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Pactiv 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
(Exact name of Registrant as
Specified in its Charter)
Registrant’s telephone number, including area code:
(847) 482-2000
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes ü No
Indicate by check mark if the
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes No ü
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.
Yes ü No
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. ü
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the
registrant is a shell company (as defined by
Rule 12b-2
of the Exchange Act).
Yes No ü
State the aggregate market value of
the voting and non-voting common equity held by non-affiliates
of the registrant. The aggregate market value is computed by
reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of the last
business day of the registrant’s most recently completed
second fiscal quarter.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
REGISTRANT’S CLASSES OF COMMON STOCK, AS OF THE LATEST
PRACTICABLE DATE. Common Stock ($.01 par value).
130,398,869 shares outstanding as of January 31, 2008.
(See Note 11 to the Financial Statements.)
Documents Incorporated by Reference:
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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 44 manufacturing facilities in North America, and 1 in
Germany. 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). In 2007, 95% of our $3.3 billion in sales was
generated in North America.
We have two operating segments:
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.
The portion of the businesses we retained is included in our
Foodservice/Food Packaging segment. All financial statements
included in this report reflect this change.
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.”
References in this report to our business do not include the
protective- and flexible-packaging operations that were sold,
except as otherwise indicated.
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:
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In 2007, Consumer Products accounted for 37.5% of our sales.
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 2007, Foodservice/Food Packaging accounted for 62.5% 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.
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 and international
manufacturers 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.
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 2007, 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:
Successful development of new products and value-added
product-line extensions are essential to our continued growth.
Our acquisition of Prairie has broadened our product offering,
particularly in the area of cups and cutlery. We anticipate that
significant sales synergies will result from selling
Prairie’s products through our national distribution
network. We spent $34 million on research and development
activities in 2007 and $33 million in both 2006 and 2005.
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.
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Our continued focus on productivity enhancements and
manufacturing and logistics cost reductions is key to improving
our profitability. In 2007, approximately 30% of our research
and development spending and 20% of our capital spending was
devoted to efforts to reduce costs and improve manufacturing and
distribution efficiency.
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. Our focus is on products that have strong growth
characteristics and attractive margins.
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 20% of
our consolidated sales in 2007 and 16% in 2006, was the only
customer that accounted for more than 10% of our sales. Our
backlog of orders is not material.
The following table sets forth information regarding sales from
continuing operations.
See Note 14 to the financial statements for additional
segment and geographic information.
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.
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 2007, and we believe that our
raw material supply will remain adequate in 2008.
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
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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.
At December 31, 2007, we employed approximately
13,000 people, including persons employed by our Asian
joint ventures. Approximately 10% of our U.S. employees are
covered by collective-bargaining agreements. Five of the
agreements, covering approximately 700 employees, are
scheduled for renegotiation in 2008. 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.
Our website address is www.pactiv.com. Our investor relations
link on this website has the following information available
free of charge:
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.
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).
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.
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
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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.
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.
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 could increase our
manufacturing costs.
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.
Currently most of our production and sales are in the
U.S. Competition from products manufactured in countries
that have lower labor and other costs than the U.S. could
negatively impact our profitability. Additionally, if we were to
manufacture or sell more of our products in countries outside of
the U.S., we would be exposed to additional economic, political,
competitive, and foreign-currency exchange risks.
At the time of our spin-off from Tenneco in 1999, we became the
sponsor of Tenneco (now Pactiv) pension plans. These plans cover
individuals/beneficiaries from many companies previously owned
by Tenneco, but not owned by Pactiv. As a result, 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 and shareholders’ equity 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:
Funding of the qualified U.S. pension plan is currently
determined by requirements of the Employee Retirement Income
Security Act, under which we were not required to make
contributions to the plan in 2007. On August 17, 2006,
President Bush signed the Pension Protection Act of 2006 (PPA)
into law. The PPA, which is effective for plan years beginning
after December 31, 2007, significantly alters current
funding requirements. Based on our current assumptions and
requirements of the PPA, we do not anticipate that after-tax
contributions to the plan will be significant for the
foreseeable future.
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None.
Our corporate headquarters is located at 1900 West Field
Court, Lake Forest, Illinois 60045. Our general telephone number
is
(847) 482-2000.
Our Consumer Products and Foodservice/Food Packaging segments
operate 44 manufacturing and 8 distribution facilities in North
America (United States, Mexico, and Canada). We also have a
manufacturing facility in Germany and a distribution facility in
the United Kingdom that support 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.
We have been named as a defendant in multiple lawsuits,
currently covering 1,044 plaintiffs, pending in the United
States District Court for the Middle District of Alabama. All of
these plaintiffs are represented by the same group of law firms.
The plaintiffs are seeking unspecified damages based on
allegations that they experienced personal injuries (including
wrongful death) and property damages as a result of the alleged
release of chemical substances from a wood-treatment facility in
Lockhart, Alabama, during the period from 1963 to 1998. A
predecessor of Pactiv owned the facility from 1978 to 1983.
Louisiana-Pacific Corporation, the current owner of the
facility, to which a predecessor of Pactiv sold the facility in
1983, also is named as a defendant in each of the lawsuits. Due
to the numerous uncertainties associated with the matters
alleged in the lawsuits, including uncertainties regarding the
existence, nature, and magnitude of any alleged release of
chemical substances, whether such releases caused any of the
alleged injuries and property damage, and whether Pactiv has any
responsibility for any such damages and defenses thereto, we are
not presently able to quantify our financial exposure, if any,
relating to such matters. We have engaged in settlement
discussions with the lawyers representing the plaintiffs,
although at this time it is uncertain if we will be able to
reach agreement. Should we be unable to settle these cases, we
will continue to defend these lawsuits vigorously.
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.
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
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Our executive officers, as of February 29, 2008, 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, 56, 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.
Andrew A. Campbell, 62, Senior Vice President and Chief
Financial Officer.
Mr. Campbell joined the company in October 1999 as Vice
President and Chief Financial Officer and has served as Senior
Vice President and Chief Financial Officer since January 2001.
Joseph E. Doyle, 48, 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, 57, 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, 58, 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.
Henry M. Wells, III, 63, Vice President and Chief Human
Resources Officer.
Mr. Wells has served as Vice President and Chief Human
Resources Officer since April 2000.
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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 2007 and 2006 are shown below.
At January 31, 2008, there were approximately 32,580
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, 2007, the remaining number of shares
authorized to be repurchased was 597,579. 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.
Details of the shares purchased in the fourth quarter of 2007
are shown in the following table.
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The following graph compares the cumulative total return for the
company’s common stock for the period ended
December 31, 2002, through December 31, 2007, 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. Previously, the company’s custom composite index
included Ivex Packaging Corporation through the second quarter
of 2002 when it was acquired by Alcoa, Inc. No information is
available for Ivex Packaging Corporation for the period covered
by this performance graph and therefore it is no longer part of
the custom composite index. 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, 2002
with dividends reinvested
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Other Information:
The company has never paid a dividend.
See Note 5 for discontinued operations.
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Financial statements for all periods presented in this report
are 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
prior-years’ financial information to conform to
current-year presentation.
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%, and since then we have included the joint
venture in our consolidated financial statements.
On October 12, 2005, we completed the sale of most of our
protective- and flexible-packaging businesses to Pregis
Corporation. These businesses historically were included in our
Protective and Flexible Packaging segment. In conjunction with
the sale of these entities, we reviewed our reporting segments
in concert with requirements of the Statement of Financial
Accounting Standards (SFAS) No. 131, “Disclosures
About Segments of an Enterprise and Related Information.”
As a result, we elected to include the retained portions of the
protective- and flexible-packaging businesses in our
Foodservice/Food Packaging segment.
We have three reporting segments:
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.
Our primary business involves the manufacture and sale of
consumer and specialty-packaging products for the consumer and
foodservice/food packaging markets. We operate 47 manufacturing
facilities in 5 countries.
Consumer products include plastic, aluminum, and
paper-based products, such as waste bags, food-storage bags, and
disposable tableware and cookware. These products are sold under
such well-known brand names as
Hefty®,
Baggies®,
Hefty®
OneZip®,
Hefty®
Cinch
Sak®,
Hefty®
The
Gripper®,
Hefty®
Zoo
Pals®,
Kordite®,
and EZ
Foiltm.
Foodservice and food-packaging products include foam,
clear plastic, aluminum, pressed-paperboard, and molded-fiber
packaging for customers in the food-distribution channel.
Customers include wholesalers, supermarkets, restaurants, and
packer processors, who prepare and process food for consumption.
We sell our products to a wide array of customers worldwide.
Customers include grocery stores, mass merchandisers, discount
chains, restaurants, distributors, and fabricators. Costs
incurred in connection with the
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manufacture and sale of these products are recorded in either
cost of sales or selling, general, and administrative expenses.
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.
We have pension plans that cover substantially all of our
employees. In addition, in conjunction with our spin-off from
Tenneco Inc. (Tenneco) in 1999, we became the sponsor of
retirement plans covering participating employees of certain
former subsidiaries and affiliates of Tenneco. With the
exception of pension-service costs associated with our
production operations, we record pension income as an offset to
selling, general, and administrative expenses. However, when
assessing our performance and returns, we typically exclude the
effect of pension income and pension assets and liabilities.
Several opportunities and challenges may influence our continued
growth.
Near-term risks include:
Longer-term risks include:
We expect to continue to be successful by:
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.
Oil prices are currently near their historic highs, and we
expect that resin costs will continue to be a source of
volatility for us. Over time, we have been able to raise selling
prices in many areas of our business to mitigate the effect of
resin-cost increases. We continue to closely monitor the resin
marketplace and will respond quickly to any raw-material cost
increases.
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
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productivity improvements and other cost reductions. However, if
energy-related costs increase significantly in the future, we
may not be able to fully offset such increases with productivity
gains.
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. We expect
our ability to use these tools throughout the organization will
positively affect our operating results over the next several
years.
We expect that the integration of the Prairie and Pactiv
businesses will result in synergies of $15 million during
the first full year, and will give rise to improved operating
results over the next several years.
The company commenced the implementation of a cost-reduction
program in the first quarter of 2008. This program will include
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. We will take a
related charge of approximately $10 million after tax
(earnings per share reduction of $0.08), the majority of which
will occur in the first quarter. Approximately $6 million
of the charge will be noncash. The program is expected to
increase after-tax earnings by $7 million, or $0.05 per
share, in 2008, and by $13 million, or $0.10 per share, on
an annualized basis.
Year 2007
compared with 2006
Results
of Continuing Operations
Total sales grew 12%. Excluding the impact of the Prairie
acquisition ($292 million), sales grew 2%, reflecting
higher volume ($19 million), selling prices
($12 million), and foreign-currency exchange gains
($13 million).
Sales for Consumer Products rose 13%, reflecting volume growth
of 11% from the Prairie acquisition ($117 million) and an
increase of 1% in both volume and price in the base business.
Sales growth of 11% for Foodservice/Food Packaging was
attributable to a volume gain of 10% from the Prairie
acquisition ($175 million), as well as modest volume growth
in the base business ($9 million) and foreign-currency
exchange gains ($13 million).
The improvement in total operating income was driven primarily
by volume growth ($49 million), principally from the
Prairie acquisition, and lower performance-related compensation
($26 million) and advertising and promotional (A&P)
expenses ($13 million), offset partially by a
$38 million decline in the spread between selling prices
and raw-material costs (spread), resulting from higher
raw-material costs.
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The increase in operating income for Consumer Products was
driven mainly by volume growth ($21 million), primarily
from the Prairie acquisition, and lower A&P expenses
($13 million), offset partially by higher operating costs
($7 million).
The increase in operating income for the Foodservice/Food
Packaging business was due to volume growth ($28 million),
primarily related to the Prairie acquisition, and lower
SG&A expenses ($12 million), offset, in part, by
unfavorable spread ($37 million) resulting from higher
raw-material costs.
The increase in operating income for the Other segment was
driven primarily by lower performance-related compensation.
Our effective tax rate for 2007 was 35.5%, compared with 29.1%
for 2006. The lower 2006 tax rate was driven principally by a
reduction in accrued income taxes due to the expiration of the
statute of limitations for prior tax years, offset partially by
other accruals for income-tax liabilities.
We recorded income from continuing operations of
$244 million, or $1.84 per share, compared with
$277 million, or $1.98 per share, in 2006. The decline
primarily reflects the nonrecurrence in 2007 of amounts booked
in 2006 to recognize a realized foreign-currency exchange gain
upon the liquidation of our European treasury operation
($20 million after tax) and to record favorable income-tax
liability adjustments ($29 million after tax), and higher
interest costs ($15 million after tax) in 2007, partially
offset by higher operating income ($30 million after tax)
in 2007.
Discontinued
Operations
Income
(Loss) from Discontinued Operations
Income (loss) from discontinued operations (see “Basis of
Presentation” on page 11) was as follows:
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:
In 2007, $27 million of deferred taxes was reclassified as
liabilities related to discontinued operations as a result of
the adoption of Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, “Accounting for
Uncertainty in Income Taxes”. For 2006, $26 million
was reclassified from deferred taxes to noncurrent liabilities
related to discontinued operations to conform to the
current-year presentation. In 2006, we recorded a loss on
discontinued operations of $3 million, reflecting final
working-capital adjustments and taxes related to business
dispositions.
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Liquidity
and Capital Resources
Shareholders’ equity increased $373 million in 2007 as
detailed below.
Cash flows for continuing and discontinued operations were as
follows:
The increase in cash provided by operating activities was driven
primarily by a decrease in accounts receivable
($109 million), principally as a result of the
$110 million increase in amounts drawn under our
asset-securitization facility, higher income from continuing
operations ($16 million) excluding the impact of a noncash
foreign-currency exchange gain ($20 million after tax) and
income-tax liability adjustments ($29 million after tax) in
2006, and an increase in interest cost accrued
($15 million), offset partially by a decrease in other
liabilities ($60 million) and higher cash taxes
($35 million).
Cash used by investing activities in 2007 primarily reflected
amounts spent on the acquisition of Prairie ($1 billion)
and plant and equipment ($151 million). Cash used by
investing activities in 2006 was driven principally by capital
expenditures of $78 million.
Cash provided by financing activities in 2007 was driven by the
issuance of long-term debt ($939 million) and common stock
($19 million) and the cash-tax benefit from stock-option
exercises ($23 million), offset partially by the repayment
of long-term ($99 million) and revolving-credit
($132 million) debt, as well as the repurchase of company
stock ($108 million). Cash used by financing activities in
2006 primarily reflected the repurchase of company stock
($369 million), offset partially by the issuance of company
stock in connection with the administration of employee-benefit
plans ($73 million).
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Commitments for authorized capital expenditures totaled
approximately $94 million at December 31, 2007. 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.
We enter into arrangements that obligate us to make future
payments under long-term contracts. Our long-term contractual
obligations at December 31, 2007, were as follows:
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
$300 million was outstanding at December 31, 2007. We
were in full compliance with the financial and other covenants
of our revolving-credit agreement at the end of the period. We
also use an asset-securitization facility as a form of
off-balance sheet financing. At December 31, 2007,
$110 million was securitized under this facility. No
amounts were securitized as of December 31, 2006.
On April 13, 2007, we repaid $99 million of notes due
on that date using proceeds from our asset-securitization
facility ($90 million) and cash on hand.
We have pension plans that cover substantially all of our
employees. Funding of the qualified U.S. pension plan is
currently determined by requirements of the Employee Retirement
Income Security Act, under which we were not required to make
contributions to the plan in 2007. On August 17, 2006,
President Bush signed the Pension Protection Act of 2006 (PPA)
into law. The PPA, which is effective for plan years beginning
after December 31, 2007, significantly alters current
funding requirements. Based on our current assumptions and
requirements of the PPA, we do not anticipate that after-tax
contributions to the plan will be significant 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 liquidity and capital requirements.
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Year 2006
compared with 2005
Results
of Continuing Operations
Excluding the positive impact of acquisitions
($16 million), total sales grew 5.3% in 2006, primarily due
to higher pricing ($155 million) and favorable
foreign-currency exchange rates ($6 million), offset
partially by a decline in volume ($15 million).
The 2006 sales gain for Consumer Products was driven principally
by price increases of 9% and an increase in volume of 1%.
Sales growth in Foodservice/Food Packaging in 2006 was
attributable to price increases of $64 million, the
positive impact of acquisitions ($16 million) and
foreign-currency exchange rates ($6 million), offset
partially by a slight decline in volume in the base business
($21 million).
Total operating income increased in 2006 as a result of positive
spread (the difference between selling prices and raw-material
costs) of $142 million and lower operating costs
($26 million), offset partially by higher selling, general,
and administrative (SG&A) costs ($52 million).
SG&A expenses rose as a result of higher
performance-related compensation costs ($32 million),
primarily driven by the increase in our stock price, lower
pension income ($13 million), and higher advertising and
promotion expenses ($8 million).
Operating income for the Consumer Products business improved
significantly from 2005. The increase was driven principally by
positive spread ($82 million) and lower operating expenses
($9 million), offset partially by higher A&P
($8 million) and other SG&A ($7 million) costs.
The increase in operating income for the Foodservice/Food
Packaging business in 2006 primarily reflected favorable spread
($60 million) and productivity gains ($17 million),
offset, in part, by higher SG&A costs ($17 million).
Operating income for the Other segment decreased in 2006,
principally because of lower noncash pension income
($13 million) and higher administrative expenses
($4 million).
Our effective tax rate for 2006 was 29.1%, compared with 36.0%
for 2005. The reduction in the tax rate was driven principally
by a reduction in accrued income taxes due to the expiration of
the statute of limitations for prior tax years, offset partially
by other accruals for income-tax liabilities.
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We recorded income from continuing operations of
$277 million, or $1.98 per share, in 2006, compared with
$143 million, or $0.96 per share, in 2005. Results in 2006
included noncash pension income of $26 million after tax,
or $0.19 per share, a realized foreign-currency exchange gain
upon the liquidation of our European treasury operation of
$20 million after tax, or $0.14 per share, and favorable
income-tax liability adjustments of $29 million, or $0.21
per share. Prior-period results included noncash pension income
of $34 million after tax, or $0.23 per share.
Discontinued
Operations
Income
(Loss) from Discontinued Operations
Income (loss) from discontinued operations (see “Basis of
Presentation” on page 11) was as follows:
In 2006, we recorded a loss on discontinued operations of
$3 million related to final working-capital adjustments and
taxes related to the sale of our protective- and
flexible-packaging businesses.
Income (loss) from discontinued operations for 2005 included an
allocation of interest expense ($11 million), which was
based on the ratio of net assets of discontinued operations to
the company’s total net assets plus consolidated debt.
Interest expense was allocated through October 12, 2005,
the date of sale of the protective- and flexible-packaging
businesses. The buyer of the businesses did not assume the debt
of the discontinued operations. In addition, we did not have any
debt-repayment requirements as a result of the sale.
In December 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123(R) “Share-Based
Payment,” which requires that the fair value of all
share-based payments to employees, including stock options, be
recognized in financial statements. SFAS No. 123(R)
superseded Accounting Principles Board (APB) Opinion No. 25
“Accounting for Stock Issued to Employees,” which
required that the intrinsic-value method be used in determining
compensation expense for share-based payments to employees.
Under SFAS No. 123(R), 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).
We adopted SFAS No. 123(R) using the modified
prospective method as of January 1, 2006. The impact if
SFAS No. 123(R) had been adopted in prior periods is
shown in the “Stock Based Compensation” section of
Note 2. The one-time cumulative adjustment recorded in
connection with adopting SFAS No. 123(R) was
immaterial for the twelve months ended December 31, 2006.
We elected to use the simplified method in calculating our
additional paid-in capital pool upon adoption of
SFAS No. 123(R), as described in FASB Staff Position
No. FAS 123(R) — 3, “Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards.” SFAS No. 123(R)
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 totaled
$23 million in 2007, $4 million in 2006, and
$6 million in 2005.
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In July 2006, the FASB issued FIN No. 48, which
clarifies the application of SFAS No. 109,
“Accounting for Income Taxes.” FIN No. 48
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, FIN No. 48
provides guidance regarding measurement, derecognition,
classification, and disclosure of tax positions. We adopted
FIN No. 48 as of January 1, 2007. See
Note 10 to the financial statements for additional
information.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an Amendment of
SFAS Nos. 87, 88, 106, and 132(R).”
SFAS No. 158 requires employers to recognize the
overfunded or underfunded status of defined-benefit
postretirement plans as assets or liabilities in their statement
of financial position. In this connection, previously disclosed
but unrecognized gains or losses, prior-service costs or
credits, and transition assets or obligations must be recognized
upon adoption as a component of accumulated other comprehensive
income, net of applicable taxes. SFAS No. 158 also
requires that additional disclosures be provided in the notes to
the financial statements regarding the impact on net
periodic-benefit costs of delaying the recognition of gains or
losses, prior-service costs or credits, and transition assets or
obligations. These changes are effective for fiscal years ending
after December 15, 2006. In addition, effective for fiscal
years ending after December 15, 2008,
SFAS No. 158 precludes companies from using other than
their fiscal year-end date to measure plan assets and
obligations.
We adopted the recognition and disclosure provisions of
SFAS No. 158 on December 31, 2006. We recorded a
charge to other comprehensive income of $41 million upon
adoption.
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.
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. Our
accounting policy for all these programs is to deduct the
expenses from revenues in accordance with Emerging Issues Task
Force (EITF)
01-9. 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.
Our inventories are stated at the lower of cost or market. A
portion of inventories (51% and 55% at December 31, 2007,
and 2006, respectively) is valued using the
last-in,
first-out (LIFO) method of accounting. Products which are made
and sold in the U.S. and use polystyrene, polyethylene,
amorphous polypropylene terephthalate, or paper as their
principal raw material utilize the LIFO method of inventory
accounting. Similar products which are produced and sold outside
of the U.S. use the
first-in,
first-out (FIFO) or the average-cost method of inventory
accounting because the LIFO valuation method is not permitted in
those countries in which we operate. Worldwide, we use the FIFO
accounting method for production supplies and products made from
aluminum and polypropylene.
Given the volatility of the cost of our raw materials (primarily
plastic resins), we prefer the LIFO valuation method, because it
reflects the current cost of inventories in cost of sales. If we
had first valued all inventories using the FIFO accounting
method as of January 1, 2005, net income would have been
$35 million, or $0.24 per share, higher in 2005;
$2 million, or $0.02 per share, higher in 2006; and
$4 million, or $0.03 per share, lower in 2007.
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.
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In September 2006, the FASB issued SFAS No. 158. See
“Changes in Accounting Principles” on page 36 for
additional information. Total pretax pension-plan income was
$50 million in 2007, $42 million in 2006, and
$54 million in 2005, 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 decrease to $49 million in 2008.
Projections of pension income are based on a number of factors,
including estimates of future returns on pension-plan assets;
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 its inception in 1971, our
U.S. qualified pension plan’s annual rate of return on
assets has averaged 11%. 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-on-assets assumption was appropriate for 2007.
Holding all other assumptions constant, a one-half
percentage-point change in the rate-of-return-on-assets
assumption would impact our pretax pension income by
approximately $19 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 at our September
30 measurement date was 6.39% for 2007 and 5.93% for 2006.
Holding all other assumptions constant, a one-half
percentage-point change in the discount rate would impact our
pretax pension income by approximately $6 million.
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 a
5-year
period. Resulting unrecognized gains or losses, along with other
actuarial gains and losses, are amortized using the
“corridor approach” outlined in SFAS No. 87,
“Employers’ Accounting for Pensions.”
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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:
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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.
During the fourth quarter of 2007, we entered into natural gas
purchase agreements with third parties, hedging a portion of the
first quarter 2008 purchases of natural gas used in the
production process 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,
2007 were immaterial.
At December 31, 2007, we had public-debt securities of
$1.276 billion outstanding, with fixed interest rates and
maturities ranging from 4 to 19 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 variable-interest-rate line of credit,
against which we borrowed $300 million at December 31,
2007. The fair value of the debt at that date was equal to the
outstanding balance.
As a part of the acquisition of Prairie Packaging Inc.
(Prairie), we assumed Prairie’s liability for amounts
($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 (3.4%
as of December 31, 2007) 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 Inc., 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.
In September 2007, we entered into an interest-rate swap
agreement to hedge the risk of interest-rate volatility on
$100 million of amounts due under our
variable-interest-rate revolving-credit facility. This agreement
will terminate in December 2008, and its fair value was a
liability of $1 million at December 31, 2007.
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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, 2007. 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, 2007, was effective.
In conducting our evaluation of the effectiveness of our
internal control over financial reporting, we did not include
the financial reporting of Prairie Packaging, Inc. (Prairie),
which was acquired on June 5, 2007, because Prairie’s
results were not included in our 2007 consolidated financial
statements for the full year. Prairie represented approximately
$1.1 billion, or 29%, of total assets as of
December 31, 2007, and $292 million, or 9%, of sales
for the year then ended. Refer to Note 4 to the
consolidated financial statements for further discussion of the
Prairie acquisition.
Our internal control over financial reporting as of
December 31, 2007, 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 26.
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The Board of Directors and Shareholders of Pactiv Corporation
We have audited the accompanying consolidated statements of
financial position of Pactiv Corporation (the Company) as of
December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2007. 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,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2007, 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, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” and effective
December 31, 2006, the Company adopted certain provisions
of Statement of Financial Accounting Standards No. 158,
“Employer’s Accounting for Defined Benefit Pension and
Other Postretirement Plans”, and effective January 1,
2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”.
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, 2007, 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 27, 2008 expressed
an unqualified opinion thereon.
/s/ Ernst &
Young LLP
Chicago, Illinois
February 27, 2008
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The Board of Directors and Shareholders of Pactiv Corporation
We have audited Pactiv Corporation’s internal control over
financial reporting as of December 31, 2007, 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.
As indicated in the accompanying Management’s Report on
Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Prairie Packaging, Inc., which is included in the
2007 consolidated financial statements of Pactiv Corporation and
constituted $1.1 billion or 29% of total assets as of
December 31, 2007 and $292 million or 9% of revenues
for the year then ended. Our audit of internal control over
financial reporting of Pactiv Corporation also did not include
an evaluation of the internal control over financial reporting
of Prairie Packaging, Inc.
In our opinion, Pactiv Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the COSO criteria.
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We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial position of Pactiv
Corporation as of December 31, 2007 and 2006, and the
related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2007, and our report dated
February 27, 2008 expressed in unqualified opinion thereon.
/s/ Ernst &
Young LLP
Chicago, Illinois
February 27, 2008
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The accompanying notes to the financial statements are an
integral part of this statement.
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Consolidated
Statement of Financial Position
The accompanying notes to the financial statements are an
integral part of this statement.
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Consolidated
Statement of Cash Flows
The accompanying notes to the financial statements are an
integral part of this statement.
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Consolidated
Statement of Shareholders’ Equity
The accompanying notes to the financial statements are an
integral part of this statement.
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Financial statements for all periods presented in this report
are 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
prior-years’ financial information to conform to
current-year presentation.
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%, and since then we have included the joint
venture in our consolidated financial statements.
On October 12, 2005, we completed the sale of most of our
protective- and flexible-packaging businesses to Pregis
Corporation. These businesses historically were included in our
Protective and Flexible Packaging segment. In conjunction with
the sale of these entities, we reviewed our reporting segments
in concert with requirements of the Statement of Financial
Accounting Standards (SFAS) No. 131, “Disclosures
About Segments of an Enterprise and Related Information.”
As a result, we elected to include the retained portions of the
protective- and flexible-packaging businesses in our
Foodservice/Food Packaging segment.
We have three reporting segments:
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.
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 carried at cost plus our
share of the change in equity since the date of acquisition. All
inter-company transactions are eliminated.
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.
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.
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Notes to
Financial Statements — (Continued)
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 liquidity.
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. The related proceeds are included in cash provided by
operating activities in the statement of cash flows. Receivables
aggregating $110 million were sold at December 31,
2007, while no receivables were sold at December 31, 2006.
Discounts and fees related to these sales were $4 million
in 2007, not material in 2006, and $2 million in 2005.
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.
Our inventories are stated at the lower of cost or market. A
portion of inventories (51% and 55% at December 31, 2007,
and 2006, respectively) is valued using the
last-in,
first-out (LIFO) method of accounting. Products which are made
and sold in the U.S. and use polystyrene, polyethylene,
amorphous polyethylene terephthalate or paper as their principal
raw material utilize the LIFO method of inventory accounting.
Similar products which are produced and sold outside of the
U.S. use the
first-in,
first-out (FIFO) or the average-cost method of inventory
accounting because the LIFO valuation method is not permitted in
those countries in which we operate. Worldwide, we use the FIFO
accounting method for production supplies and other products
made from aluminum and polypropylene. If FIFO or average-cost
methods had been used to value all inventories, the total
inventory balance would have been $48 million higher at
December 31, 2007, and $59 million higher at
December 31, 2006.
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 $143 million in 2007, $129 million in 2006,
and $129 million in 2005.
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, were $26 million in 2007 and
$31 million in 2006.
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.
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” we review the carrying value of
our goodwill and indefinite-lived intangibles for possible
impairment. 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 and indefinite-lived intangibles
is determined using a two-step process.
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Notes to
Financial Statements — (Continued)
Estimates of fair value used in testing goodwill and
indefinite-lived intangible assets for possible impairment are
primarily determined using discounted cash flow projections,
along with publicly available market information. These
approaches use 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.
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.
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.
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
deductions are related to volume rebates, early payment
discounts, and coupon redemptions. 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. Our accounting policy for all
these programs is to deduct the expenses from revenues in
accordance with Emerging Issues Task Force (EITF)
01-9.
We record amounts billed to customers for shipping and handling
as sales, and record shipping and handling expenses as cost of
sales.
Total noncash pension income was as follows:
Research and development costs, which are expensed as incurred,
totaled $34 million in 2007 and $33 million in both
2006 and 2005.
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Notes to
Financial Statements — (Continued)
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
$13 million in 2007, $21 million in 2006, and
$16 million in 2005.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R) “Share-Based
Payment,” which requires that the fair value of all
share-based payments to employees, including stock options, be
recognized in financial statements. SFAS No. 123(R)
superseded Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees,” which required that the intrinsic-value method
be used in determining compensation expense for share-based
payments to employees. Under SFAS No. 123(R),
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).
Effective January 1, 2006, we adopted the fair-value method
of accounting for employee stock-compensation costs as outlined
in SFAS No. 123(R). Prior to that date, we used the
intrinsic-value method in accordance with requirements of APB
Opinion No. 25. The following table shows the effects on
net income and earnings per share had the fair-value method been
used in determining stock-based compensation costs in 2005.
Effective November 28, 2005, our board of directors
modified our long-range compensation program, replacing stock
options with performance shares. As part of this change, the
board accelerated the vesting of all unvested stock options as
of that date. This action will give rise to a reduction in
compensation costs going forward, compared with what would have
been the case if we had commenced the expensing of these options
in 2006.
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Notes to
Financial Statements — (Continued)
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 in that we intend to
reinvest those earnings in foreign operations. Unremitted
earnings of foreign subsidiaries totaled $35 million at
December 31, 2007, and $40 million at
December 31, 2006. The unrecognized deferred-tax liability
associated with unremitted earnings totaled approximately
$7 million at December 31, 2007, and $6 million
at December 31, 2006.
On October 22, 2004, the American Jobs Creation Act of 2004
was signed into law. This act allowed us to take a special,
one-time tax deduction of 85% of certain repatriated foreign
earnings. In the fourth quarter of 2005, we repatriated
$147 million of the accumulated foreign earnings of our
discontinued foreign operations, and recorded a related tax
expense of $5 million.
Basic earnings per share is computed by dividing income
available to 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.
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, 2007.
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 other accumulated 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.
Gains on derivative contracts were $9 million in 2007, and
immaterial in 2006 and 2005. We do not use derivative financial
instruments for speculative purposes.
We adopted SFAS No. 123(R) using the modified
prospective method as of January 1, 2006. The impact if
SFAS No. 123(R) had been adopted in prior periods is
shown in the “Stock Based Compensation” section of
this note. The one-time cumulative adjustment recorded in
connection with adopting SFAS No. 123(R) was
immaterial for the twelve months ended December 31, 2006.
In connection with the adoption of SFAS No. 123(R), we
elected to use the simplified method in calculating our
additional paid-in capital, as described in FASB Staff Position
No. FAS 123(R) — 3, “Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards.” SFAS No. 123(R)
requires that
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Notes to
Financial Statements — (Continued)
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 totaled
$23 million in 2007, $4 million in 2006, and
$6 million in 2005.
In July 2006, the FASB issued FASB Interpretation (FIN)
No. 48, “Accounting for Uncertainty in Income
Taxes,” which clarifies the application of
SFAS No. 109, “Accounting for Income Taxes.”
FIN No. 48 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, FIN No. 48 provides guidance regarding
measurement, derecognition, classification, and disclosure of
tax positions. We adopted FIN No. 48 as of
January 1, 2007. See Note 10 for additional
information.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an Amendment of
SFAS Nos. 87, 88, 106, and 132(R).”
SFAS No. 158 requires employers to recognize the
overfunded or underfunded status of defined-benefit
postretirement plans as assets or liabilities in their statement
of financial position. In this connection, previously disclosed
but unrecognized gains or losses, prior-service costs or
credits, and transition assets or obligations must be recognized
upon adoption as a component of accumulated other comprehensive
income, net of applicable taxes. SFAS No. 158 also
requires that additional disclosures be provided in the notes to
the financial statements regarding the impact on net
periodic-benefit costs of delaying the recognition of gains or
losses, prior-service costs or credits, and transition assets or
obligations. These changes are effective for fiscal years ending
after December 15, 2006. In addition, effective for fiscal
years ending after December 15, 2008,
SFAS No. 158 precludes companies from using other than
their fiscal year-end date to measure plan assets and
obligations.
We adopted the recognition and disclosure provisions of
SFAS No. 158 on December 31, 2006. We recorded a
charge to accumulated other comprehensive income of
$41 million upon adoption. See Note 13 for additional
information.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” SFAS No. 157
establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and
liabilities. SFAS No. 157, which does not require any
new fair value measurements, clarifies the application of other
accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 must be applied
prospectively beginning January 1, 2008. We are currently
reviewing SFAS No. 157 and evaluating its potential
impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115.” SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value at specified election dates.
SFAS No. 159 is expected to expand the use of fair
value measurement, but does not eliminate disclosure
requirements included in other accounting standards, including
those in SFAS No. 157. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007. We are currently reviewing SFAS No. 159 and
evaluating its potential impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
‘‘Business Combinations,” which replaces
SFAS No. 141, “Business Combinations.”
SFAS No. 141(R) retains the underlying concepts of
SFAS No. 141 in that all business combinations are
still required to be accounted for at fair value under the
acquisition method of accounting, but SFAS No. 141(R)
changed the method of applying the acquisition method in a
number of significant aspects. Acquisition costs generally will
be expensed as incurred; noncontrolling interests will be valued
at fair value at the acquisition date; in-process research and
development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination
generally will be expensed subsequent to the acquisition date;
and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally
will affect income tax expense. SFAS No. 141(R) is
effective on a prospective basis for all business combinations
for which the acquisition date is on or after the beginning of
the first annual period subsequent to December 15, 2008,
with the exception of the accounting for valuation allowances on
deferred taxes and
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Notes to
Financial Statements — (Continued)
acquired tax contingencies. SFAS No. 141(R) amends
SFAS No. 109 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 SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). Early adoption is not
permitted. We are currently reviewing SFAS No. 141(R)
and evaluating its potential impact on our financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51”.
SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008, with earlier adoption prohibited.
SFAS No. 160 requires the recognition of a
noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the
parent’s equity. The amount of net earnings attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement.
SFAS No. 160 also amends certain of ARB
No. 51’s consolidation procedures for consistency with
the requirements of SFAS No. 141(R) and includes
expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest. We are currently
reviewing SFAS No. 160 and evaluating its potential
impact on our financial statements
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.
Reclassifications
Certain prior-year amounts have been reclassified to conform
with current-year presentation.
The company commenced the implementation of a cost-reduction
program in the first quarter of 2008. This program will include
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. We will take a
related charge of approximately $10 million after tax
(earnings per share reduction of $0.08), the majority of which
will occur in the first quarter. Approximately $6 million
of the charge will be noncash.
On June 5, 2007, we acquired 100% of the stock of Prairie.
Prairie manufactures a broad range of tableware and foodservice
products, including drink cups, portion cups, containers,
cutlery, plates, and bowls which are sold regionally to a
relatively small number of customers. It operates five
manufacturing facilities in the U.S. and employs
approximately 1,600 people. This acquisition broadens our
consumer and foodservice product offerings. The results of
Prairie’s operations have been included in the consolidated
financial statements as of the date of acquisition.
The purchase price of the acquisition was $1 billion in
cash. At the closing of the acquisition, we paid the purchase
price by issuing an $800 million short-term
interest-bearing promissory note that matured on June 18,
2007, and by drawing down $200 million under our existing
$750 million revolving-credit facility. We repaid the note
on June 18, 2007, by borrowing $500 million under a
third-party bridge loan, and using our revolving-credit
facility. We repaid the bridge loan on June 25, 2007, with
proceeds from the issuance of notes due in 2012
($250 million with a coupon of 5.875%) and 2018
($250 million with a coupon of 6.4%). In addition, we
assumed Prairie’s existing obligation related to amounts
($5 million) borrowed from the Illinois Development Finance
Authority (IDFA) bearing interest at varying rates (3.4% as of
December 31, 2007) not to exceed 12% per annum.
The total cost of the acquisition was allocated to the assets
acquired and the liabilities assumed based on their respective
fair values in accordance with requirements of
SFAS No. 141, “Business Combinations.”
Goodwill and other intangible assets recorded in connection with
the acquisition totaled $590 million and $206 million,
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Notes to
Financial Statements — (Continued)
respectively, and all of the goodwill is expected to be
deductible for tax purposes. We anticipate that significant
sales and operating synergies will result from selling
Prairie’s products through our national distribution
network. Recorded intangible assets pertain to customer
relationships and is being amortized over a
15-year
period. The allocation of the purchase price gave rise to a
$14 million increase in the value of property, plant, and
equipment to reflect the estimated fair value of those assets.
The following table summarizes the preliminary estimated fair
values of the assets acquired and liabilities assumed as of the
acquisition date of June 5, 2007.
Shown below is an unaudited pro forma condensed consolidated
statement of income for Pactiv reflecting the assumption that
the acquisition of Prairie was completed on the first day of
each of the periods depicted.
Pro forma adjustments were related primarily to the amortization
of intangible assets, interest cost, and tax expense. These pro
forma statements have been prepared for comparative purposes
only and are not intended to be indicative of what Pactiv’s
results would have been had the acquisition occurred at the
beginning of the periods presented, or of future results.
On March 15, 2005, we acquired Newspring Industrial Corp.
(Newspring) for $98 million. Newspring is a leading
supplier of thin wall, injection-molded polypropylene products
for use in the takeout, delicatessen, and foodservice markets.
We paid $87 million for the stock of Newspring and recorded
liabilities of $11 million for anticipated future payments
related to non-compete agreements and other items. Appraisals of
the fair-market value of the assets acquired were finalized
during 2006. This resulted in goodwill being reduced by
$1 million and increases in other intangibles for
$2 million, property, plant, and equipment for
$7 million, and deferred-tax liabilities for
$8 million.
On October 12, 2005, we completed the sale of most of our
protective- and flexible-packaging businesses to Pregis
Corporation for $523 million. Results of these businesses
are reported in our financial statements as discontinued
operations.
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Notes to
Financial Statements — (Continued)
Income (loss) from discontinued operations in 2007, 2006, and
2005 was as follows:
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.
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:
In 2007, $27 million of deferred taxes was reclassified as
liabilities related to discontinued operations as a result of
the adoption of Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, “Accounting for
Uncertainty in Income Taxes. For the December 31, 2006,
statement of financial position, $26 million was
reclassified from deferred taxes to noncurrent liabilities
related to discontinued operations to conform to the
current-year presentation.
Income (loss) from discontinued operations for 2005 included an
allocation of interest expense ($11 million), which was
based on the ratio of net assets of discontinued operations to
the company’s total net assets plus consolidated debt.
Interest expense was allocated through October 12, 2005,
the date of sale of the protective- and flexible-packaging
businesses. The buyer of the businesses did not assume the debt
of the discontinued operations. In addition, we did not have any
debt-repayment requirements as a result of the sale.
The American Jobs Creation Act of 2004 allowed us to take a
special, one-time tax deduction of 85% of certain repatriated
foreign earnings. In the fourth quarter of 2005, we repatriated
$147 million of the accumulated foreign earnings of our
discontinued operations, and recorded a related tax expense of
$5 million.
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Notes to
Financial Statements — (Continued)
At December 31, 2007, the aggregate maturities of debt
outstanding were $5 million due in 2010, $300 million
due in 2011, $250 million due in 2012 and $1,026 thereafter.
We were in full compliance with financial and other covenants in
our various credit agreements at December 31, 2007.
We use lines of credit and overnight borrowings to finance
certain of our short-term capital requirements. Information
regarding short-term debt, excluding current maturities of
long-term debt, is shown below. We had no short-term borrowings
in 2007.
In 1999, our former parent, Tenneco Inc. (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
debentures. At December 31, 2007, the unamortized balance
was $37 million.
At December 31, 2007, and 2006, 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 than the amount recorded for these assets
and liabilities. The fair value of long-term debt was
approximately $1.7 billion at December 31, 2007, and
approximately $871 million at year-end 2006. The recorded
amount was $1.6 billion at December 31, 2007, and
$771 million at December 31, 2006. The fair value of
long-term debt was based on quoted market prices for our debt
instruments.
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.
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
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Notes to
Financial Statements — (Continued)
average life of the underlying debt. Amounts recognized in
earnings related to our hedging transactions were immaterial in
2006 and 2005.
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, 2007.
During the fourth quarter of 2007, we entered into natural-gas
purchase agreements with third parties, hedging a portion of
first-quarter 2008 purchases of natural gas used in the
production process 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, 2007, were immaterial.
In September 2007, we entered into an interest-rate swap
agreement to hedge the risk of interest-rate volatility on
$100 million of amounts due under our
variable-interest-rate revolving-credit facility. This agreement
will terminate in December 2008, and its fair value was a
liability of $1 million at December 31, 2007.
Changes in the carrying value of goodwill during 2007 and 2006
by operating segment are shown in the following table.
Goodwill and other intangible assets recorded in connection with
the Prairie acquisition totaled $590 million and
$206 million, respectively. We anticipate that significant
sales and operating synergies will result from selling
Prairie’s products through our national distribution
network. Recorded intangible assets pertain to customer
relationships and is being amortized over a
15-year
period. The allocation of the purchase price gave rise to a
$14 million increase in the value of property, plant, and
equipment to reflect the estimated fair value of those assets.
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Notes to
Financial Statements — (Continued)
Details of intangible assets are shown in the following table.
A pension-related intangible of $9 million was eliminated
as a result of adjusting our minimum pension liability prior to
the adoption of SFAS No. 158 in 2006.
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 $22 million for the year ended December 31,
2007. Amortization expense is estimated to total
$27 million in 2008, $26 million in 2009,
$25 million in 2010, and $24 million in 2011.
Capitalized interest was $2 million in 2007,
$2 million in 2006, and $3 million in 2005.
Details of income (loss) from continuing operations before
income taxes are shown below.
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Notes to
Financial Statements — (Continued)
Shown below are details of income-tax expense for continuing
operations.
In the third quarter of 2006, we reduced our accrued income
taxes by $27 million, which gave rise to an increase of
$29 million, or $0.21 per share, in income from continuing
operations, for the year ended December 31, 2006, and a
decrease of $2 million, or $0.02 per share, in income from
discontinued operations for the same period. These adjustments,
which were related principally to matters associated with our
separation from Tenneco in 1999, reflected (1) a reduction
in accrued income taxes of $40 million due to the
expiration of the statute of limitations for prior tax years and
(2) an increase in other accruals for income-tax
liabilities of $13 million, primarily related to the status
of tax audits in Europe.
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.
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Notes to
Financial Statements — (Continued)
Summarized below are the components of our net deferred-tax
liabilities.
We had federal capital-loss carryforwards of $15 million as
of December 31, 2007, which will expire in 2011. State
tax-loss carryforwards at December 31, 2007,
($14 million) will expire at various dates from 2010 to
2018. Foreign tax-loss carryforwards at December 31, 2007,
totaled $90 million, of which $26 million will expire
at various dates from 2013 to 2015, with the balance having an
unlimited life.
In July 2006, the FASB issued FIN No. 48,
“Accounting for Uncertainties in Income Taxes,” which
clarifies the application of SFAS No. 109,
“Accounting for Income Taxes.” FIN No. 48
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, FIN No. 48
provides guidance regarding measurement, derecognition,
classification, and disclosure of tax positions.
We adopted FIN No. 48 on January 1, 2007. We did
not record a material adjustment to the liability for
unrecognized income-tax benefits in connection with the
adoption. Changes in the balance of unrecognized income-tax
benefits in 2007 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 $26 million as
of December 31, 2007. As of December 31, 2007, 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.
Table of Contents
Notes to
Financial Statements — (Continued)
It is our continuing practice to record accruals for interest
and penalties related to income-tax matters in income-tax
expense. Such accruals totaled $7 million as of the
adoption date and $8 million as of December 31, 2007.
Expense recorded through December 31, 2007, for interest
and penalties was $2 million.
U.S. federal income-tax returns filed for the years 2004
through 2006 are open for examination by the Internal Revenue
Service. Various state, local, and foreign tax returns filed for
the years 2002 through 2006 are open for examination by tax
authorities in those jurisdictions.
Included in unrecognized income-tax benefits at
December 31, 2007, was $14 million related to
discontinued operations, all of which if recognized, would
impact income from discontinued operations in future periods.
Amounts recorded through December 31, 2007 for interest and
penalties related to discontinued operations was $1 million.
In connection with the adoption of SFAS No. 123(R), we
elected to use the simplified method in calculating our
additional paid-in capital pool upon adoption of
SFAS No. 123(R), as described in FASB Staff Position
No. FAS 123(R) — 3, “Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards.” SFAS No. 123(R)
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 totaled
$23 million in 2007, $4 million in 2006, and
$6 million in 2005.
We have 350 million shares of common stock ($0.01 par
value) authorized, of which 130,439,873 shares were issued
and outstanding as of December 31, 2007.
Reserved shares at December 31, 2007 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 18 million
were issued or granted as of December 31, 2007.
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.
Table of Contents
Notes to
Financial Statements — (Continued)
Changes in performance-share balances were as follows:
Additional information related to performance shares is as
follows:
There was $7 million after tax of unamortized performance
share expense at December 31, 2007, of which
$6 million will be charged against net income in 2008 and
$1 million in 2009.
Summarized below are changes in stock-option balances.
Table of Contents
Notes to
Financial Statements — (Continued)
Summarized below is information regarding stock options
outstanding and exercisable at December 31, 2007.
See Note 2 for additional information regarding stock-based
compensation accounting.
Employee Stock-Purchase Plan — Prior to 2006,
our stock-purchase plan allowed U.S. and Canadian employees
to purchase Pactiv stock (up to $25,000 annually) at a 15%
discount. In 2005, employees purchased 199,114 shares of
stock, at a weighted-average price of $17.66 per share. We
terminated the plan on December 31, 2005.
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. In 2007, 2006, and 2005, we incurred
401(k) plan expense of $10 million, $9 million, and
$10 million, respectively.
Grantor Trust — In November 1999, we
established a grantor trust and issued 3,200,000 shares of
Pactiv common stock for the trust. These shares were issued to
the trust in January 2000. This so-called “rabbi
trust” is designed to assure the payment of
deferred-compensation and supplemental-pension benefits. These
shares are not considered outstanding for purposes of financial
reporting.
In November 1999, we adopted a qualified offer rights plan
(QORP). Its purpose is to deter coercive takeover tactics and to
prevent a potential acquirer from gaining control of the company
in a transaction that would not be in the best interest of
shareholders. Under the plan, if a person becomes a beneficial
owner of 20% or more of our outstanding common stock without a
qualified offer, any right holder, other than the 20% holder, is
entitled to acquire common stock having a market value of twice
the right’s exercise price.
Rights are not exercisable in connection with a qualified offer.
A qualified offer is defined as an all-cash tender offer for all
outstanding shares of common stock that is fully financed,
remains open for a period of at least 60 business days, results
in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step
acquisition of shares not purchased in the initial offer at the
same price as in the initial offer, and meets certain other
requirements.
In connection with the adoption of the QORP, the board of
directors also adopted an evaluation mechanism. It calls for an
independent board committee (the Three-year Independent Director
Evaluation (TIDE) Committee) to review, on an ongoing basis, the
QORP and developments in rights plans in general. Based on its
review, the TIDE Committee can recommend modification or
termination of the plan. At least every 3 years, the TIDE
Committee is required to report to the board whether the QORP
continues to be in the best interest of shareholders. In May
2005, upon consideration and advice of the TIDE Committee, the
board decided to retain the QORP.
Table of Contents
Notes to
Financial Statements — (Continued)
Earnings from continuing operations per share of common stock
outstanding were computed as follows:
The following table summarizes annual repurchases of our common
stock for 2005 through 2007.
Pactiv has 50 million shares of preferred stock
($0.01 par value) authorized, none of which was issued at
December 31, 2007. We have reserved 750,000 shares of
preferred stock for the QORP.
We have pension plans that cover substantially all of our
employees. Benefits are based on years of service and, for most
salaried employees, final average compensation. Our funding
policy is to contribute to the plans amounts necessary to
satisfy requirements of applicable laws and regulations. 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.
On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 was enacted. Starting
in 2006, this act expands 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
Table of Contents
Notes to
Financial Statements — (Continued)
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 $1.8 million per year for the next
three years.
Effective December 31, 2006, we adopted the recognition and
disclosure provisions of SFAS No. 158. See Note 2.
Prior to the adoption of the recognition provisions of
SFAS No. 158, we accounted for our defined-benefit
postretirement plans in accordance with requirements of
SFAS No. 87, “Employers Accounting for
Pensions”, and SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” Accordingly, if the accumulated
benefit obligations of a pension plan exceeded its fair value of
plan assets, SFAS No. 87 required that an additional
minimum pension liability be recorded as a noncash charge to
accumulated other comprehensive income (loss) in
shareholders’ equity (deficit). SFAS No. 106
required that the liability for postretirement benefits other
than pensions represent the actuarial present value of all
future benefits attributable to employees’ service rendered
to date. Under both SFAS Nos. 87 and 106, changes in the
funded status were deferred and recognized ratably over future
periods.
Upon the adoption of the recognition provisions of
SFAS No. 158, we recognized prior changes in the
funded status of our postretirement benefit plans by recording
the following adjustments in our consolidated statement of
financial position at December 31, 2006.
The adoption of SFAS No. 158 had no effect on our
consolidated statement of income for the year ended
December 31, 2006, or for any prior period presented
herein, and had no impact on our debt covenants.
Funding of the qualified U.S. pension plan is currently
determined by requirements of the Employee Retirement Income
Security Act, under which we were not required to make
contributions to the plan in 2007. On August 17, 2006,
President Bush signed the Pension Protection Act of 2006 (PPA)
into law. The PPA, which is effective for plan years beginning
after December 31, 2007, significantly alters current
funding requirements. Based on our current assumptions and
requirements of the PPA, we do not anticipate that after-tax
contributions to the plan will be significant for the
foreseeable future.
Table of Contents
Notes to
Financial Statements — (Continued)
Financial data pertaining to our pension- and
postretirement-benefit plans appear below.
Table of Contents
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 below.
We expect to contribute $8 million to our foreign and
nonqualified pension plans in 2008.
The impact of pension plans on pretax income from continuing
operations was as follows:
Pension-plan actuarial assumptions used to determine projected
benefit obligations at September 30 follow.
The net periodic-benefit income for 2007 was determined using
the assumptions listed for 2006.
For all of our worldwide pension plans, accumulated benefit
obligations totaled $3.867 billion in 2007 and
$3.954 billion in 2006.
Pension plans with accumulated benefit obligations in excess of
plan assets were as follows:
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