s Discussion and Analysis of Financial Condition and Results of Operations).
Product Changes and Innovation
We operate in a very competitive environment. Historically, product innovation and development have been key to our obtaining and maintaining market share and margins. Our future sales and profitability are partially impacted by our ability to anticipate and react more effectively than our competitors to changes in consumer demand for the types of products we sell. This requires understanding customer desires, creating products that meet those desires, and producing and selling products in a cost effective manner.
Changes in Customers
We must address the demands of both the consumers who ultimately purchase and use our products and the retailers and others who sell our products to end-users. This is necessary for both of our segments, but it is particularly important in our Consumer Products segment. Our sales and margins can be impacted by changes in our distribution channels, customer mix, and merchandising strategies. Examples include customer concentration, consolidation, and substitution of unbranded products for branded products.
Although we have a diverse customer base, we have several large customers. These large customers provide us with cost saving opportunities that may not be available with smaller, more diverse accounts. However, large customers can take actions that put pressure on our margins. Moreover, a significant downturn in the financial condition of one or more large customers could have an adverse effect on our business results.
Increases in Production Costs
Most of our products are made from plastic. Plastic resin prices are impacted by the price of oil, natural gas, and chemical intermediaries, such as benzene and ethylene, which can be volatile and affected by many factors, including overall economic activity, geopolitical situations (particularly in oil exporting regions), natural disasters, and governmental policies and regulation.
Our margins can be negatively impacted by the difference in timing of raw material cost increases and corresponding product selling price increases. Similarly, changes in labor, utility, or transportation costs can affect our margins.
Laws Relating to Use or Manufacture of Plastic Products
Changes in laws or governmental actions regarding the use of disposable plastic products, such as laws relating to recycling or reuse of plastic products, could increase the cost of our products. Such additional costs could make our products less competitive with products made from other materials. Similarly, changes in laws regarding air emissions, including so-called cap and trade legislation, could increase our manufacturing costs.
Growth/Acquisitions and Divestitures
Growth, internally and through acquisitions, is an important element of our business strategy. We currently have adequate sources of liquidity for our operations. However, our ability to grow could be impacted if our cost of capital were to increase or if capital were to become more difficult to obtain. Our future success will depend somewhat on our ability to integrate new businesses that we may acquire, dispose of businesses or business segments that we may wish to divest, and redeploy proceeds from possible divestitures.
International Issues
Currently most of our production and sales are in the United States. Competition from products manufactured in countries that have lower labor and other costs than the United States could negatively impact our profitability. Additionally, if we were to manufacture or sell more of our products in countries outside of the United States, we would be exposed to additional economic, political, competitive, and foreign currency exchange risks.
Pension Plans
At the time of our spin-off from Tenneco in 1999, we became the sponsor of Tenneco (now Pactiv) pension plans. These plans cover most of our employees as well as individuals/beneficiaries from many companies previously owned by Tenneco, but not owned by Pactiv. As a result, while persons who are not current employees do not accrue benefits under the plans, the total number of individuals/beneficiaries covered by these plans is much larger than would have been the case if only Pactiv personnel were participants. For this reason, the impact of the pension plans on our net income, shareholders’ equity and cash from operations is
greater than is typically found at similarly sized companies. Changes in the following factors can have a disproportionate effect on our results compared with similarly sized companies:
•
Assumptions regarding the long-term rate of return on pension assets and other factors
•
Interest rate used to discount projected benefit obligations
•
Level of amortization of actuarial gains and losses
•
Governmental regulations relating to funding of retirement plans in the U.S. and foreign countries
•
Financial market performance
ITEM 1B.
Unresolved Staff Comments.
None.
ITEM 2.
Properties.
Headquarters
Our corporate headquarters is located at 1900 West Field Court, Lake Forest, Illinois 60045. Our general telephone number is (847) 482-2000.
Manufacturing and Distribution Facilities
Our Consumer Products and Foodservice/Food Packaging segments operate 43 manufacturing and 9 distribution facilities in North America (United States, Mexico, and Canada). We also have a manufacturing facility in Germany that supports our Foodservice/Food Packaging segment. In addition, we have research and development centers in Canandaigua, New York, and Vernon Hills, Illinois. We also have joint-venture interests in a corrugated-converting operation in Shaoxing, China (62.5% owned) and in a folding carton operation in Dongguan, China (51% owned).
Our plants and equipment are well maintained and in good operating condition. We have satisfactory title to our owned properties, which are subject to certain liens that do not detract materially from the value or use of the properties.
ITEM 3.
Legal Proceedings.
We are party to other legal proceedings arising from our operations. We establish reserves for claims and proceedings 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 matters, based on our assessment of the facts and circumstances now known, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.
ITEM 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
ITEM 4.1.
Executive Officers of the Registrant.
Our executive officers, as of February 26, 2010, are listed below. This information is being included in Part I of this Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Richard L. Wambold, 58, Chairman of the Board of Directors, President, and Chief Executive Officer.
Mr. Wambold has served as Chairman since March 2000, President since June 1999, and Chief Executive Officer since our spin-off in November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and General Manager of our foodservice/food packaging and consumer products business units.
Edward T. Walters, 58, Senior Vice President and Chief Financial Officer.
Mr. Walters has served as Senior Vice President and Chief Financial Officer since July 2008. Prior to that date, he served as vice president and controller since 1999. Mr. Walters has been with Pactiv and predecessor companies since 1975 in various financial, planning and general management positions.
Joseph E. Doyle, 50, Vice President, General Counsel, and Secretary.
Mr. Doyle was appointed Vice President, General Counsel, and Secretary of the company on February 1, 2007. Prior to joining the company, he was a partner at the law firm of Mayer Brown LLP from 2001 to 2007.
Peter J. Lazaredes, 59, Executive Vice President and General Manager, Foodservice/Food Packaging.
Mr. Lazaredes has served as Executive Vice President and General Manager, Foodservice/Food Packaging, since July 2004. Prior to 2004, and since he joined the company in 1996, Mr. Lazaredes held various senior management positions in the company’s foodservice/food packaging business unit.
John N. Schwab, 60, Senior Vice President and General Manager, Hefty®
Consumer Products.
Mr. Schwab has served as Senior Vice President and General Manager, Hefty®
Consumer Products, since January 2001. Prior to 2001, and since he joined the company in 1995, Mr. Schwab held various senior management positions in the company’s consumer products business unit.
Michael O. Oliver, 56, Vice President and Chief Human Resources Officer.
Mr. Oliver has served as Vice President and Chief Human Resources Officer since May 2008. Prior to joining the company, Mr. Oliver served as Senior Vice President, Human Resources, for Brady Corporation from February 1997 to April 2008.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
The outstanding shares of Pactiv Corporation common stock ($0.01 par value) are listed on the New York Stock Exchange under the symbol “PTV.” Stock price and dividend information for 2009 and 2008 are shown below.
At January 31, 2010, there were approximately 28,726 holders of record of the company’s common stock, including brokers and other nominees.
We periodically consider alternatives to increase shareholder value, including dividend payments. Dividend declarations are at the discretion of our board of directors. We currently do not pay a dividend.
In July 2006, the board of directors approved the repurchase of 10 million shares of our common stock. As of December 31, 2009, the remaining number of shares authorized to be repurchased was 522,361. We repurchase shares using open market or privately negotiated transactions. Repurchased shares are held in treasury for general corporate purposes. There is no expiration date for the current share repurchase authorization. We did not repurchase stock in the fourth quarter of 2009.
The following graph compares, for the five years ended December 31, 2009, the cumulative total return for the company’s common stock with the cumulative total return for the Standard & Poor’s (S&P) 500®
stock index and a custom composite index. The latter index is comprised of the following companies: Aptar Group Inc., Bemis Co., Crown Holdings, Inc., Sealed Air Corp., and Sonoco Products Co. These companies were selected in good faith based on their similarity with the company’s business. The historical performance of the company’s stock shown in this graph is not necessarily indicative of future performance.
Cumulative Total Return
Based on an assumed initial investment of $100 on December 31, 2004
with dividends reinvested
December 31,
Pactiv Corp.
$
$
$
$
$
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S&P 500®
Index
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$
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Custom Composite Index (5 stocks)
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ITEM 6.
Selected Financial Data.
Other Information:
The company has never paid a dividend.
(1)
2008 through 2005 have been adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
(2)
Includes restructuring and other charges (credits) of $16 million in 2008, ($1) million in 2006, and $6 million in 2005, as well as a realized foreign currency exchange gain of $31 million in 2006.
(3)
2006 includes $0.14 per share for a realized foreign currency exchange gain and $0.21 for income tax liability adjustments.
(4)
In 2009, pension contributions were $411 million net of income tax.
See Note 5 to the financial statements for discontinued operations.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Basis of Presentation
Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to the prior years financial information to conform to current year presentation.
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie’s operations have been included in the consolidated financial statements as of that date.
In January 2007, we purchased an additional 1% interest in a folding carton operation in Dongguan, China. This brought our interest to 51%, requiring us to include the joint venture in our consolidated financial statements.
On October 12, 2005, we sold substantially all of our protective and flexible packaging businesses. The results of the sold businesses, as well as costs and charges associated with the transaction, are classified as discontinued operations.
We have three reporting segments:
•
Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.
•
Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
•
Other includes 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 income, expenses, assets, and liabilities are used.
In 2009, we changed our method of accounting for inventory from a combination of the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method to the FIFO method. In accordance with Accounting Standards Codification (ASC) 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. For more information on the change in inventory accounting method, see the “Inventory Valuation” section and Note 2 to the financial statements. As a result of the accounting change, the discussions included in Item 7 reflect our results adjusted for the accounting change.
Subsequent Events
In February 2010, the board of directors approved an Agreement and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will acquire PWP Holdings and PWP Industries for $200 million. This transaction is expected to close in the late first quarter or early second quarter of 2010. PWP Industries manufactures and sells amorphous polyethylene terephthalate (APET) products in the food service market.
In February 2010, the board of directors also approved the repurchase of an additional 10 million shares of our common stock. This amount is in addition to the remaining 522,361 shares authorized to be repurchased as of December 31, 2009.
We have evaluated subsequent events through the filing date of this Form 10-K, and have determined that there were no other subsequent events to recognize or disclose in these financial statements.
Executive Overview
Business
Our primary business involves the manufacture and sale of consumer and specialty packaging products for the consumer and foodservice/food packaging markets. We operate 46 manufacturing facilities in 5 countries.
We sell our products to a wide array of customers worldwide. Customers include grocery stores, mass merchandisers, discount chains, restaurants, distributors, and packer processors, who prepare and process food for consumption.
Greater than 80% of our sales come from products made from different types of plastic resins, principally polystyrene and polyethylene, and, to a lesser extent, polypropylene and amorphous polyethylene terephthalate.
Consumer products include waste bags, food storage bags and disposable tableware and cookware. These products, made from various raw materials including plastic, aluminum, and paper, are sold under such well-known brand names as Hefty®,
Hefty®
Baggies®,
Hefty®
OneZip®,
Hefty®
Cinch Sak®,
Hefty®
The Gripper®,
Hefty®
Zoo Pals®,
Kordite®,
Hefty®
Odor Block®,
and Hefty®
EZ Foil®.
Foodservice and food packaging products include foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging for customers in the food distribution channel.
Significant Trends, Opportunities, and Challenges
Risks
Several opportunities and challenges may influence our continued growth.
Near-term risks include:
•
The impact of raw material cost volatility
•
The ability to maintain or increase selling prices
•
The continued effectiveness of our productivity and procurement initiatives
•
Economic and financial market conditions
Longer-term risks include:
•
Potential changes in consumer demand or governmental regulations
•
Possible supplier and customer consolidations
•
Potential increases in foreign-based competition
•
Possible growth in market share of unbranded products
We expect to continue to be successful by:
•
Adjusting selling prices to offset raw material price movements
•
Implementing aggressive cost management and productivity programs
•
Leveraging our existing products into new distribution channels
•
Introducing innovative new products
•
Making strategic acquisitions
•
Growing our business by following, where appropriate, our dual brand/private label strategy
Raw Materials and Energy-Related Costs
The primary raw materials used to manufacture our products are plastic resins, principally polystyrene and polyethylene. Average industry prices for polystyrene and polyethylene as published by Chemical Market Associates, Inc. are depicted in the following graphs.
Polystyrene (cents/lb.)
Polyethylene (cents/lb.)
The prices of plastic resins are affected by the prices of crude oil and natural gas, as well as supply and demand factors of various intermediate petrochemicals. In recent years, there have been significant movements in resin prices, which rose to historic highs in 2008, and dropped precipitously at the end of 2008 and into early 2009. At the end of 2009, prices were increasing but still were moderately lower than at the end of 2008. We have historically adjusted our selling prices to reflect changes in raw material costs, although there is usually a lag of several months. Some of our business is pursuant to contracts that have price indices that automatically adjust after a set number of months, usually three or six, to reflect changes in certain raw materials.
Our business is sensitive to other energy-related cost movements, particularly those that affect transportation and utility costs. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. As energy costs have declined, we have seen a favorable impact on our margins. However, the extent and duration of energy-related cost reductions is uncertain.
Demand
The economic downturn that began in late 2007 has impacted consumer spending in many areas and has reduced demand for some of our products. However, our overall volume has not been adversely impacted by the economic downturn.
Productivity Improvements
In 2006, we began to introduce “lean” principles and tools in many of our operating facilities. We are expanding the use of lean principles to help us accelerate productivity improvements by reducing inventory and scrap levels, providing rapid stock replenishment, shortening scheduling cycles, improving our “one-stop shopping” service, eliminating nonvalue-added activities, and streamlining processes. As this is a long-term process, we expect our ability to use these tools throughout the organization will have a positive effect on our operating results in future years.
Pension
Worldwide stock markets declined significantly in 2008 and, as a result, our U.S. pension plan was substantially underfunded by approximately $1.1 billion at December 31, 2008. By the end of 2009, our U.S. pension plan underfunding was reduced by approximately one half due to a combination of $550 million of pension contributions, funded completely by cash flow from operations, and a 26% return earned during 2009 on pension plan assets. See the “Liquidity” and “Shareholders’ Equity” sections for further discussion of the impact on the company of its pension plan funding status.
We believe that cash flow from operations, available cash reserves, and the ability to obtain cash under our credit facility and asset securitization program will be sufficient to meet current and future potential pension funding, liquidity, and capital requirements.
Restructuring
In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. In 2008, we recorded a charge of approximately $10 million after tax, or $0.08 per share. Cash payments related to restructuring and other charges were $2 million for the year ended December 31, 2008. Cash payments related to restructuring and other were $1 million pretax for the year ended December 31, 2009. The program is essentially complete with the exception of a small idle plant held for sale.
Results of Continuing Operations
Year 2009 compared with 2008
Sales
Sales declined 6%, reflecting lower pricing of 8% and unfavorable foreign exchange of 1%, offset partially by volume growth of 3%.
Sales for Consumer Products decreased 4%, reflecting lower pricing of 6%, offset partially by higher volume of 2%. The price decline reflects normal reductions due to lower raw material costs. Volume growth was a result of increases in tableware, partially offset by a decline in waste bags. Waste bag volume was down due to a decline in the overall waste bag market.
Foodservice/Food Packaging sales fell 7%, driven by lower average selling prices of 9% and unfavorable foreign exchange of 1%, offset partially by volume growth of 3%. The lower pricing was related to decreases in raw material costs. The volume increase primarily was related to continued growth in cups and cutlery.
Operating Income
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Operating income increased primarily as a result of lower operating costs of $63 million driven by productivity and lower freight and utility rates, an $87 million improvement in spread (the difference between selling prices and raw material costs), higher volume of $42 million and lower restructuring costs of $16 million. This was offset, in part, by higher selling, general, and administrative (SG&A) expense of $68 million. The increase in SG&A expense was primarily a result of higher incentive compensation accruals, increased advertising expense, and lower pension income.
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
We believe that focusing on operating income excluding the effect of restructuring and other charges is a meaningful alternative way of evaluating our operating results. The restructuring and other charges relate to actions that will have an ongoing effect on our company. Considering such charges as being only applicable to the periods in which they are recognized could make our operating performance in those periods more difficult to evaluate relative to other periods in which there are no such charges. We use operating income excluding restructuring and other charges to evaluate operating performance and, along with other factors, in determining management compensation.
The following table shows operating income excluding restructuring and other charges for 2009 and 2008.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The increase in operating income for Consumer Products was driven mainly by favorable spread of $71 million, lower operating costs of $37 million, offset partially by higher SG&A expense of $33 million. The increase in SG&A expense primarily was due to higher advertising expense in support our Hefty®
Odor Block®
unscented odor control waste bags which launched at the end of 2008.
Higher operating income for Foodservice/Food Packaging was driven primarily by increased volume of $33 million and lower operating costs of $27 million, partially offset by higher SG&A expense of $14 million.
The decrease in Other operating income was due mainly to lower pension income, higher incentive compensation accruals, and higher legal and insurance costs.
Income Taxes
Our effective tax rate for 2009 was 36.4%, compared with 35.1% for 2008.
Income from Continuing Operations attributable to Pactiv
We recorded income from continuing operations of $308 million, or $2.31 per share, compared with $220 million, or $1.66 per share, in 2008. The change was driven primarily by higher operating income of $84 million (including lower restructuring of $10 million after tax) as described previously.
Discontinued Operations
Income (Loss) from Discontinued Operations
In 2009, we recorded income from discontinued operations of $15 million, which was primarily related to the expiration of the statute of limitations on the 2005 tax year for tax liabilities which had been recorded in conjunction with divested businesses. In 2008, we recorded expense from discontinued operations of $4 million, which was attributed to taxes associated with business dispositions which occurred in prior years.
Liabilities related to discontinued operations, which included obligations related to income taxes and certain royalty payments were as follows:
Liquidity and Capital Resources
Capitalization
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
(2)
Short-term debt payable in December 2010.
Total equity increased $314 million in 2009 as detailed below.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Cash Flows
Cash flows for continuing and discontinued operations were as follows:
The decrease in cash provided by operating activities was driven primarily by a $550 million pretax contribution to our U.S. pension plan, reduced by related favorable cash tax effects of approximately $139 million. This was offset partially by favorable working capital of $156 million and higher income from continuing operations of $88 million. The change in working capital was due to the favorable effect of lower raw material costs in 2009 compared to 2008 as well as higher incentive compensation liabilities.
The decrease in cash used by investing activities was driven by lower capital expenditures of $25 million, partially offset by the acquisition of the WinCup polypropylene cup business for $20 million.
The decrease in cash used by financing activities was a result of long-term revolving debt repayments of $160 million in 2008.
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $61 million at December 31, 2009. 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
We enter into arrangements that obligate us to make future payments under long-term contracts. Our long-term contractual obligations at December 31, 2009, were as follows:
(1)
Includes fixed rate notes, plus related interest payment obligations, based on rates in effect at December 31, 2009.
(2)
Includes open capital commitments, amounts related to the purchase of minimum quantities of raw materials at current market prices under supply agreements and other long-term vendor agreements with specific payment provisions and early termination penalties.
(3)
Includes undiscounted workers’ compensation obligations, and undiscounted and unfunded postretirement medical and supplemental pension funding requirements.
Liquidity and Off-Balance Sheet Financing
We use various sources of funding to manage liquidity. Sources of liquidity include cash flow from operations and a 5-year revolving credit facility of $750 million, under which no balance was outstanding at December 31,
2009. We were in full compliance with the financial and other covenants of our revolving credit agreement at the end of the period. The two financial covenant ratios contained in our debt agreements are an interest coverage ratio and the total debt to EBITDA ratio. The interest coverage ratio is defined as consolidated earnings before interest, taxes, depreciation and amortization, and other unusual noncash items (EBITDA) divided by interest expense. The minimum required ratio is 3.50 to 1. The total debt to EBITDA ratio is calculated by dividing the total debt by EBITDA. The maximum permitted total debt to EBITDA ratio is 3.50 to 1.
The interest coverage ratio and the debt to EBITDA ratio are shown in the following table.
(1)
Amounts per the consolidated statement of income.
(2)
Amounts per the consolidated statement of cash flows.
(3)
Amounts per the consolidated statement of financial position.
There have been no stated events of default, which would permit the lenders to accelerate the debt if not cured within applicable grace periods, or any cross default provisions in our debt agreements.
We also use an asset securitization facility as a form of off-balance-sheet financing. At December 31, 2009, $110 million was securitized under this facility, and $130 million was securitized at December 31, 2008. We do not participate in financial commercial paper markets.
We have a U.S. qualified pension plan that covers approximately 7,000 of our employees, as well as approximately 65,000 others, mostly retirees and persons who worked for predecessor companies that were part of Tenneco. The requirement to make contributions to this plan is a function of several factors, the most important of which are the return on plan assets and applicable funding discount rate used in calculating plan liabilities. We were not required to make a contribution to this plan in 2009, however, we elected to make contributions in 2009 of $550 million pretax. The related cash tax benefits of the contributions are $193 million, of which $139 million was realized in 2009 and $54 million will carry over into 2010.
In 2009, the plan assets earned approximately 26% and as of December 31, 2009, the Employee Retirement Income Security Act (ERISA) funding discount rate was 6.6% based on the 24-month average as of September 2009.
As of December 31, 2009, our U.S. pension plan was 94% funded on an ERISA basis, which determines the minimum funding requirements for the plan. As long as our funded ratio is above 60%, there is no meaningful
impact on us or the plan. We do not expect to make additional sizeable contributions to the plan for the foreseeable future.
We believe that cash flow from operations, available cash reserves, and the ability to obtain cash under our credit facility and asset securitization program will be sufficient to meet current and future potential pension funding, liquidity, and capital requirements.
Year 2008 compared with 2007
Sales
Sales grew 10%, reflecting 6% volume growth primarily from the inclusion of acquisition sales, an increase in net pricing of $124 million, and foreign currency exchange gains of $6 million.
The 10% increase in sales for Consumer Products reflected volume improvement of 7% primarily from the inclusion of acquisition sales, and an increase in net pricing of $33 million.
Sales growth of 10% for Foodservice/Food Packaging was attributable to a volume gain of 5% principally a result of the inclusion of acquisition sales, favorable pricing of $91 million, and foreign currency exchange gains of $6 million.
Operating Income
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Operating income declined as favorable volume of $36 million and lower advertising and promotional (A&P) costs of $5 million were more than offset by higher operating costs of $29 million, restructuring charges of $16 million, acquisition-related depreciation and amortization of $16 million, and unfavorable spread of $6 million. The higher operating costs were driven primarily by the impact of higher utility and freight costs.
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
We believe that focusing on operating income excluding the effect of restructuring and other charges is a meaningful alternative way of evaluating our operating results. The restructuring and other charges relate to actions that will have an ongoing effect on our company. Considering such charges as being only applicable to the periods in which they are recognized could make our operating performance in those periods more difficult to evaluate relative to other periods in which there are no such charges. We use operating income excluding restructuring and other charges to evaluate operating performance and, along with other factors, in determining management compensation.
The following table shows operating income excluding restructuring and other charges for 2008 and 2007.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The decline in operating income for the Consumer Products business was driven principally by unfavorable spread of $27 million and higher operating costs of $6 million, offset partially by higher volume of $13 million and lower A&P costs of $5 million.
Operating income for the Foodservice/Food Packaging business was essentially flat, reflecting higher volume of $23 million and favorable spread of $21 million, offset by higher operating costs of $23 million, acquisition-related depreciation and amortization of $15 million, higher SG&A expense of $3 million, and unfavorable foreign currency exchange of $2 million. The increase in operating costs was driven primarily by higher utility and freight costs.
The increase in operating income for the Other segment primarily reflects lower legal-related expenses.
Income Taxes
Our effective tax rate for 2008 was 35.1%, compared with 35.5% for 2007.
Income from Continuing Operations attributable to Pactiv
We recorded income from continuing operations of $220 million, or $1.66 per share, compared with $243 million, or $1.83 per share, in 2007. The decline was driven primarily by lower operating income of $16 million (including a restructuring charge of $10 million after tax) as described previously, and higher interest costs of $6 million after tax related to the financing of the Prairie acquisition.
Discontinued Operations
Income (Loss) from Discontinued Operations
In 2008, we recorded expense from discontinued operations of $4 million, which was attributed to taxes associated with business dispositions which occurred in prior years. In 2007, we recorded income from discontinued operations of $1 million, which was related to final working capital adjustments and taxes associated with business dispositions.
In 2007, $27 million of deferred taxes was reclassified as liabilities related to discontinued operations as a result of the adoption of certain provisions of Financial Accounting Standards Board (FASB) ASC 740-10, “Income Taxes.”
Changes in Accounting Principles
The FASB has issued a number of accounting pronouncements effective in 2009 or 2008, as disclosed in Note 2 to the financial statements. None of these changes in accounting principles had a material effect upon adoption in 2008 or 2009.
The FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets,” which is effective for interim and annual periods beginning after November 15, 2009. SFAS No. 166, which is not yet included in the Codification, requires additional information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures. We are currently reviewing SFAS No. 166, and evaluating the impact of its adoption on our financial statements.
Critical Accounting Policies
Following are our accounting policies that involve the exercise of considerable judgment and the use of estimates. These have the most significant impact on our financial condition and results of operations.
Revenue Recognition
We recognize sales when the risks and rewards of ownership have transferred to customers, which generally occurs as products are shipped. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs. These include volume rebates, early payment discounts, and coupon offerings. Estimates are based on historical trends and are reviewed quarterly for possible revision. In addition, we pay slotting fees and participate in cooperative advertising programs. The costs for all such programs are accounted for as reductions to revenues. In the event that future sales deduction trends vary significantly from past or expected trends, reported sales may increase or decrease by a material amount.
Inventory Valuation
Our inventories are stated at the lower of cost or market using the FIFO method. We periodically review inventory balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors, including new product introductions, changes in consumer demand patterns, and historical usage trends.
In 2009, we changed our method of accounting for inventory from a combination of the LIFO method and the FIFO method to the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. We believe the new method of accounting for inventory is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position, provides better matching of revenue and expenses under our business model, and provides uniformity across our operations with respect to the method of inventory accounting for financial reporting.
In accordance with ASC 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. The cumulative effect of the change in accounting principle on periods prior to those presented has been reflected as an adjustment to the opening balance of retained earnings as of January 1, 2005. For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the years ended December 31, 2008, and 2007, see Note 2 to the financial statements. For a summary of the effect on the unaudited interim quarters of 2009, see Note 16 to the financial statements.
Pension Plans
The FASB issued ASC 715-20, “Compensation - Retirement Benefits” of which we adopted the recognition and disclosure provisions on December 31, 2006. See “Changes in Accounting Principles” in Note 2 to the financial statements for additional information. Total pretax pension plan income was $36 million in 2009,
$49 million in 2008, and $50 million in 2007, and represented the net pension income, which is recorded as an offset to SG&A expenses, and our production operations’ pension service costs, which are recorded in cost of sales. We estimate that our noncash pretax pension income will increase to $48 million in 2010.
Projections of pension income are based on a number of factors, including estimates of future returns on pension plan assets; estimates of discount rates; assumptions pertaining to the amortization of actuarial gains/losses; expectations regarding employee compensation; and assumptions related to participant turnover, retirement age, and life expectancy.
In developing our assumption regarding the expected rate of return on pension plan assets, we estimate future returns on various classes of assets, risk free rates of return, and long-term inflation rates. Since 1976, our U.S. qualified pension plan’s annual rate of return on assets has averaged 10%. Historically, the plan has invested approximately 70% of its assets in equity securities and 30% in fixed-income investments. After considering all of these factors, we concluded that the use of a 9% rate of return was appropriate for 2009. Holding all other assumptions constant, a one-half percentage-point change in the rate of return assumption would impact our pretax pension income by approximately $20 million.
The discount rate assumption for our U.S. pension plan is based on the composite yield of a portfolio of high quality corporate bonds constructed with durations to match the plan’s future benefit obligations. In this connection, the discount rate assumption for our U.S. plan was 5.75% at our December 31, 2009, measurement date and 6.74% at our December 31, 2008, measurement date. Holding all other assumptions constant, a one-half percentage-point change in the discount rate would impact our pretax pension income by approximately $3 million. For more information on our pension plan, see Note 13 to the financial statements.
CAUTIONARY STATEMENT FOR PURPOSES OF “SAFE HARBOR” PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
Certain statements included in this Annual Report on Form 10-K, 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 our current expectations or projections about future events. Accordingly, these forward-looking statements are subject to known and unknown risks and uncertainties. While we believe that the assumptions underlying these forward-looking statements are reasonable and make the statements in good faith, actual results almost always vary from expected results, and differences could be material.
In the “Risk Factors” section (Item 1A), we have attempted to list some of the factors that we believe could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. These factors include the following:
•
Changes in consumer demand and selling prices for our products, including new products that our competitors or we may introduce that could impact sales and margins.
•
Material substitutions and changes in costs of raw materials, including plastic resins, labor, utilities, or transportation that could impact our expenses and margins.
•
Changes in laws or governmental actions, including changes in regulations such as those relating to air emissions or plastics generally.
•
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 we operate, including currency fluctuations and other risks associated with operating outside of the U.S.
•
Changes in (1) assumptions regarding the long-term rate of return on pension assets and other factors, (2) the discount rate, and (3) the level of amortization of actuarial gains and losses.
•
Changes in U.S. and/or foreign governmental regulations relating to pension plan funding.
•
Changes enacted by the Securities and Exchange Commission, the Financial Accounting Standards Board, or other regulatory or accounting bodies. See “Changes in Accounting Principles.”
•
Competition from producers located in countries that have lower labor and other costs.
•
Our ability to integrate new businesses that we have acquired and may acquire or to dispose of businesses or business segments that we may wish to divest.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Derivative Financial Instruments
We are exposed to market risks related to changes in foreign currency exchange rates, interest rates, and commodity prices. To manage these risks we may enter into various hedging contracts in accordance with established policies and procedures. We do not use hedging instruments for trading purposes and are not a party to any transactions involving leveraged derivatives.
Commodity Derivatives
During the fourth quarter of 2009, we entered into natural gas purchase agreements with third parties, hedging a portion of the first half of 2010 purchases of natural gas used in the production processes at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2009, were immaterial.
Cash Flow Hedges
To minimize volatility in our margins due to large fluctuations in the price of commodities, in the second quarter of 2009 we entered into swap contracts to manage risks associated with market fluctuations in resin prices. These contracts were designated as cash flow hedges of forecasted commodity purchases. All monthly swap contracts entered into in the third quarter of 2009 have expired. There were no contracts outstanding as of December 31, 2009, and no gains are expected to be reclassified to earnings in the first quarter of 2010.
Interest Rates
At December 31, 2009, we had public debt securities of $1.276 billion outstanding, with fixed interest rates and maturities ranging from 2 to 18 years. Should we decide to redeem these securities prior to their stated maturity, we would incur costs based on the fair value of the securities at that time.
In addition, we have a 5-year revolving credit facility of $750 million, which expires in 2011, under which no balance was outstanding at December 31, 2009.
As a part of the acquisition of Prairie Packaging Inc. (Prairie), we assumed Prairie’s liability for $5 million borrowed from the Illinois Development Finance Authority (IDFA), which were funded by industrial development revenue bonds issued by the IDFA. The debt matures on December 1, 2010, and bears interest at varying rates (0.4% as of December 31, 2009) not to exceed 12% per annum.
The following table provides information about Pactiv’s financial instruments that are sensitive to interest rate risks.
Prior to our spin-off from Tenneco, we entered into an interest rate swap to hedge our exposure to interest rate movements. We settled this swap in November 1999, incurring a $43 million loss, which is being recognized as additional interest expense over the life of the underlying debt.
In April 2007, we entered into interest rate swap agreements to hedge the interest rate risk related to $250 million of the debt expected to be issued in connection with the acquisition of Prairie. We entered into these swap agreements to moderate the risk of interest rate changes during the period from the date the agreement to acquire Prairie was signed to the date the notes used to finance the acquisition were issued. The swap agreements were terminated on June 20, 2007, resulting in a gain of $9 million. This gain is being recognized as a reduction of interest expense over the average life of the underlying debt.
ITEM 8.
Financial Statements and Supplementary Data.
Index of the Financial Statements of Pactiv Corporation
and Consolidated Subsidiaries
Page
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statement of Income for the three years ended December 31, 2009
Consolidated Statement of Financial Position at December 31, 2009, and 2008
Consolidated Statement of Cash Flows for the three years ended December 31, 2009
Consolidated Statement of Changes in Equity for the three years ended December 31, 2009
Consolidated Statement of Comprehensive Income (Loss) for the three years ended December 31, 2009
Notes to Financial Statements
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We assessed the effectiveness of our internal controls over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, we concluded that Pactiv’s internal control over financial reporting at December 31, 2009, was effective.
Our internal control over financial reporting as of December 31, 2009, was audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the company’s consolidated financial statements. Ernst & Young’s attestation report on the company’s internal control over financial reporting appears on page 28.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Pactiv Corporation
We have audited the accompanying consolidated statement of financial position of Pactiv Corporation (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pactiv Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed its method of accounting for inventory and in 2008 the Company adopted the requirement to measure the funded status of its defined benefit pension and postretirement healthcare plans as of the date of the year-end statement of financial position.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pactiv Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2010
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Pactiv Corporation
We have audited Pactiv Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Pactiv Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pactiv Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Pactiv Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2009, and our report dated February 26, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2010
Consolidated Statement of Income
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The accompanying notes to the financial statements are an integral part of this statement.
Consolidated Statement of Financial Position
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The accompanying notes to the financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The accompanying notes to the financial statements are an integral part of this statement.
Consolidated Statement of Changes in Equity
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The accompanying notes to the financial statements are an integral part of this statement.
Consolidated Statement of Comprehensive Income (Loss)
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The accompanying notes to the financial statements are an integral part of this statement.
Notes to Financial Statements
Note 1.
Basis of Presentation
Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied, except for changes in accounting principles disclosed in Note 2. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior years financial information to conform to current year presentation.
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
We have three reporting segments:
•
Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks such as Hefty®.
•
Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
•
Other includes 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/liabilities are used.
In 2009, we changed our method of accounting for inventory from a combination of the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method to the FIFO method. In accordance with Accounting Standards Codification (ASC) 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. For more information on the change in inventory accounting method, see Note 2 to the financial statements.
Subsequent Events
In February 2010, the board of directors approved an Agreement and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will acquire PWP Holdings and PWP Industries for $200 million. This transaction is expected to close in the late first quarter or early second quarter of 2010. PWP Industries manufactures and sells amorphous polyethylene terephthalate (APET) products in the food service market.
In February 2010, the board of directors also approved the repurchase of an additional 10 million shares of our common stock. This amount is in addition to the remaining 522,361 shares authorized to be repurchased as of December 31, 2009.
We have evaluated subsequent events through the filing date of this Form 10-K, and have determined that there were no other subsequent events to recognize or disclose in these financial statements.
Note 2.
Summary of Accounting Policies
Consolidation
Our financial statements include all majority-owned subsidiaries. Investments in 20% to 50% owned companies in which we have the ability to exert significant influence over operating and financial policies are accounted for using the equity method of accounting. All inter-company transactions are eliminated.
Notes to Financial Statements - (Continued)
Foreign Currency Translation
Financial statements of international operations are translated into U.S. dollars using end-of-period exchange rates for assets and liabilities and weighted-average exchange rates for sales, expenses, gains, and losses. Translation adjustments are recorded as a component of shareholders’ equity.
Cash and Temporary Cash Investments
We define cash and temporary cash investments as checking accounts, money market accounts, certificates of deposit, and U.S. Treasury notes having an original maturity of 90 days or less.
Accounts and Notes Receivable
Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts. We record such allowances based on a number of factors, including historical trends and specific customer situations.
On a recurring basis, we sell an undivided interest in a pool of trade receivables meeting certain criteria to a third party as an alternative to debt financing. 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. Related proceeds are included in cash provided by operating activities in the statement of cash flows. At December 31, 2009, receivables aggregating $110 million were sold, while receivables totaling $130 million were sold at December 31, 2008. Discounts and fees related to such sales were $1 million in 2009, and $4 million in both 2008 and 2007. These expenses are 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, our debt would increase, or our cash balance would decrease, by an amount corresponding to the level of sold receivables at such time.
Inventories
Our inventories are stated at the lower of cost or market using the FIFO method. We periodically review inventory balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors, including new product introductions, changes in consumer demand patterns, and historical usage trends.
In 2009, we changed our method of accounting for inventory from a combination of the LIFO method and the FIFO method to the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. We believe the new method of accounting for inventory is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position, provides better matching of revenue and expenses under our business model, and provides uniformity across our operations with respect to the method of inventory accounting for financial reporting.
In accordance with ASC 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting.
Notes to Financial Statements - (Continued)
The following table presents the line items on the statement of income that were impacted by the accounting change for the years ended December 31, 2008, and 2007.
The following table presents the line items on the statement of financial position that were impacted by the accounting change as of December 31, 2008.
The following table presents the line items on the statement of cash flows that were impacted by the accounting change for the years ended December 31, 2008, and 2007.
Notes to Financial Statements - (Continued)
The following table presents the segment information line items that were impacted by the accounting change for the years ended December 31, 2008, and 2007.
For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the interim quarters of 2009, see Note 16 to the financial statements.
Property, Plant, and Equipment, Net
Depreciation is recorded on a straight-line basis over the estimated useful lives of assets. Useful lives range from 10 to 40 years for buildings and improvements and from 3 to 25 years for machinery and equipment. Depreciation expense totaled $158 million in 2009, $155 million in 2008, and $143 million in 2007.
We capitalize certain costs related to the purchase and development of software used in our business. Such costs are amortized over the estimated useful lives of the assets, ranging from 3 to 12 years. Capitalized software development costs, net of amortization at December 31 were $16 million in 2009, and $20 million in 2008.
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets to determine if adjustments are warranted. We use estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets’ remaining useful lives.
Goodwill and Intangibles, Net
We review the carrying value of our goodwill and indefinite-lived intangibles for possible impairment on an annual basis. Our annual review is conducted in the fourth quarter of the year, or earlier if warranted by events or changes in circumstances.
Possible impairment of goodwill is determined using a two-step process.
•
The first step requires that the fair value of individual reporting units be compared with their respective carrying values. If the carrying value of a reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment, if any.
•
The second step requires that the fair value of a reporting unit be allocated to all of its assets and liabilities, including indefinite-lived intangibles. Any remaining fair value is the implied goodwill, which is then compared with the carrying value of goodwill.
We test goodwill for impairment at the reporting unit level. Our four reporting units are Institutional, Specialty (both part of the Foodservice reporting segment), Consumer, and Other (Corporate functions). Our operating
Notes to Financial Statements - (Continued)
segments are each deemed to be a reporting unit as none of the operating segments’ components qualifies as a separate reporting unit or the operating segment is comprised of only one component.
Estimates of fair value used in testing goodwill and indefinite-lived intangible assets for possible impairment are determined using the discounted cash flow method. This approach uses estimates and assumptions regarding the amount and timing of projected cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, and appropriate market comparables. We believe this is the most appropriate method as it reflects how Pactiv, as well as other investors, typically value packaging industry companies. We also compare the result of the discounted cash flow method to the enterprise value (market capitalization plus debt) of Pactiv.
The many assumptions used in the cash flow analysis are subject to the accuracy of our projections of volume, selling price, raw materials costs and SG&A expenses. The percentage by which projected discounted cash flows would have to decrease to have a failure in step one of the impairment test is 61% for Consumer, 61% for Institutional, and 70% for Specialty. Our Other reporting unit has no goodwill or indefinite-lived intangible assets.
Intangible assets that are not deemed to have an indefinite life are amortized over their useful lives. We use undiscounted cash flows, excluding interest charges, to assess the recoverability of the carrying value of such assets, and record an impairment loss if the carrying value of assets exceeds their fair value. See Note 8 for additional information.
Environmental Liabilities
We are subject to a variety of environmental and pollution control laws and regulations. From time to time, we identify costs or liabilities arising from compliance with environmental laws and regulations. When related liabilities are probable and can be reasonably estimated, we establish appropriate reserves. Estimated liabilities may change as additional information becomes available. We appropriately adjust our reserves as new information on possible clean-up costs, expense and effectiveness of alternative clean-up methods, and other potential liabilities is received. We do not expect that any additional liabilities recorded as a result of the availability of new information will have a material adverse effect on our financial position. However, such costs could have a material effect on our results of operations or cash flows in a particular period.
Revenue Recognition
We recognize sales when the risks and rewards of ownership have transferred to customers, which generally occurs as products are shipped. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs. These include volume rebates, early payment discounts, and coupon offerings. Estimates are based on historical trends and are reviewed quarterly for possible revision. In addition, we pay slotting fees and participate in cooperative advertising programs. The cost for all such programs are accounted for as reductions to revenues.
Freight
We record amounts billed to customers for shipping and handling as sales, and record shipping and handling expenses as cost of sales.
Notes to Financial Statements - (Continued)
General and Administrative Expenses
Total noncash pension income was as follows:
Research and Development
Research and development costs, which are expensed as incurred, totaled $33 million in 2009, $32 million in 2008, and $35 million in 2007.
Advertising
Advertising production costs are expensed as incurred, while advertising media costs are expensed in the period in which the related advertising first takes place. Advertising expenses were $28 million in 2009, $8 million in 2008, and $13 million in 2007.
Stock-Based Compensation
We account for stock-based compensation under ASC 718-10 “Compensation - Stock Compensation,” which requires that the fair value of all share-based payments to employees, including stock options, be recognized in financial statements. ASC 718-10 superseded prior authoritative guidance which required that the intrinsic-value method be used in determining compensation expense for share-based payments to employees. Employee compensation expense is based on the grant date fair value of awards, and is recognized in the Statement of Income over the period that recipients of awards are required to provide related service (normally the vesting period).
Income Taxes
We use the asset and liability method of accounting for income taxes. This method requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. If we determine that it is more likely than not that a portion of deferred tax assets will not be realized in a future period, we reduce deferred tax assets by recording a valuation allowance. Estimates used to recognize deferred tax assets are subject to revision in subsequent periods based on new facts or circumstances.
We do not accrue for U.S. federal income taxes on unremitted earnings of foreign subsidiaries because we intend to reinvest those earnings in foreign operations. Unremitted earnings of foreign subsidiaries totaled $50 million at December 31, 2009, and $47 million at December 31, 2008. The unrecognized deferred tax liability associated with unremitted earnings totaled approximately $10 million at December 31, 2009, and $7 million at December 31, 2008.
Earnings Per Share
Basic earnings per share is computed by dividing income attributable to Pactiv common shareholders by the weighted-average number of shares outstanding. Diluted earnings per share is calculated in the same manner; however, adjustments are made to reflect the potential issuance of dilutive shares.
Notes to Financial Statements - (Continued)
Risk Management
From time to time, we use derivative financial instruments to hedge our exposure to changes in foreign currency exchange rates, principally using foreign currency purchase and sale contracts with terms of less than 1 year. We do so to mitigate our exposure to exchange rate changes related to third-party trade receivables and accounts payable. Net gains or losses on such contracts are recognized in the statement of income as offsets to foreign currency exchange gains or losses on the underlying transactions. In the statement of cash flows, cash receipts and payments related to hedging contracts are classified in the same way as cash flows from the transactions being hedged. We had no open foreign currency contracts as of December 31, 2009.
Interest rate risk management is accomplished through the use of swaps. Interest rate swaps are booked at their fair value at each reporting date, with an equal offset recorded either in earnings or accumulated other comprehensive income depending on the designation (or lack thereof) of each swap as a hedging instrument.
From time to time, we employ commodity forward or other derivative contracts to hedge our exposure to adverse changes in the price of certain commodities used in our production processes. We do not use derivative financial instruments for speculative purposes. See Note 7 for additional information.
Changes in Accounting Principles
The Financial Accounting Standards Board (FASB) issued ASC 105-10, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which was effective for fiscal years, and interim periods within such fiscal years, ending after September 15, 2009. ASC 105-10 establishes an authoritative United States GAAP superseding all pre-existing accounting standards and literature. ASC 105-10 did not have a material effect on our financial statements upon adoption or as of December 31, 2009. We have updated all references to specific authoritative guidance within our annual financial reporting to reflect the new Accounting Standards Codification structure.
The FASB issued ASC 820-10, “Fair Value Measurements and Disclosures” which was effective as of January 1, 2008. ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. ASC 820-10, which does not require the use of any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. ASC 820-10 did not have a material effect on our financial statements upon adoption and as of December 31, 2009.
The FASB issued ASC 715-20, “Compensation - Retirement Benefits,” of which we adopted the recognition and disclosure provisions on December 31, 2006. We recorded a charge to accumulated other comprehensive income of $41 million upon adoption. We adopted the measurement provisions of ASC 715-20-65 on January 1, 2008, using the transition method based on the data as of our September 30, 2007, measurement date. As a result, we increased “retained earnings” by $7 million after tax in 2008.
The FASB issued ASC 825-10, “Financial Instruments” which was effective January 1, 2008. ASC 825-10 permits entities to choose to measure many financial instruments and certain other items at fair value as of specified election dates. ASC 825-10 expands the use of fair value measurement, but does not eliminate disclosure requirements of other accounting standards, including ASC 820-10. ASC 825-10 did not impact our financial statements upon adoption and as of December 31, 2009. We did not choose to measure any financial instruments at fair value as permitted under the statement.
The FASB issued ASC 805-10, “Business Combinations,” which replaces prior authoritative guidance on business combinations, and was effective on a prospective basis for all business combinations that occur in fiscal years beginning after December 15, 2008, with the exception of accounting for valuation allowances on deferred taxes and acquired tax contingencies. ASC 805-10 retains the underlying concepts of the prior authoritative guidance in that all business combinations are still required to be accounted for at fair value using the acquisition method of accounting, but it changes the application of the acquisition method in a number of significant ways. In this regard, the pronouncement requires that (1) acquisition-related costs
Notes to Financial Statements - (Continued)
generally be expensed as incurred, (2) noncontrolling interests be recorded at fair value, (3) in-process research and development costs be recorded at fair value as an indefinite lived intangible asset, (4) restructuring costs associated with a business combination generally be expensed subsequent to the date of such a combination, and (5) changes in valuation allowances on deferred tax assets and income tax uncertainties after the acquisition date generally be recorded as income tax expense. ASC 805-10 amends ASC 740-10, “Income Taxes” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of ASC 805-10 would also be subject to the provisions of ASC 805-10. ASC 805-10 was effective on January 1, 2009, and did not have a material impact on our financial statements upon adoption and as of December 31, 2009.
The FASB issued ASC 810-10-45, “Consolidation” which was effective for fiscal years, and interim periods within such fiscal years, beginning on or after December 15, 2008. ASC 810-10-45 requires that noncontrolling (minority) interests be recognized as equity (but separate from the parent’s equity) in consolidated financial statements, and that net earnings related to noncontrolling interests be included in consolidated net income, but identified separately on the face of the income statement. ASC 810-10-45 also amends prior authoritative guidance, and expands disclosure requirements regarding the interests of parents and noncontrolling interests. ASC 810-10-45 was effective on January 1, 2009, and did not have a material impact on our financial statements upon adoption and as of December 31, 2009.
The FASB issued the disclosure requirements within ASC 815-10-65, “Derivatives and Hedging” which was effective for fiscal years, and interim periods within such fiscal years, beginning on or after November 15, 2008. ASC 815-10 requires (1) enhanced disclosures about an entity’s derivative and hedging activities, specifically how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under ASC 815-10 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815-10 was effective on January 1, 2009, and did not have a material impact on our financial statements upon adoption and as of December 31, 2009.
The FASB issued the disclosure requirements within ASC 825-10-65, “Financial Instruments” which was effective for interim reporting periods ending after June 15, 2009. ASC 825-10-65 amends prior authoritative guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10-65 also amends ASC 270-10, “Interim Reporting,” to require those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 was effective for our June 30, 2009 interim reporting, and did not have a material effect on our financial statements upon adoption and as of December 31, 2009.
The FASB issued ASC 855-10, “Subsequent Events” which was effective for fiscal years, and interim periods within such fiscal years, ending after June 15, 2009. ASC 855-10 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. ASC 855-10 was effective for our June 30, 2009 interim reporting, and did not have a material effect on our financial statements upon adoption and as of December 31, 2009.
The FASB issued the disclosure requirements within ASC 715-20-65 “Compensation - Retirement Benefits” which was effective for fiscal years ending after December 15, 2009. ASC 715-20-65 requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan, including (1) information on investment policies and strategies, (2) the fair value of each major category of plan assets, (3) the inputs and valuation techniques used to measure the fair value of plan assets, (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and (5) significant concentrations of risk within plan assets. ASC 715-20-65 was effective for our December 31, 2009, reporting, and did not have a material impact on our financial statements upon adoption.
The FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets,” which is effective for interim and annual periods beginning after November 15, 2009.
Notes to Financial Statements - (Continued)
SFAS No. 166, which is not yet included in the Codification, requires additional information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures. We are currently reviewing SFAS No. 166, and evaluating the impact of its adoption on our financial statements.
Estimates
Financial statement presentation requires management to make estimates and assumptions that affect reported amounts for assets, liabilities, sales, and expenses. Actual results may differ from such estimates.
Note 3.
Restructuring and Other
In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. The program is essentially complete with the exception of a small idle plant held for sale. The accrued restructuring balance of $1 million as of December 31, 2009, and $2 million as of December 31, 2008, is for remaining severance payments. Cash payments related to restructuring and other were $1 million pretax for the year ended December 31, 2009. In 2008, we recorded a charge of approximately $10 million after tax, or $0.08 per share. Cash payments related to restructuring and other charges were $2 million for the year ended December 31, 2008.
(1)
Consists principally of a gain on the sale of one of our facilities and asset removal and transfer costs.
Note 4.
Business Combinations
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on their respective fair values. Goodwill and other intangible assets recorded in connection with the acquisition totaled $1 million and $3 million, respectively, and all of the goodwill is expected to be deductible for tax purposes. Recorded intangible assets pertain to customer relationships and are being amortized over a 15-year period.
Appraisals of the fair-market value and physical counts of the assets acquired during the third quarter of 2009 resulted in goodwill being decreased by $1 million, and property, plant, and equipment being increased by the same amount.
Notes to Financial Statements - (Continued)
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie’s operations have been included in the consolidated financial statements as of that date.
Note 5.
Discontinued Operations
On October 12, 2005, we sold substantially all of our protective and flexible packaging businesses. The results of the sold businesses, as well as costs and charges associated with the transaction, are classified as discontinued operations.
In 2009, we recorded $15 million of income from discontinued operations primarily related to the expiration of the statute of limitations on the 2005 tax year for tax liabilities which had been recorded in conjunction with divested businesses. In 2008, we recorded expense from discontinued operations of $4 million, which was attributed to taxes associated with the disposition of a business. Liabilities related to discontinued operations, which included obligations related to income taxes, certain royalty payments, and the costs of closing a facility in Europe, were as follows:
Notes to Financial Statements - (Continued)
Note 6.
Long-Term Debt, Short-Term Debt, and Financing Arrangements
Long-Term Debt
Short-Term Debt
At December 31 (In millions)
Current maturities of long-term debt
$
$
-
At December 31, 2009, the aggregate maturities of debt outstanding were $5 million due in 2010, $250 million due in 2012, and $1.026 billion thereafter.
We were in full compliance with financial and other covenants in our various credit agreements at December 31, 2009.
There have been no stated events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, or any cross default provisions in our debt agreements. We had no short-term borrowings as of December 31, 2009.
In 1999, our former parent, Tenneco realigned certain of its debt in preparation for the spin-off of Pactiv. In conjunction with this realignment, we entered into an interest rate swap to hedge our exposure to interest rate movement. We settled this swap in November 1999 at a loss of $43 million. The loss on the swap is being recognized as additional interest expense over the life of the underlying notes. At December 31, 2009, the unamortized balance was $35 million.
Note 7.
Financial Instruments
Asset and Liability Instruments
At December 31, 2009, and 2008, the fair value of cash and temporary cash investments, short- and long-term receivables, accounts payable, and short-term debt were the same as, or not materially different from, the amount recorded for these assets and liabilities. The fair value of long-term debt was approximately $1.5 billion at December 31, 2009, and approximately $1.4 billion at December 31, 2008. The recorded amount was $1.3 billion at December 31, 2009, and at December 31, 2008. The fair value of long-term debt was based on quoted market prices for our debt instruments.
Instruments with Off-Balance Sheet Risk (Including Derivatives)
We use derivative instruments, principally swaps, forward contracts, and options, to manage our exposure to movements in foreign currency values, interest rates, and commodity prices.
Notes to Financial Statements - (Continued)
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the hedge instruments are reclassified from OCI to earnings if the hedge ceases to be highly effective or if the hedged transaction is no longer probable.
Foreign Currency
From time to time, we use derivative financial instruments to hedge our exposure to changes in foreign currency exchange rates, principally using foreign currency purchase and sale contracts with terms of less than one year. We do so to mitigate our exposure to exchange rate changes related to third-party trade receivables and accounts payable. Net gains or losses on such contracts are recognized in the statement of income as offsets to foreign currency exchange gains or losses on the underlying transactions. In the statement of cash flows, cash receipts and payments related to hedging contracts are classified in the same way as cash flows from the transactions being hedged. We had no open foreign currency contracts as of December 31, 2009.
Interest Rates
We entered into interest rate swap agreements in connection with the acquisition of Prairie. The agreements were terminated on June 20, 2007, resulting in a gain of $9 million. This gain is being recorded as a reduction of interest expense over the average life of the underlying debt. Amounts recognized in earnings related to our hedging transactions were $1 million for the year ended December 31, 2009, and December 31, 2008.
Commodity
During the fourth quarter of 2009, we entered into natural gas purchase agreements with third parties, hedging a portion of the first half of 2010 purchases of natural gas used in the production processes at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2009, were immaterial.
To minimize volatility in our margins due to large fluctuations in the price of commodities, in the second quarter of 2009 we entered into swap contracts to manage risks associated with market fluctuations in resin prices. These contracts were designated as cash flow hedges of forecasted commodity purchases. All monthly swap contracts entered into in the third quarter of 2009 have expired. There were no contracts outstanding as of December 31, 2009, and no gains are expected to be reclassified to earnings in the first quarter of 2010.
Fair Value Measurements
Financial assets and liabilities that are recorded at fair value consist of derivative contracts that are used to hedge exposures to interest rate, commodity, and currency risks. ASC 820-10-35 sets out a fair value hierarchy that groups fair value measurement inputs into three classifications: Level 1, Level 2, or Level 3. Level 1 inputs are quoted prices in an active market for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. All of our fair value measurements for derivative contracts use Level 2 inputs.
There were no outstanding derivative instruments recorded in the consolidated balance sheet as of December 31, 2009, and as of December 31, 2008.
Notes to Financial Statements - (Continued)
The following table indicates the amounts recognized in OCI for those derivatives designated as cash flow hedges for the years ended December 31, 2009, and 2008.
(Gain) or Loss
Reclassified from OCI into
Gain or (Loss)
Income
Recognized in OCI
Location of Gain or (Loss)
(Effective
(Effective Portion)
Reclassified from OCI into
Portion)
(In millions)
Income (Effective Portion)
Commodity Contracts
$
-
$
-
Cost of Sales
$
(2
)
$
-
Interest Rate Contracts
$
-
$
-
Interest Expense
$
(1
)
$
(1
)
There were no transactions that ceased to qualify as a cash flow hedge in the years ended December 31, 2009, or 2008.
Note 8.
Goodwill and Intangible Assets
Changes in the carrying value of goodwill during 2009 and 2008 by reporting segment are shown in the following table.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Goodwill and other intangible assets recorded in connection with the WinCup acquisition totaled $1 million and $3 million, respectively. Recorded intangible assets pertain to customer relationships and are being amortized over a 15-year period.
Details of intangible assets are shown in the following table.
Notes to Financial Statements - (Continued)
The weighted-average amortization period used for patents and other intangible assets subject to amortization is 15 years and 18 years, respectively. Amortization of intangible assets was $26 million for the year ended December 31, 2009. Amortization expense is estimated to total $25 million in 2010, $24 million in 2011, $23 million in 2012, $19 million in 2013, and $19 million in 2014.
Note 9.
Property, Plant, and Equipment, Net
Capitalized interest was $1 million in 2009, and $2 million in both 2008 and 2007.
Note 10.
Income Taxes
Details of income (loss) from continuing operations before income taxes are shown in the following table.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Shown below are details of income tax expense for continuing operations.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Notes to Financial Statements - (Continued)
A reconciliation of the difference between the U.S. statutory federal income tax rate and our effective income tax rate is shown in the following table.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The components of our net deferred tax assets and liabilities are summarized in the following table.
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
(2)
Decrease mainly due to realized tax benefits from pension contributions.
(3)
Related to federal and foreign tax loss and tax credit carryforwards.
We had federal net operating loss carryforwards of $77 million as of December 31, 2009, which will expire in 2030 and federal capital loss carryforwards of $44 million as of December 31, 2009, which will expire in 2011. State net operating loss carryforwards of $3 million at December 31, 2009, will expire at various dates
Notes to Financial Statements - (Continued)
from 2015 to 2030. Foreign net operating loss carryforwards at December 31, 2009, totaled $47 million, and have an unlimited life.
We had federal tax credit carryforwards of $5 million, as of December 31, 2009, which will expire at various dates from 2017 to 2030. State tax credit carryforwards at December 31, 2009, totaled $13 million ($8 million, net of the federal benefit of state tax), of which $10 million will expire at various dates from 2011 to 2024, with the balance having an unlimited life. Foreign tax credit carryforwards of $2 million at December 31, 2009, will expire in 2019 and 2020.
The FASB issued certain provisions within ASC 740-10 “Income Taxes” which clarifies the application of prior authoritative guidance and was effective as of January 1, 2007. ASC 740-10 establishes a threshold condition that a tax position must meet for any part of the benefit of such a position to be recognized in the financial statements. In addition, ASC 740-10 provides guidance regarding measurement, derecognition, classification, and disclosure of tax positions.
Changes in the balance of unrecognized income tax benefits are detailed below.
The total amount of unrecognized income tax benefits that, if recognized, would favorably impact our effective tax rate for continuing operations in future periods was $50 million as of December 31, 2009. As of December 31, 2009, it is reasonably possible that the balance of unrecognized income tax benefits may increase or decrease during the following twelve months. However, it is not expected that any such changes would significantly affect, individually or in total, our operating results or financial condition.
It is our continuing practice to record accruals for interest and penalties related to income tax matters in income tax expense. Such accruals totaled $11 million as of December 31, 2009, and $10 million as of December 31, 2008. Expense recorded through December 31, 2009, for interest and penalties related to continuing operations was $3 million.
U.S. federal income tax returns filed for the years 2006 through 2008 are open for examination by the Internal Revenue Service. Various state, local, and foreign tax returns filed for the years 2002 through 2008 are open for examination by tax authorities in those jurisdictions.
Included in unrecognized income tax benefits at December 31, 2009, was $1 million related to discontinued operations, all of which, if recognized, would impact income from discontinued operations in future periods. In 2009, an income tax benefit of $15 million was recorded, which included the reversal of $2 million of interest and penalties as a result of the expiration of the 2005 tax year statute of limitations.
In connection with the adoption of ASC 718-10 “Compensation - Stock Compensation,” we elected to use the simplified method in calculating our additional paid-in capital pool upon adoption of ASC 718-10, as described in prior authoritative guidance. ASC 718-10 requires that tax deductions for compensation costs in excess of amounts recognized for accounting purposes be reported as cash flow from financing activities, rather than as cash flow from operating activities. Such “excess” amounts were $1 million in 2009, immaterial in 2008, and $23 million in 2007.
Notes to Financial Statements - (Continued)
Note 11.
Common Stock
We have 350 million shares of common stock ($0.01 par value) authorized, of which 132,334,417 shares were issued and outstanding as of December 31, 2009.
Reserves
Reserved shares at December 31, 2009, were as follows:
Stock Plans
2002 Incentive Compensation Plan - In November 1999, we initiated a stock ownership plan that permits the granting of a variety of incentives, including common stock, restricted stock, performance shares, stock appreciation rights, and stock options, to directors, officers, and employees. In May 2002, the 1999 plan was succeeded by the 2002 plan, and all balances under the 1999 plan were transferred to the new plan, which remains in effect until amended or terminated. Under the 2002 plan, up to 27 million shares of common stock can be issued (including shares issued under the prior plan), of which 17 million were issued or granted as of December 31, 2009.
Restricted stock, performance share, and stock option awards generally require that, among other things, grantees remain with the company for certain periods of time. Performance shares granted under the plan vest upon the attainment of specified performance goals in the 3 years following the date of grant.
Changes in performance share balances were as follows:
Additional information related to performance shares is as follows:
There was $20 million after tax of unamortized performance share expense at December 31, 2009, of which $8 million will be charged against net income in 2010 and $12 million in 2011.
Notes to Financial Statements - (Continued)
Summarized below are changes in stock option balances.
Summarized below is information regarding stock options outstanding and exercisable at December 31, 2009.
See Note 2 for additional information regarding stock-based compensation accounting.
Employee 401(k) Plans - We have qualified 401(k) plans for employees, under which eligible participants may make contributions equal to a percentage of their annual salary. We matched a portion of such contributions with Pactiv common stock until February 2006. Effective March 2006, all matching contributions are in cash. The company or plan participants may contribute additional amounts in accordance with the plans’ terms. We incurred 401(k) plan expense of $10 million in 2009, 2008, and 2007.
Rabbi Trust - In November 1999, we established a rabbi 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 trust is designed to assure the payment of deferred compensation and supplemental pension benefits. These shares are not considered outstanding for purposes of financial reporting.
Notes to Financial Statements - (Continued)
Earnings Per Share
Earnings from continuing operations per share of common stock outstanding were computed as follows:
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
The following table summarizes annual repurchases of our common stock for 2007 through 2009.
Note 12.
Preferred Stock
Pactiv has 50 million shares of preferred stock ($0.01 par value) authorized, none of which was issued at December 31, 2009.
Note 13.
Pension Plans and Other Postretirement Benefits
We have pension plans that cover the majority of our employees. Benefits are based on years of service and, for most salaried employees, final average compensation. Assets of our U.S. qualified plan consist principally of equity and fixed income securities.
We have postretirement health care and life insurance plans that cover certain of our salaried and hourly employees who retire in accordance with the various provisions of such plans. Benefits may be subject to deductibles, co-payments, and other limitations. These postretirement plans are not funded, and we reserve the right to change them.
Notes to Financial Statements - (Continued)
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was enacted. Starting in 2006, this act expanded Medicare coverage, primarily by adding a prescription drug benefit for Medicare-eligible participants. The act provides employers currently sponsoring prescription drug programs for Medicare-eligible participants with a range of options to coordinate with the new government sponsored program to potentially reduce employers’ costs. These options include supplementing the government program on a secondary payor basis, or accepting a direct subsidy from the government to support a portion of the costs of employers’ programs.
Our plans currently provide prescription drug benefits that are coordinated with the related Medicare benefits. As a result, subsidies from Medicare for prescription drug benefits will average approximately $1.1 million per year.
Effective December 31, 2006, we adopted the recognition and disclosure provisions of ASC 715-10. See Note 2.
During 2009 we contributed $550 million pretax to the plan and plan assets earned a return of approximately 26%. As of December 31, 2009, our U.S. pension plan was 94% funded on an Employee Retirement Income Security Act (ERISA) basis, which determines the minimum funding requirements for the plan. As long as our funded ratio is above 60%, there is no meaningful impact on us or to the plan. We do not expect to make additional sizeable contributions to the plan for the foreseeable future.
Notes to Financial Statements - (Continued)
Financial data pertaining to our pension and postretirement benefit plans is shown on the following tables.
(1)
For 2008, the change in benefit obligation and plan assets are for the period beginning October 1, 2007 and ending December 31, 2008, including amounts recorded in the statement of income and in “other comprehensive income” in 2008.
Notes to Financial Statements - (Continued)
Benefit payments expected to be made under the pension and postretirement benefit plans over the next 10 years are summarized in the following table.
We expect to contribute $15 million to our pension and post retirement plans in 2010.
The impact of pension plans on pretax income from continuing operations was as follows:
(1)
ASC 715-20, “Compensation - Retirement Benefits, Defined Benefit Plans.”
In 2009, our nonqualified and foreign plans had net periodic benefit expense of $12 million.
Pension plan actuarial assumptions used to determine projected benefit obligations are as follows:
The net periodic benefit income for 2009 was determined using the assumptions listed for 2008.
For all of our worldwide pension plans, accumulated benefit obligations totaled $4.045 billion in 2009 and $3.677 billion in 2008.
Pension plans with accumulated benefit obligations in excess of plan assets were as follows:
Notes to Financial Statements - (Continued)
The discount rate assumption for our U.S. qualified plan is based on the composite yield of a portfolio of high quality corporate bonds constructed with durations to match the plan’s future benefit obligations. A one-percentage-point change in the discount rate impacts the projected benefit obligation by approximately $360 million.
Plan Assets
In developing the assumption for the return on pension plan assets, we receive independent input on asset allocation strategies, projections regarding long-term rates of return on various asset classes, risk free rates of return, and long-term inflation rates. Since 1976, our U.S. qualified pension plan’s annual rate of return on assets has averaged 10%. At December 31, 2009, the percentage of pension plan assets invested in equity and fixed income securities was approximately 72% and 28%, respectively. The investment policy of the pension plan is to achieve a rate of return sufficient to meet the immediate and long-term benefit obligations of the plan. The investment strategy seeks to maximize long-term return within an acceptable level of risk by balancing investments in assets with higher expected rates of return such as equity securities and assets with lower expected volatility such as fixed-income securities. Risk tolerances are based on careful consideration of plan liabilities, plan funded status, and the company’s financial condition. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. The plan generally maintains an asset allocation of approximately 70% in equities and 30% in fixed income securities. Equity investments include U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization stocks. Other equity like asset classes, such as private equity investments, are used to enhance long-term returns, while increasing portfolio diversification. Fixed-income investments include corporate bonds, government bonds, asset backed securities (including mortgages), and cash. After considering all of these factors, we concluded that a 9% rate of return on assets assumption for our U.S. plan was appropriate for 2009 and 2008.
The majority of the pension plan assets are invested in equities of which a substantial portion is invested in U.S. equities. A broad-based decline in equity values around the world or a general decline in U.S. equity values would have a significant adverse effect on the pension plan. The plan also has a large holding of bonds that pay a fixed rate of interest. A material increase in interest rates would reduce the value these bonds.
Notes to Financial Statements - (Continued)
The fair values of pension plan assets at December 31, 2009, by asset category are as follows:
(a)
This asset category includes funds that invest in international companies including companies from countries classified as Emerging Markets by MSCI.
(b)
This asset category includes municipal bonds.
(c)
This asset category includes venture capital funds.
The change in the fair value of pension plan assets using Level 3 or significant unobservable inputs during the year ended December 31, 2009, is detailed in the table below.
We use a market-related method for calculating the value of plan assets. This method recognizes the difference between actual and expected returns on plan assets over time. The market-related value of plan assets (MRVA)
Notes to Financial Statements - (Continued)
as of January 1, 2010, is $4.191 billion. Each year, the expected gain on plan assets (MRVA multiplied by the expected rate of return) is compared with the change in fair market value of assets (adjusted for pension benefit payments and expenses) during the year to determine the asset gain or loss for the year just ended.
The asset gain or loss for the year just ended is amortized over five years to the pool of amortizable actuarial gains or losses accumulated from prior years. Also added to the amortizable pool are all other actuarial gains or losses, which have occurred during the year just ended. The pool is amortized using the “corridor approach” in ASC 715-20. The corridor amount is 10% of the greater of the MRVA or the pension benefit obligation. The amount of actuarial gains or losses to be amortized as a component of pension income is the amount of the pool in excess of the corridor amount. The accumulated pool of amortizable losses as of January 1, 2010, was $1.543 billion. The amortization period is determined by the weighted-average of the life expectancy of inactive plan participants and the remaining service expectancy of active plan participants. As of January 1, 2010, this weighted average is 21.2 years.
The impact of postretirement benefit plans, other than pensions, on pretax income from continuing operations was as follows:
Actuarial assumptions used to determine postretirement benefit obligations were as follows:
(1)
Assumed to decline to 5% in 2017.
A one percentage-point change in assumed health-care cost inflation would have the following effects:
(In millions)
1% increase
1% decrease
Effect on total service and interest costs
$
-
$
-
Effect on postretirement benefit obligations
(2
)
We contributed $6 million and $8 million in 2009 and 2008, respectively, to fund postretirement medical plan obligations. We expect to contribute $6 million to fund our postretirement medical plan obligations in 2010.
Note 14.
Segment and Geographic Area Information
Our three reporting segments are Consumer Products, Foodservice/Food Packaging, and Other. See Note 1 for additional details.
Products are transferred between segments and among geographic areas, as nearly as possible, using market value. Wal-Mart Stores, Inc., accounted for approximately 21% of our consolidated sales in 2009 and 2008. These sales were reflected primarily in the results of the Consumer Products segment and, to a lesser extent, in the results of the Foodservice/Food Packaging segment. Our backlog of orders is not material.
Notes to Financial Statements - (Continued)
The following table sets forth certain segment information.
(a)
Included restructuring and other charges of $16 million in 2008 ($5 million for Consumer Products, $10 million for Foodservice/Food Packaging, and $1 million for Other).
(b)
Included pension plan income and unallocated corporate expense.
(c)
Included pension plan income and stock-based compensation expense.
(d)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Notes to Financial Statements - (Continued)
The following table sets forth certain geographic area information.
(1)
Sales to external customers and long-lived assets for individual countries (primarily Germany, Canada, and Mexico) were not material.
(2) Geographic assignment is based on location of selling business.
(3)
Long-lived assets include all long-term assets other than net assets of discontinued operations, goodwill, intangibles, and deferred taxes.
(4)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Note 15.
Commitments and Contingencies
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $61 million at December 31, 2009. 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.
Lease Commitments
Certain of our facilities, equipment, and other assets are leased under long-term arrangements. Minimum lease payments under noncancelable operating leases with lease terms in excess of 1 year are expected to total $30 million in 2010, $24 million in 2011, $19 million in 2012, $13 million in 2013, $10 million in 2014, and $40 million in subsequent years.
Commitments under capital leases are not significant. Total rental costs for continuing operations totaled $37 million in 2009, $35 million in 2008, and $31 million in 2007, and included minimum rentals under noncancelable operating leases of $37 million, $35 million, and $31 million for the respective periods.
Litigation
We are party to other legal proceedings arising from our operations. We establish reserves for claims and proceedings 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 matters, based on our assessment of the
Notes to Financial Statements - (Continued)
facts and circumstances now known, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.
Environmental Matters
We are subject to a variety of environmental and pollution control laws and regulations. From time to time, we identify costs or liabilities arising from compliance with environmental laws and regulations. When related liabilities are probable and can be reasonably estimated, we establish appropriate reserves. Estimated liabilities may change as additional information becomes available. We appropriately adjust our reserves as new information on possible clean-up costs, expense and effectiveness of alternative clean-up methods and other potential liabilities is received. We do not expect that any additional liabilities recorded as a result of the availability of new information will have a material adverse effect on our financial position. However, such costs could have a material effect on our results of operations or cash flows in a particular period.
Note 16.
Quarterly Financial Data (Unaudited)
(1)
First quarter 2009 through third quarter 2009 and all four quarters of 2008 have been adjusted for the change in inventory accounting method.
Notes to Financial Statements - (Continued)
(1)
The sum of amounts shown for individual quarters may not equal the total for the year because of changes in the weighted-average number of shares outstanding throughout the year. First quarter 2009 through third quarter 2009 and the full year 2008 have been adjusted for the change in inventory accounting method.
The following tables present the changes to the interim quarters of 2009 for the change in inventory accounting method, as described in Note 2 to the financial statements.
(1)
Impacts the (increase) decrease in inventories
Notes to Financial Statements - (Continued)
Note 17.
Noncontrolling Interests
The FASB issued ASC 810-10-45, “Consolidation” which was effective for fiscal years, and interim periods within such fiscal years, beginning on or after December 15, 2008. ASC 810-10-45 requires that noncontrolling (minority) interests be recognized as equity (but separate from the parent’s equity) in consolidated financial statements, and that net earnings related to noncontrolling interests be included in consolidated net income, but identified separately on the face of the income statement. ASC 810-10-45 also amends prior authoritative guidance, and expands disclosure requirements regarding the interests of parents and noncontrolling interests. In order to meet the ASC 810-10-45 disclosure requirements upon adoption, we have added a statement of shareholders’ equity and a statement of comprehensive income (loss) to our interim reporting.
ASC 810-10-45 also requires disclosure of the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. In January 2007, we purchased an additional 1% interest in a folding carton operation in Dongguan, China. This brought our interest to 51%, requiring us to include the joint venture in our consolidated financial statements. There were no changes in ownership interest in our subsidiaries in 2009 or 2008, and the effect in 2007 of the additional 1% interest in Dongguan, China had an immaterial impact on the equity attributable to Pactiv.
The preceding notes are an integral part of the foregoing financial statements.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the appropriate time periods. We, under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures, and we and such officers have concluded that such controls and procedures were adequate and effective as of December 31, 2009. We completed our evaluation of such controls and procedures in connection with the preparation of this annual report on Form 10-K on February 26, 2010.
There have been no significant changes in our 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. There were no changes in internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2009, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
Other Information.
None.
PART III
ITEM 10.
Directors, Executive Officers, and Corporate Governance.
Information regarding our executive officers required by this Item 10 is set forth in Item 4.1 of Part I, “Executive Officers of the Registrant.”
The following information required by this Item 10 is included in our Proxy Statement related to our May 14, 2010, Annual Meeting of Shareholders, and is incorporated by reference herein.
•
Information regarding our directors
•
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934
•
Information regarding our code of ethics
ITEM 11.
Executive Compensation.
Information regarding the compensation of certain of the company’s executive officers required in Item 11 is included in our Proxy Statement related to our May 14, 2010, Annual Meeting of Shareholders, and is incorporated by reference herein.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding the security ownership of certain beneficial owners and management and related stockholder matters of the company required in Item 12 is included in our Proxy Statement related to our May 14, 2010 Annual Meeting of Shareholders, and is incorporated by reference herein.
The following table summarizes our equity compensation plans at December 31, 2009.
Number of shares of
common stock
Number of shares of
available for future
common stock to be
issuance under
issued upon exercise
Weighted-average
equity-compensation
of outstanding
exercise price of
plans (excluding
options, warrants
outstanding options,
shares reflected in
Plan category
and rights (a)
warrants and rights
the first column)
Equity compensation plans approved by shareholders
5,185,572 (b
)
$
21.80
9,965,678
(a)
Does not include Pactiv common stock index units (common stock equivalents) under the company’s deferred compensation plan. The deferred compensation is unfunded, and allows participants to defer receipt of certain compensation and to elect to have such deferred amounts indexed against various investment options, including the Pactiv Stock Index Fund. Participants may elect to have their deferred amounts paid in cash or in Pactiv common stock. If all persons who had their deferred compensation indexed against the Pactiv Stock Index Fund elected to receive their payout in Pactiv common stock, 494,673 shares of common stock would be issuable as of December 31, 2009.
(b)
Includes outstanding options and performance share awards. Outstanding performance share awards are subject to achievement of performance criteria, vesting, and continued employment, and are paid in stock. See Note 11 to the financial statements for additional information.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
Information required in Item 13 is included in our Proxy Statement related to our May 14, 2010, Annual Meeting of Shareholders, and is incorporated by reference herein.
ITEM 14.
Principal Accounting Fees and Services.
Information required in Item 14 is included in our Proxy Statement related to our May 14, 2010, Annual Meeting of Shareholders, and is incorporated by reference herein.
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules.
Financial Statements Included in Item 8
See “Index of Financial Statements of Pactiv Corporation and Consolidated Subsidiaries” in Item 8, “Financial Statements and Supplementary Data.”
Index of Financial Statements and Schedules Included in Item 15
Page
Schedule II - Valuation and qualifying accounts - three years ended December 31, 2009
Schedules Omitted as Not Required or Inapplicable
Schedule I - Condensed financial information of registrant
Schedule III - Real estate and accumulated depreciation
Schedule IV - Mortgage loans on real estate
Schedule V - Supplemental information concerning property - casualty insurance operations
Schedule II - Valuation and Qualifying Accounts
(In millions)
(1)
Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
Index of Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2009. (Exhibits designated with an asterisk are filed with this report; all other exhibits are incorporated by reference.)
Exhibit No.
Description
Distribution Agreement by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 2 to Pactiv Corporation’s Current Report on Form 8-K dated November 11, 1999, File No. 1-15157).
.1
Restated Certificate of Incorporation of the registrant (incorporated herein by reference to Exhibit 3.1 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.2
Amended and Restated By-laws of the registrant (incorporated herein by reference to Exhibit 3.1 to Pactiv Corporation’s Current Report on Form 8-K dated September 4, 2009, File No. 1-15157).
.1
Specimen Stock Certificate of Pactiv Corporation Common Stock (incorporated herein by reference to Exhibit 4.1 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.2(a)
Qualified Offer Plan Rights Agreement, dated as of November 4, 1999, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.2 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.2(b)
Amendment No. 1 to Rights Agreement, dated as of November 7, 2002, by and between the registrant and National City Bank, as rights agent (incorporated herein by reference to Exhibit 4.4(a) to Pactiv Corporation’s Registration Statement on Form S-8 dated November 8, 2002, File No. 333-101121).
.3(a)
Indenture, dated September 29, 1999, by and between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to Tenneco Packaging Inc.’s Registration Statement on Form S-4, File No. 333-82923).
.3(b)
First Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(b) to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3(c)
Second Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(c) to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3(d)
Third Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(d) to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3(e)
Fourth Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(e) to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3(f)
Fifth Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(f) to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3(g)
Sixth Supplemental Indenture dated as of June 25, 2007 to Indenture, dated as of September 29, 1999, between Pactiv Corporation and the Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to Pactiv Corporation’s Current Report on Form 8-K dated June 25, 2007, File No. 1-15157).
Exhibit No.
Description
.3(h)
Seventh Supplemental Indenture dated as of June 25, 2007 to Indenture, dated as of September 29, 1999, between Pactiv Corporation and the Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.2 to Pactiv Corporation’s Current Report on Form 8-K dated June 25, 2007, File No. 1-15157).
.4
Registration Rights Agreement, dated as of November 4, 1999, by and between the registrant and the trustees under the Pactiv Corporation Rabbi Trust (incorporated herein by reference to Exhibit 4.4 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.1
Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Executive Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.5 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.2
Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.3
Amended and Restated Change in Control Severance Benefit Plan for Key Executives (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporation’s Current Report on Form 8-K dated September 4, 2009, File No. 1-15157).
.4
Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.5
Pactiv Corporation Rabbi Trust (incorporated herein by reference to Exhibit 10.11 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
.6
Pactiv Corporation 2002 Incentive Compensation Plan (incorporated herein by reference to Exhibit 4.7 to Pactiv Corporation’s Registration Statement on Form S-8 dated November 8, 2002, File No. 333-101121).
.7
Credit Agreement, dated as of April 19, 2006, among the registrant, Bank of America, N.A., as Administrative Agent, JP Morgan Chase Bank, N. A., as Syndication Agent and L/C Issuer, BNP Paribas, Suntrust Bank, and Citibank, N. A., Inc., as Co-Documentation Agents, and the other financial institutions party thereto (incorporated herein by reference to Exhibit 10.15 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-15157).
.8
Pactiv Corporation Deferred Retirement Savings Plan (incorporated herein by reference to Exhibit 10.16 to Pactiv Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157).
.9
Receivables Purchase Agreement, dated as of December 21, 2006, among the registrant and Atlantic Asset Securitization LLC and Calyon New York Branch, as agent for Purchasers (incorporated herein by reference to Exhibit 10.22 to Pactiv Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-15157).
.10
Continuing Agreement for Standby Letters of Credit between Pactiv Corporation and JPMorgan Chase Bank, N.A. dated June 5, 2007 (incorporated herein by reference to Exhibit 10.20 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-15157).
.11
Credit Agreement between Pactiv Corporation and JPMorgan Chase Bank, N.A. dated June 5, 2007 (incorporated herein by reference to Exhibit 10.21 to Pactiv Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-15157).
None.
None.
None.
Code of Ethical Conduct for Financial Managers (posted to company’s website, www.pactiv.com) in accordance with Item 406(c)(2) of Regulation S-K.
Exhibit No.
Description
None.
None.
*
Letter regarding change in accounting principle.
*
List of subsidiaries of Pactiv Corporation.
None.
*
Consent of Ernst & Young LLP.
*
Powers of Attorney for the following directors of Pactiv Corporation: Larry D. Brady, K. Dane Brooksher, Robert J. Darnall, Mary R. (Nina) Henderson, N. Thomas Linebarger, Roger B. Porter, and Norman H. Wesley.
*
.1
Rule 13a-14(a)/15d-14(a) Certification.
*
.2
Rule 13a-14(a)/15d-14(a) Certification.
*
*32
.1
Section 1350 Certification.
*
*32
.2
Section 1350 Certification.
*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACTIV CORPORATION
By:
/s/ Richard L. Wambold
Richard L. Wambold
Chairman, President and
Chief Executive Officer
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Richard L. Wambold
Richard L. Wambold
Chairman, President, Chief Executive Officer and Director (principal executive officer)
February 26, 2010
/s/ Edward T. Walters
Edward T. Walters
Senior Vice President and Chief Financial Officer (principal financial officer)
February 26, 2010
/s/ Donald E. King
Donald E. King
Corporate Controller and Chief Accounting Officer (principle accounting officer)
February 26, 2010
/s/ Larry D. Brady*
Larry D. Brady
Director
February 26, 2010
/s/ K. Dane Brooksher*
K. Dane Brooksher
Director
February 26, 2010
/s/ Robert J. Darnall*
Robert J. Darnall
Director
February 26, 2010
/s/ Mary R. (Nina) Henderson*
Mary R. (Nina) Henderson
Director
February 26, 2010
/s/ N. Thomas Linebarger*
N. Thomas Linebarger
Director
February 26, 2010
/s/ Roger B. Porter*
Roger B. Porter
Director
February 26, 2010
/s/ Norman H. Wesley*
Norman H. Wesley
Director
February 26, 2010
*By: /s/ Joseph E. Doyle
Joseph E. Doyle
Attorney-in-fact
February 26, 2010