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Pactiv 10-K 2010 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 whether the
registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes 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.
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).
132,337,357 shares outstanding as of January 31, 2010.
(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 43 manufacturing facilities in North America, and 1 in
Germany. We also have 2 joint-venture interests in China. In
2009, 96% of our $3.4 billion in sales was generated in
North America.
We have three reporting segments:
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operates
one manufacturing facility in North Carolina. The results of
this business have been included in the consolidated financial
statements as of that date.
Our company was incorporated in the state of Delaware in 1965
under the name of Packaging Corporation of America, operating as
a subsidiary of Tenneco Inc. (Tenneco). In November 1995, we
changed our name to Tenneco Packaging Inc. In November 1999, we
were spun-off from Tenneco as an independent company, and
changed our name to Pactiv Corporation.
In this report, we sometimes refer to Pactiv Corporation and its
subsidiaries as “Pactiv” or the “company.”
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:
In 2009, Consumer Products accounted for 38% 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.
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In 2009, Foodservice/Food Packaging accounted for 62% of our
sales.
Foodservice customers use our products to merchandise and sell
food products on their premises and for takeout meals. Products
include tableware items, such as plates, bowls, and cups, and a
broad line of takeout service containers, made from clear
plastic, microwaveable plastic, foam, molded fiber, paperboard,
and aluminum.
Food packaging products for supermarkets include clear
rigid-display packaging for produce, delicatessen, and bakery
applications; microwaveable containers for prepared,
ready-to-eat meals; and foam trays for meat and produce. We also
manufacture plastic zipper closures for a variety of other
packaging applications.
Food processor products include dual-ovenable paperboard
containers, molded fiber egg cartons, meat and poultry trays,
and aluminum containers.
Our business strategy is to grow by expanding our existing
businesses and by making strategic acquisitions. Through our
broad product lines and custom-design capability, we offer
customers a range of products to fit their needs. As a result,
we are a primary supplier to several national retailers,
restaurant chains, and distributors, and have developed
long-term relationships with key participants in the packaging
and foodservice distribution markets. These relationships enable
us to better identify and penetrate new markets.
Many of our products have strong market share positions,
including those in key markets such as zipper bags, tableware,
foam trays, foodservice foam containers, clear rigid-display
packaging, and aluminum cookware. In 2009, we derived more than
80% of our sales from market sectors in which we hold the
No. 1 or No. 2 market share position. This is a
reflection of the:
Successful development of new products and value-added product
line extensions are essential to our continued growth. Our
acquisition of Prairie Packaging, Inc. (Prairie) has broadened
our product offering, particularly in the area of cups and
cutlery. We spent $33 million on research and development
activities in 2009, $32 million in 2008, and
$35 million in 2007.
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.
Our continued focus on productivity enhancements and
manufacturing and logistics cost reductions is key to improving
our profitability. In 2009, approximately 20% of our research
and development spending and 15% of our capital spending was
devoted to efforts to reduce costs and improve manufacturing and
distribution efficiency.
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Strategic acquisitions have been an important element of our
growth strategy. Since the beginning of 2000, $1.3 billion
has been invested to acquire businesses that complement
and/or
expand our core businesses, including $1 billion in 2007
for Prairie. We focus on products that have strong growth
characteristics and attractive margins, which provide the
opportunity to leverage our existing distribution channels and
core capabilities.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operates
one manufacturing facility in North Carolina.
We have a sales and marketing staff of approximately
500 people. Our consumer products are sold through a direct
sales force and a national network of brokers and
manufacturers’ representatives. We primarily use a direct
sales force to sell to our foodservice and food packaging
customers.
Wal-Mart Stores, Inc., which accounted for approximately 21% of
our consolidated sales in 2009 and in 2008, was the only
customer that accounted for more than 10% of our sales. Our
backlog of orders is not material.
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 2009, and we believe that our
raw material supply will remain adequate in 2010.
We are subject to a variety of environmental and pollution
control laws and regulations. Costs to continually monitor our
compliance with these laws and regulations are a recurring part
of our operations. These costs are not a significant percentage
of total operating costs. We do not expect continued compliance
to have a material impact on our results of operations,
financial condition, or cash flows.
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Change in
Accounting Method
In 2009, we changed our method of accounting for inventory from
a combination of the
last-in,
first-out (LIFO) method and the
first-in,
first-out (FIFO) method to the FIFO method. All of our
businesses now use the FIFO method of accounting for inventory.
In accordance with Accounting Standards Codification (ASC)
250-10
“Accounting Changes and Error Corrections,” all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting. The cumulative effect of the
change in accounting principle on periods prior to those
presented has been reflected as an adjustment to the opening
balance of retained earnings as of January 1, 2005. For a
summary of the effect of the retrospective adjustments resulting
from the change in accounting principle for inventory costs for
the years ended December 31, 2008, and 2007, see
Note 2 to the financial statements. For a summary of the
effect on the unaudited interim quarters of 2009, see
Note 16 to the financial statements.
At December 31, 2009, we employed approximately
12,000 people, including persons employed by our Asian
joint ventures. Our relations with employees remain satisfactory.
We own a number of U.S. and foreign patents, trademarks,
and other intellectual property that are significant with regard
to the manufacture, marketing, and distribution of certain
products. We also use numerous software licenses. The
intellectual property and licensing rights we hold are adequate
for our business.
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.
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We must address the demands of both the consumers who ultimately
purchase and use our products and the retailers and others who
sell our products to end-users. This is necessary for both of
our segments, but it is particularly important in our Consumer
Products segment. Our sales and margins can be impacted by
changes in our distribution channels, customer mix, and
merchandising strategies. Examples include customer
concentration, consolidation, and substitution of unbranded
products for branded products.
Although we have a diverse customer base, we have several large
customers. These large customers provide us with cost saving
opportunities that may not be available with smaller, more
diverse accounts. However, large customers can take actions that
put pressure on our margins. Moreover, a significant downturn in
the financial condition of one or more large customers could
have an adverse effect on our business results.
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, including so-called cap
and trade legislation, 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 United
States. Competition from products manufactured in countries that
have lower labor and other costs than the United States could
negatively impact our profitability. Additionally, if we were to
manufacture or sell more of our products in countries outside of
the United States, we would be exposed to additional economic,
political, competitive, and foreign currency exchange risks.
At the time of our spin-off from Tenneco in 1999, we became the
sponsor of Tenneco (now Pactiv) pension plans. These plans cover
most of our employees as well as individuals/beneficiaries from
many companies previously owned by Tenneco, but not owned by
Pactiv. As a result, while persons who are not current employees
do not accrue benefits under the plans, the total number of
individuals/beneficiaries covered by these plans is much larger
than would have been the case if only Pactiv personnel were
participants. For this reason, the impact of the pension plans
on our net income, shareholders’ equity and cash from
operations is
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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:
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 43 manufacturing and 9 distribution facilities in North
America (United States, Mexico, and Canada). We also have a
manufacturing facility in Germany that supports our
Foodservice/Food Packaging segment. In addition, we have
research and development centers in Canandaigua, New York, and
Vernon Hills, Illinois. We also have joint-venture interests in
a corrugated-converting operation in Shaoxing, China (62.5%
owned) and in a folding carton operation in Dongguan, China (51%
owned).
Our plants and equipment are well maintained and in good
operating condition. We have satisfactory title to our owned
properties, which are subject to certain liens that do not
detract materially from the value or use of the properties.
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 2009.
Our executive officers, as of February 26, 2010, are listed
below. This information is being included in Part I of this
Form 10-K
pursuant to Instruction 3 to Item 401(b) of
Regulation S-K.
Richard L. Wambold, 58, Chairman of the Board of Directors,
President, and Chief Executive Officer.
Mr. Wambold has served as Chairman since March 2000, President since June 1999, and Chief Executive Officer since our spin-off in November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and General Manager of our foodservice/food packaging and consumer products business units.
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Edward T. Walters, 58, Senior Vice President and Chief
Financial Officer.
Mr. Walters has served as Senior Vice President and Chief Financial Officer since July 2008. Prior to that date, he served as vice president and controller since 1999. Mr. Walters has been with Pactiv and predecessor companies since 1975 in various financial, planning and general management positions.
Joseph E. Doyle, 50, Vice President, General Counsel, and
Secretary.
Mr. Doyle was appointed Vice President, General Counsel, and Secretary of the company on February 1, 2007. Prior to joining the company, he was a partner at the law firm of Mayer Brown LLP from 2001 to 2007.
Peter J. Lazaredes, 59, Executive Vice President and General
Manager, Foodservice/Food Packaging.
Mr. Lazaredes has served as Executive Vice President and General Manager, Foodservice/Food Packaging, since July 2004. Prior to 2004, and since he joined the company in 1996, Mr. Lazaredes held various senior management positions in the company’s foodservice/food packaging business unit.
John N. Schwab, 60, Senior Vice President and General
Manager,
Hefty®
Consumer Products.
Mr. Schwab has served as Senior Vice President and General Manager, Hefty® Consumer Products, since January 2001. Prior to 2001, and since he joined the company in 1995, Mr. Schwab held various senior management positions in the company’s consumer products business unit.
Michael O. Oliver, 56, Vice President and Chief Human
Resources Officer.
Mr. Oliver has served as Vice President and Chief Human Resources Officer since May 2008. Prior to joining the company, Mr. Oliver served as Senior Vice President, Human Resources, for Brady Corporation from February 1997 to April 2008.
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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 2009 and 2008 are shown below.
At January 31, 2010, there were approximately 28,726
holders of record of the company’s common stock, including
brokers and other nominees.
We periodically consider alternatives to increase shareholder
value, including dividend payments. Dividend declarations are at
the discretion of our board of directors. We currently do not
pay a dividend.
In July 2006, the board of directors approved the repurchase of
10 million shares of our common stock. As of
December 31, 2009, the remaining number of shares
authorized to be repurchased was 522,361. We repurchase shares
using open market or privately negotiated transactions.
Repurchased shares are held in treasury for general corporate
purposes. There is no expiration date for the current share
repurchase authorization. We did not repurchase stock in the
fourth quarter of 2009.
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The following graph compares, for the five years ended
December 31, 2009, the cumulative total return for the
company’s common stock with the cumulative total return for
the Standard & Poor’s (S&P)
500®
stock index and a custom composite index. The latter index is
comprised of the following companies: Aptar Group Inc., Bemis
Co., Crown Holdings, Inc., Sealed Air Corp., and Sonoco Products
Co. These companies were selected in good faith based on their
similarity with the company’s business. The historical
performance of the company’s stock shown in this graph is
not necessarily indicative of future performance.
Cumulative
Total Return
Based on an assumed initial investment of $100 on December 31, 2004 with dividends reinvested 
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The company has never paid a dividend.
See Note 5 to the financial statements for discontinued
operations.
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Financial statements for all periods presented in this report
were prepared on a consolidated basis in accordance with
generally accepted accounting principles consistently applied.
All per share information is presented on a diluted basis unless
otherwise noted. Certain reclassifications have been made to the
prior years financial information to conform to current year
presentation.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operates
one manufacturing facility in North Carolina. The results of
this business have been included in the consolidated financial
statements as of that date.
We acquired 100% of the stock of Prairie Packaging, Inc.
(Prairie) on June 5, 2007. The results of Prairie’s
operations have been included in the consolidated financial
statements as of that date.
In January 2007, we purchased an additional 1% interest in a
folding carton operation in Dongguan, China. This brought our
interest to 51%, requiring us to include the joint venture in
our consolidated financial statements.
On October 12, 2005, we sold substantially all of our
protective and flexible packaging businesses. The results of the
sold businesses, as well as costs and charges associated with
the transaction, are classified as discontinued operations.
We have three reporting segments:
The accounting policies of the reporting segments are the same
as those for Pactiv as a whole. Where discrete financial
information is not available by segment, reasonable allocations
of income, expenses, assets, and liabilities are used.
In 2009, we changed our method of accounting for inventory from
a combination of the
last-in,
first-out (LIFO) method and the
first-in,
first-out (FIFO) method to the FIFO method. In accordance with
Accounting Standards Codification (ASC)
250-10
“Accounting Changes and Error Corrections,” all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting. For more information on the change
in inventory accounting method, see the “Inventory
Valuation” section and Note 2 to the financial
statements. As a result of the accounting change, the
discussions included in Item 7 reflect our results adjusted
for the accounting change.
Subsequent
Events
In February 2010, the board of directors approved an Agreement
and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will
acquire PWP Holdings and PWP Industries for $200 million.
This transaction is expected to close in the late first quarter
or early second quarter of 2010. PWP Industries manufactures and
sells amorphous polyethylene terephthalate (APET) products in
the food service market.
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In February 2010, the board of directors also approved the
repurchase of an additional 10 million shares of our common
stock. This amount is in addition to the remaining
522,361 shares authorized to be repurchased as of
December 31, 2009.
We have evaluated subsequent events through the filing date of
this Form 10-K, and have determined that there were no
other subsequent events to recognize or disclose in these
financial statements.
Our primary business involves the manufacture and sale of
consumer and specialty packaging products for the consumer and
foodservice/food packaging markets. We operate 46 manufacturing
facilities in 5 countries.
We sell our products to a wide array of customers worldwide.
Customers include grocery stores, mass merchandisers, discount
chains, restaurants, distributors, and packer processors, who
prepare and process food for consumption.
Greater than 80% of our sales come from products made from
different types of plastic resins, principally polystyrene and
polyethylene, and, to a lesser extent, polypropylene and
amorphous polyethylene terephthalate.
Consumer products include waste bags, food storage bags
and disposable tableware and cookware. These products, made from
various raw materials including plastic, aluminum, and paper,
are sold under such well-known brand names as
Hefty®,
Hefty®
Baggies®,
Hefty®
OneZip®,
Hefty®
Cinch
Sak®,
Hefty®
The
Gripper®,
Hefty®
Zoo
Pals®,
Kordite®,
Hefty®
Odor
Block®,
and
Hefty®
EZ
Foil®.
Foodservice and food packaging products include foam,
clear plastic, aluminum, pressed paperboard, and molded fiber
packaging for customers in the food distribution channel.
Significant
Trends, Opportunities, and Challenges
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:
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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.
The prices of plastic resins are affected by the prices of crude
oil and natural gas, as well as supply and demand factors of
various intermediate petrochemicals. In recent years, there have
been significant movements in resin prices, which rose to
historic highs in 2008, and dropped precipitously at the end of
2008 and into early 2009. At the end of 2009, prices were
increasing but still were moderately lower than at the end of
2008. We have historically adjusted our selling prices to
reflect changes in raw material costs, although there is usually
a lag of several months. Some of our business is pursuant to
contracts that have price indices that automatically adjust
after a set number of months, usually three or six, to reflect
changes in certain raw materials.
Our business is sensitive to other energy-related cost
movements, particularly those that affect transportation and
utility costs. Historically, we have been able to mitigate the
effect of higher energy-related costs with productivity
improvements and other cost reductions. As energy costs have
declined, we have seen a favorable impact on our margins.
However, the extent and duration of energy-related cost
reductions is uncertain.
The economic downturn that began in late 2007 has impacted
consumer spending in many areas and has reduced demand for some
of our products. However, our overall volume has not been
adversely impacted by the economic downturn.
In 2006, we began to introduce “lean” principles and
tools in many of our operating facilities. We are expanding the
use of lean principles to help us accelerate productivity
improvements by reducing inventory and scrap levels, providing
rapid stock replenishment, shortening scheduling cycles,
improving our “one-stop shopping” service, eliminating
nonvalue-added activities, and streamlining processes. As this
is a long-term process, we expect our ability to use these tools
throughout the organization will have a positive effect on our
operating results in future years.
Worldwide stock markets declined significantly in 2008 and, as a
result, our U.S. pension plan was substantially underfunded
by approximately $1.1 billion at December 31, 2008. By
the end of 2009, our U.S. pension plan underfunding was
reduced by approximately one half due to a combination of
$550 million of pension contributions, funded completely by
cash flow from operations, and a 26% return earned during 2009
on pension plan assets. See the “Liquidity” and
“Shareholders’ Equity” sections for further
discussion of the impact on the company of its pension plan
funding status.
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We believe that cash flow from operations, available cash
reserves, and the ability to obtain cash under our credit
facility and asset securitization program will be sufficient to
meet current and future potential pension funding, liquidity,
and capital requirements.
In 2008, we implemented a cost reduction program that included
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. In 2008, we recorded
a charge of approximately $10 million after tax, or $0.08
per share. Cash payments related to restructuring and other
charges were $2 million for the year ended
December 31, 2008. Cash payments related to restructuring
and other were $1 million pretax for the year ended
December 31, 2009. The program is essentially complete with
the exception of a small idle plant held for sale.
Year
2009 compared with 2008
Sales declined 6%, reflecting lower pricing of 8% and
unfavorable foreign exchange of 1%, offset partially by volume
growth of 3%.
Sales for Consumer Products decreased 4%, reflecting lower
pricing of 6%, offset partially by higher volume of 2%. The
price decline reflects normal reductions due to lower raw
material costs. Volume growth was a result of increases in
tableware, partially offset by a decline in waste bags. Waste
bag volume was down due to a decline in the overall waste bag
market.
Foodservice/Food Packaging sales fell 7%, driven by lower
average selling prices of 9% and unfavorable foreign exchange of
1%, offset partially by volume growth of 3%. The lower pricing
was related to decreases in raw material costs. The volume
increase primarily was related to continued growth in cups and
cutlery.
Operating income increased primarily as a result of lower
operating costs of $63 million driven by productivity and
lower freight and utility rates, an $87 million improvement
in spread (the difference between selling prices and raw
material costs), higher volume of $42 million and lower
restructuring costs of $16 million. This was offset, in
part, by higher selling, general, and administrative (SG&A)
expense of $68 million. The increase in SG&A expense
was primarily a result of higher incentive compensation
accruals, increased advertising expense, and lower pension
income.
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The following table shows the impact of restructuring and other
charges on 2008 operating income by segment.
We believe that focusing on operating income excluding the
effect of restructuring and other charges is a meaningful
alternative way of evaluating our operating results. The
restructuring and other charges relate to actions that will have
an ongoing effect on our company. Considering such charges as
being only applicable to the periods in which they are
recognized could make our operating performance in those periods
more difficult to evaluate relative to other periods in which
there are no such charges. We use operating income excluding
restructuring and other charges to evaluate operating
performance and, along with other factors, in determining
management compensation.
The following table shows operating income excluding
restructuring and other charges for 2009 and 2008.
The increase in operating income for Consumer Products was
driven mainly by favorable spread of $71 million, lower
operating costs of $37 million, offset partially by higher
SG&A expense of $33 million. The increase in SG&A
expense primarily was due to higher advertising expense in
support our
Hefty®
Odor
Block®
unscented odor control waste bags which launched at the end of
2008.
Higher operating income for Foodservice/Food Packaging was
driven primarily by increased volume of $33 million and
lower operating costs of $27 million, partially offset by
higher SG&A expense of $14 million.
The decrease in Other operating income was due mainly to lower
pension income, higher incentive compensation accruals, and
higher legal and insurance costs.
Income
Taxes
Our effective tax rate for 2009 was 36.4%, compared with 35.1%
for 2008.
Income
from Continuing Operations attributable to Pactiv
We recorded income from continuing operations of
$308 million, or $2.31 per share, compared with
$220 million, or $1.66 per share, in 2008. The change was
driven primarily by higher operating income of $84 million
(including lower restructuring of $10 million after tax) as
described previously.
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Discontinued
Operations
Income
(Loss) from Discontinued Operations
In 2009, we recorded income from discontinued operations of
$15 million, which was primarily related to the expiration
of the statute of limitations on the 2005 tax year for tax
liabilities which had been recorded in conjunction with divested
businesses. In 2008, we recorded expense from discontinued
operations of $4 million, which was attributed to taxes
associated with business dispositions which occurred in prior
years.
Liabilities related to discontinued operations, which included
obligations related to income taxes and certain royalty payments
were as follows:
Liquidity
and Capital Resources
Total equity increased $314 million in 2009 as detailed
below.
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Cash flows for continuing and discontinued operations were as
follows:
The decrease in cash provided by operating activities was driven
primarily by a $550 million pretax contribution to our
U.S. pension plan, reduced by related favorable cash tax
effects of approximately $139 million. This was offset
partially by favorable working capital of $156 million and
higher income from continuing operations of $88 million.
The change in working capital was due to the favorable effect of
lower raw material costs in 2009 compared to 2008 as well as
higher incentive compensation liabilities.
The decrease in cash used by investing activities was driven by
lower capital expenditures of $25 million, partially offset
by the acquisition of the WinCup polypropylene cup business for
$20 million.
The decrease in cash used by financing activities was a result
of long-term revolving debt repayments of $160 million in
2008.
Commitments for authorized capital expenditures totaled
approximately $61 million at December 31, 2009. It is
anticipated that the majority of these expenditures will be
funded over the next 12 months from existing cash and
short-term investments and internally generated cash.
We enter into arrangements that obligate us to make future
payments under long-term contracts. Our long-term contractual
obligations at December 31, 2009, were as follows:
We use various sources of funding to manage liquidity. Sources
of liquidity include cash flow from operations and a
5-year
revolving credit facility of $750 million, under which no
balance was outstanding at December 31,
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2009. We were in full compliance with the financial and other
covenants of our revolving credit agreement at the end of the
period. The two financial covenant ratios contained in our debt
agreements are an interest coverage ratio and the total debt to
EBITDA ratio. The interest coverage ratio is defined as
consolidated earnings before interest, taxes, depreciation and
amortization, and other unusual noncash items (EBITDA) divided
by interest expense. The minimum required ratio is 3.50 to 1.
The total debt to EBITDA ratio is calculated by dividing the
total debt by EBITDA. The maximum permitted total debt to EBITDA
ratio is 3.50 to 1.
The interest coverage ratio and the debt to EBITDA ratio are
shown in the following table.
There have been no stated events of default, which would permit
the lenders to accelerate the debt if not cured within
applicable grace periods, or any cross default provisions in our
debt agreements.
We also use an asset securitization facility as a form of
off-balance-sheet financing. At December 31, 2009,
$110 million was securitized under this facility, and
$130 million was securitized at December 31, 2008. We
do not participate in financial commercial paper markets.
We have a U.S. qualified pension plan that covers
approximately 7,000 of our employees, as well as approximately
65,000 others, mostly retirees and persons who worked for
predecessor companies that were part of Tenneco. The requirement
to make contributions to this plan is a function of several
factors, the most important of which are the return on plan
assets and applicable funding discount rate used in calculating
plan liabilities. We were not required to make a contribution to
this plan in 2009, however, we elected to make contributions in
2009 of $550 million pretax. The related cash tax benefits
of the contributions are $193 million, of which
$139 million was realized in 2009 and $54 million will
carry over into 2010.
In 2009, the plan assets earned approximately 26% and as of
December 31, 2009, the Employee Retirement Income Security
Act (ERISA) funding discount rate was 6.6% based on the
24-month
average as of September 2009.
As of December 31, 2009, our U.S. pension plan was 94%
funded on an ERISA basis, which determines the minimum funding
requirements for the plan. As long as our funded ratio is above
60%, there is no meaningful
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impact on us or the plan. We do not expect to make additional
sizeable contributions to the plan for the foreseeable future.
We believe that cash flow from operations, available cash
reserves, and the ability to obtain cash under our credit
facility and asset securitization program will be sufficient to
meet current and future potential pension funding, liquidity,
and capital requirements.
Year
2008 compared with 2007
Sales grew 10%, reflecting 6% volume growth primarily from the
inclusion of acquisition sales, an increase in net pricing of
$124 million, and foreign currency exchange gains of
$6 million.
The 10% increase in sales for Consumer Products reflected volume
improvement of 7% primarily from the inclusion of acquisition
sales, and an increase in net pricing of $33 million.
Sales growth of 10% for Foodservice/Food Packaging was
attributable to a volume gain of 5% principally a result of the
inclusion of acquisition sales, favorable pricing of
$91 million, and foreign currency exchange gains of
$6 million.
Operating income declined as favorable volume of
$36 million and lower advertising and promotional
(A&P) costs of $5 million were more than offset by
higher operating costs of $29 million, restructuring
charges of $16 million, acquisition-related depreciation
and amortization of $16 million, and unfavorable spread of
$6 million. The higher operating costs were driven
primarily by the impact of higher utility and freight costs.
The following table shows the impact of restructuring and other
charges on 2008 operating income by segment.
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We believe that focusing on operating income excluding the
effect of restructuring and other charges is a meaningful
alternative way of evaluating our operating results. The
restructuring and other charges relate to actions that will have
an ongoing effect on our company. Considering such charges as
being only applicable to the periods in which they are
recognized could make our operating performance in those periods
more difficult to evaluate relative to other periods in which
there are no such charges. We use operating income excluding
restructuring and other charges to evaluate operating
performance and, along with other factors, in determining
management compensation.
The following table shows operating income excluding
restructuring and other charges for 2008 and 2007.
The decline in operating income for the Consumer Products
business was driven principally by unfavorable spread of
$27 million and higher operating costs of $6 million,
offset partially by higher volume of $13 million and lower
A&P costs of $5 million.
Operating income for the Foodservice/Food Packaging business was
essentially flat, reflecting higher volume of $23 million
and favorable spread of $21 million, offset by higher
operating costs of $23 million, acquisition-related
depreciation and amortization of $15 million, higher
SG&A expense of $3 million, and unfavorable foreign
currency exchange of $2 million. The increase in operating
costs was driven primarily by higher utility and freight costs.
The increase in operating income for the Other segment primarily
reflects lower legal-related expenses.
Income
Taxes
Our effective tax rate for 2008 was 35.1%, compared with 35.5%
for 2007.
Income
from Continuing Operations attributable to Pactiv
We recorded income from continuing operations of
$220 million, or $1.66 per share, compared with
$243 million, or $1.83 per share, in 2007. The decline was
driven primarily by lower operating income of $16 million
(including a restructuring charge of $10 million after tax)
as described previously, and higher interest costs of
$6 million after tax related to the financing of the
Prairie acquisition.
Discontinued
Operations
Income
(Loss) from Discontinued Operations
In 2008, we recorded expense from discontinued operations of
$4 million, which was attributed to taxes associated with
business dispositions which occurred in prior years. In 2007, we
recorded income from discontinued operations of $1 million,
which was related to final working capital adjustments and taxes
associated with business dispositions.
In 2007, $27 million of deferred taxes was reclassified as
liabilities related to discontinued operations as a result of
the adoption of certain provisions of Financial Accounting
Standards Board (FASB) ASC
740-10,
“Income Taxes.”
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The FASB has issued a number of accounting pronouncements
effective in 2009 or 2008, as disclosed in Note 2 to the
financial statements. None of these changes in accounting
principles had a material effect upon adoption in 2008 or 2009.
The FASB issued Statement of Financial Accounting Standards
(SFAS) No. 166, “Accounting for Transfers of Financial
Assets,” which is effective for interim and annual periods
beginning after November 15, 2009. SFAS No. 166,
which is not yet included in the Codification, requires
additional information about transfers of financial assets and
where companies have continuing exposure to the risk related to
transferred financial assets. SFAS No. 166 eliminates
the concept of a qualifying special purpose entity, changes the
requirements for derecognizing financial assets, and requires
additional disclosures. We are currently reviewing
SFAS No. 166, and evaluating the impact of its
adoption on our financial statements.
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. The
costs for all such programs are accounted for as reductions to
revenues. In the event that future sales deduction trends vary
significantly from past or expected trends, reported sales may
increase or decrease by a material amount.
Our inventories are stated at the lower of cost or market using
the FIFO method. We periodically review inventory balances to
identify slow-moving
and/or
obsolete items. This determination is based on a number of
factors, including new product introductions, changes in
consumer demand patterns, and historical usage trends.
In 2009, we changed our method of accounting for inventory from
a combination of the LIFO method and the FIFO method to the FIFO
method. All of our businesses now use the FIFO method of
accounting for inventory. We believe the new method of
accounting for inventory is preferable because the FIFO method
better reflects the current value of inventories on the
Consolidated Statement of Financial Position, provides better
matching of revenue and expenses under our business model, and
provides uniformity across our operations with respect to the
method of inventory accounting for financial reporting.
In accordance with ASC
250-10
“Accounting Changes and Error Corrections,” all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting. The cumulative effect of the
change in accounting principle on periods prior to those
presented has been reflected as an adjustment to the opening
balance of retained earnings as of January 1, 2005. For a
summary of the effect of the retrospective adjustments resulting
from the change in accounting principle for inventory costs for
the years ended December 31, 2008, and 2007, see
Note 2 to the financial statements. For a summary of the
effect on the unaudited interim quarters of 2009, see
Note 16 to the financial statements.
The FASB issued ASC
715-20,
“Compensation — Retirement Benefits” of
which we adopted the recognition and disclosure provisions on
December 31, 2006. See “Changes in Accounting
Principles” in Note 2 to the financial statements for
additional information. Total pretax pension plan income was
$36 million in 2009,
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$49 million in 2008, and $50 million in 2007, and
represented the net pension income, which is recorded as an
offset to SG&A expenses, and our production
operations’ pension service costs, which are recorded in
cost of sales. We estimate that our noncash pretax pension
income will increase to $48 million in 2010.
Projections of pension income are based on a number of factors,
including estimates of future returns on pension plan assets;
estimates of discount rates; assumptions pertaining to the
amortization of actuarial gains/losses; expectations regarding
employee compensation; and assumptions related to participant
turnover, retirement age, and life expectancy.
In developing our assumption regarding the expected rate of
return on pension plan assets, we estimate future returns on
various classes of assets, risk free rates of return, and
long-term inflation rates. Since 1976, our U.S. qualified
pension plan’s annual rate of return on assets has averaged
10%. Historically, the plan has invested approximately 70% of
its assets in equity securities and 30% in fixed-income
investments. After considering all of these factors, we
concluded that the use of a 9% rate of return was appropriate
for 2009. Holding all other assumptions constant, a one-half
percentage-point change in the rate of return assumption would
impact our pretax pension income by approximately
$20 million.
The discount rate assumption for our U.S. pension plan is
based on the composite yield of a portfolio of high quality
corporate bonds constructed with durations to match the
plan’s future benefit obligations. In this connection, the
discount rate assumption for our U.S. plan was 5.75% at our
December 31, 2009, measurement date and 6.74% at our
December 31, 2008, measurement date. Holding all other
assumptions constant, a one-half percentage-point change in the
discount rate would impact our pretax pension income by
approximately $3 million. For more information on our
pension plan, see Note 13 to the financial statements.
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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 2009, we entered into natural gas
purchase agreements with third parties, hedging a portion of the
first half of 2010 purchases of natural gas used in the
production processes at certain of our plants. These purchase
agreements are marked to market, with the resulting gains or
losses recognized in earnings when hedged transactions are
recorded. The mark-to-market adjustments at December 31,
2009, were immaterial.
To minimize volatility in our margins due to large fluctuations
in the price of commodities, in the second quarter of 2009 we
entered into swap contracts to manage risks associated with
market fluctuations in resin prices. These contracts were
designated as cash flow hedges of forecasted commodity
purchases. All monthly swap contracts entered into in the third
quarter of 2009 have expired. There were no contracts
outstanding as of December 31, 2009, and no gains are
expected to be reclassified to earnings in the first quarter of
2010.
At December 31, 2009, we had public debt securities of
$1.276 billion outstanding, with fixed interest rates and
maturities ranging from 2 to 18 years. Should we decide to
redeem these securities prior to their stated maturity, we would
incur costs based on the fair value of the securities at that
time.
In addition, we have a
5-year
revolving credit facility of $750 million, which expires in
2011, under which no balance was outstanding at
December 31, 2009.
As a part of the acquisition of Prairie Packaging Inc.
(Prairie), we assumed Prairie’s liability for
$5 million borrowed from the Illinois Development Finance
Authority (IDFA), which were funded by industrial development
revenue bonds issued by the IDFA. The debt matures on
December 1, 2010, and bears interest at varying rates (0.4%
as of December 31, 2009) not to exceed 12% per annum.
The following table provides information about Pactiv’s
financial instruments that are sensitive to interest rate risks.
Prior to our spin-off from Tenneco, we entered into an interest
rate swap to hedge our exposure to interest rate movements. We
settled this swap in November 1999, incurring a $43 million
loss, which is being recognized as additional interest expense
over the life of the underlying debt.
In April 2007, we entered into interest rate swap agreements to
hedge the interest rate risk related to $250 million of the
debt expected to be issued in connection with the acquisition of
Prairie. We entered into these swap agreements to moderate the
risk of interest rate changes during the period from the date
the agreement to acquire Prairie was signed to the date the
notes used to finance the acquisition were issued. The swap
agreements were terminated on June 20, 2007, resulting in a
gain of $9 million. This gain is being recognized as a
reduction of interest expense over the average life of the
underlying debt.
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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, 2009. In making this
assessment, we used the criteria set forth in the Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
our assessment using those criteria, we concluded that
Pactiv’s internal control over financial reporting at
December 31, 2009, was effective.
Our internal control over financial reporting as of
December 31, 2009, was audited by Ernst & Young
LLP, the independent registered public accounting firm who also
audited the company’s consolidated financial statements.
Ernst & Young’s attestation report on the
company’s internal control over financial reporting appears
on page 28.
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The Board of Directors and Shareholders of Pactiv Corporation
We have audited the accompanying consolidated statement of
financial position of Pactiv Corporation (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of income, changes in equity, comprehensive income
(loss), and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the
financial statement schedule listed in the Index at
Item 15. These financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Pactiv Corporation at December 31,
2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial
statements, in 2009 the Company changed its method of accounting
for inventory and in 2008 the Company adopted the requirement to
measure the funded status of its defined benefit pension and
postretirement healthcare plans as of the date of the year-end
statement of financial position.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Pactiv Corporation’s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion thereon.
/s/ ERNST &
YOUNG LLP
Chicago, Illinois
February 26, 2010
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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, 2009, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Pactiv
Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Pactiv Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statement of financial position of Pactiv
Corporation as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in equity,
comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2009, and our report
dated February 26, 2010 expressed an unqualified opinion
thereon.
/s/ ERNST &
YOUNG LLP
Chicago, Illinois
February 26, 2010
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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 Changes in Equity
The accompanying notes to the financial statements are an
integral part of this statement.
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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
were prepared on a consolidated basis in accordance with
generally accepted accounting principles consistently applied,
except for changes in accounting principles disclosed in
Note 2. All per share information is presented on a diluted
basis unless otherwise noted. Certain reclassifications have
been made to prior years financial information to conform to
current year presentation.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operates
one manufacturing facility in North Carolina. The results of
this business have been included in the consolidated financial
statements as of that date.
We have three reporting segments:
The accounting policies of the reporting segments are the same
as those for Pactiv as a whole. Where discrete financial
information is not available by segment, reasonable allocations
of expenses and assets/liabilities are used.
In 2009, we changed our method of accounting for inventory from
a combination of the
last-in,
first-out (LIFO) method and the
first-in,
first-out (FIFO) method to the FIFO method. In accordance with
Accounting Standards Codification (ASC)
250-10
“Accounting Changes and Error Corrections,” all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting. For more information on the change
in inventory accounting method, see Note 2 to the financial
statements.
Subsequent
Events
In February 2010, the board of directors approved an Agreement
and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will
acquire PWP Holdings and PWP Industries for $200 million.
This transaction is expected to close in the late first quarter
or early second quarter of 2010. PWP Industries manufactures and
sells amorphous polyethylene terephthalate (APET) products in
the food service market.
In February 2010, the board of directors also approved the
repurchase of an additional 10 million shares of our common
stock. This amount is in addition to the remaining
522,361 shares authorized to be repurchased as of
December 31, 2009.
We have evaluated subsequent events through the filing date of
this Form 10-K, and have determined that there were no
other subsequent events to recognize or disclose in these
financial statements.
Our financial statements include all majority-owned
subsidiaries. Investments in 20% to 50% owned companies in which
we have the ability to exert significant influence over
operating and financial policies are accounted for using the
equity method of accounting. All inter-company transactions are
eliminated.
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Notes to
Financial Statements — (Continued)
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.
Trade accounts receivable are classified as current assets and
are reported net of allowances for doubtful accounts. We record
such allowances based on a number of factors, including
historical trends and specific customer situations.
On a recurring basis, we sell an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as
an alternative to debt financing. Such sales, which represent a
form of off-balance-sheet financing, are recorded as a reduction
of accounts and notes receivable in the statement of financial
position. Related proceeds are included in cash provided by
operating activities in the statement of cash flows. At
December 31, 2009, receivables aggregating
$110 million were sold, while receivables totaling
$130 million were sold at December 31, 2008. Discounts
and fees related to such sales were $1 million in 2009, and
$4 million in both 2008 and 2007. These expenses are
included in “other expense” in the statement of
income. In the event that either Pactiv or the third-party
purchaser of the trade receivables were to discontinue this
program, our debt would increase, or our cash balance would
decrease, by an amount corresponding to the level of sold
receivables at such time.
Our inventories are stated at the lower of cost or market using
the FIFO method. We periodically review inventory balances to
identify slow-moving
and/or
obsolete items. This determination is based on a number of
factors, including new product introductions, changes in
consumer demand patterns, and historical usage trends.
In 2009, we changed our method of accounting for inventory from
a combination of the LIFO method and the FIFO method to the FIFO
method. All of our businesses now use the FIFO method of
accounting for inventory. We believe the new method of
accounting for inventory is preferable because the FIFO method
better reflects the current value of inventories on the
Consolidated Statement of Financial Position, provides better
matching of revenue and expenses under our business model, and
provides uniformity across our operations with respect to the
method of inventory accounting for financial reporting.
In accordance with ASC
250-10
“Accounting Changes and Error Corrections,” all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting.
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Notes to
Financial Statements — (Continued)
The following table presents the line items on the statement of
income that were impacted by the accounting change for the years
ended December 31, 2008, and 2007.
The following table presents the line items on the statement of
financial position that were impacted by the accounting change
as of December 31, 2008.
The following table presents the line items on the statement of
cash flows that were impacted by the accounting change for the
years ended December 31, 2008, and 2007.
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Notes to
Financial Statements — (Continued)
The following table presents the segment information line items
that were impacted by the accounting change for the years ended
December 31, 2008, and 2007.
For a summary of the effect of the retrospective adjustments
resulting from the change in accounting principle for inventory
costs for the interim quarters of 2009, see Note 16 to the
financial statements.
Depreciation is recorded on a straight-line basis over the
estimated useful lives of assets. Useful lives range from 10 to
40 years for buildings and improvements and from 3 to
25 years for machinery and equipment. Depreciation expense
totaled $158 million in 2009, $155 million in 2008,
and $143 million in 2007.
We capitalize certain costs related to the purchase and
development of software used in our business. Such costs are
amortized over the estimated useful lives of the assets, ranging
from 3 to 12 years. Capitalized software development costs,
net of amortization at December 31 were $16 million in
2009, and $20 million in 2008.
We periodically re-evaluate the carrying values and estimated
useful lives of long-lived assets to determine if adjustments
are warranted. We use estimates of undiscounted cash flows from
long-lived assets to determine whether the book value of such
assets is recoverable over the assets’ remaining useful
lives.
We review the carrying value of our goodwill and
indefinite-lived intangibles for possible impairment on an
annual basis. Our annual review is conducted in the fourth
quarter of the year, or earlier if warranted by events or
changes in circumstances.
Possible impairment of goodwill is determined using a two-step
process.
We test goodwill for impairment at the reporting unit level. Our
four reporting units are Institutional, Specialty (both part of
the Foodservice reporting segment), Consumer, and Other
(Corporate functions). Our operating
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Notes to
Financial Statements — (Continued)
segments are each deemed to be a reporting unit as none of the
operating segments’ components qualifies as a separate
reporting unit or the operating segment is comprised of only one
component.
Estimates of fair value used in testing goodwill and
indefinite-lived intangible assets for possible impairment are
determined using the discounted cash flow method. This approach
uses estimates and assumptions regarding the amount and timing
of projected cash flows, discount rates reflecting the risk
inherent in future cash flows, perpetual growth rates, and
appropriate market comparables. We believe this is the most
appropriate method as it reflects how Pactiv, as well as other
investors, typically value packaging industry companies. We also
compare the result of the discounted cash flow method to the
enterprise value (market capitalization plus debt) of Pactiv.
The many assumptions used in the cash flow analysis are subject
to the accuracy of our projections of volume, selling price, raw
materials costs and SG&A expenses. The percentage by which
projected discounted cash flows would have to decrease to have a
failure in step one of the impairment test is 61% for Consumer,
61% for Institutional, and 70% for Specialty. Our Other
reporting unit has no goodwill or indefinite-lived intangible
assets.
Intangible assets that are not deemed to have an indefinite life
are amortized over their useful lives. We use undiscounted cash
flows, excluding interest charges, to assess the recoverability
of the carrying value of such assets, and record an impairment
loss if the carrying value of assets exceeds their fair value.
See Note 8 for additional information.
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 include
volume rebates, early payment discounts, and coupon offerings.
Estimates are based on historical trends and are reviewed
quarterly for possible revision. In addition, we pay slotting
fees and participate in cooperative advertising programs. The
cost for all such programs are accounted for as reductions to
revenues.
We record amounts billed to customers for shipping and handling
as sales, and record shipping and handling expenses as cost of
sales.
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Notes to
Financial Statements — (Continued)
Total noncash pension income was as follows:
Research and development costs, which are expensed as incurred,
totaled $33 million in 2009, $32 million in 2008, and
$35 million in 2007.
Advertising production costs are expensed as incurred, while
advertising media costs are expensed in the period in which the
related advertising first takes place. Advertising expenses were
$28 million in 2009, $8 million in 2008, and
$13 million in 2007.
We account for stock-based compensation under ASC
718-10
“Compensation — Stock Compensation,” which
requires that the fair value of all share-based payments to
employees, including stock options, be recognized in financial
statements. ASC
718-10
superseded prior authoritative guidance which required that the
intrinsic-value method be used in determining compensation
expense for share-based payments to employees. Employee
compensation expense is based on the grant date fair value of
awards, and is recognized in the Statement of Income over the
period that recipients of awards are required to provide related
service (normally the vesting period).
We use the asset and liability method of accounting for income
taxes. This method requires that deferred tax assets and
liabilities be recorded to reflect the future tax consequences
of temporary differences between the tax and financial statement
basis of assets and liabilities. If we determine that it is more
likely than not that a portion of deferred tax assets will not
be realized in a future period, we reduce deferred tax assets by
recording a valuation allowance. Estimates used to recognize
deferred tax assets are subject to revision in subsequent
periods based on new facts or circumstances.
We do not accrue for U.S. federal income taxes on
unremitted earnings of foreign subsidiaries because we intend to
reinvest those earnings in foreign operations. Unremitted
earnings of foreign subsidiaries totaled $50 million at
December 31, 2009, and $47 million at
December 31, 2008. The unrecognized deferred tax liability
associated with unremitted earnings totaled approximately
$10 million at December 31, 2009, and $7 million
at December 31, 2008.
Basic earnings per share is computed by dividing income
attributable to Pactiv common shareholders by the
weighted-average number of shares outstanding. Diluted earnings
per share is calculated in the same manner; however, adjustments
are made to reflect the potential issuance of dilutive shares.
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Notes to
Financial Statements — (Continued)
From time to time, we use derivative financial instruments to
hedge our exposure to changes in foreign currency exchange
rates, principally using foreign currency purchase and sale
contracts with terms of less than 1 year. We do so to
mitigate our exposure to exchange rate changes related to
third-party trade receivables and accounts payable. Net gains or
losses on such contracts are recognized in the statement of
income as offsets to foreign currency exchange gains or losses
on the underlying transactions. In the statement of cash flows,
cash receipts and payments related to hedging contracts are
classified in the same way as cash flows from the transactions
being hedged. We had no open foreign currency contracts as of
December 31, 2009.
Interest rate risk management is accomplished through the use of
swaps. Interest rate swaps are booked at their fair value at
each reporting date, with an equal offset recorded either in
earnings or accumulated other comprehensive income depending on
the designation (or lack thereof) of each swap as a hedging
instrument.
From time to time, we employ commodity forward or other
derivative contracts to hedge our exposure to adverse changes in
the price of certain commodities used in our production
processes. We do not use derivative financial instruments for
speculative purposes. See Note 7 for additional information.
The Financial Accounting Standards Board (FASB) issued ASC
105-10,
“The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,”
which was effective for fiscal years, and interim periods within
such fiscal years, ending after September 15, 2009. ASC
105-10
establishes an authoritative United States GAAP superseding all
pre-existing accounting standards and literature. ASC
105-10 did
not have a material effect on our financial statements upon
adoption or as of December 31, 2009. We have updated all
references to specific authoritative guidance within our annual
financial reporting to reflect the new Accounting Standards
Codification structure.
The FASB issued ASC
820-10,
“Fair Value Measurements and Disclosures” which was
effective as of January 1, 2008. ASC
820-10
establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and
liabilities. ASC
820-10,
which does not require the use of any new fair value
measurements, clarifies the application of other accounting
pronouncements that require or permit fair value measurements.
ASC 820-10
did not have a material effect on our financial statements upon
adoption and as of December 31, 2009.
The FASB issued ASC
715-20,
“Compensation — Retirement Benefits,” of
which we adopted the recognition and disclosure provisions on
December 31, 2006. We recorded a charge to accumulated
other comprehensive income of $41 million upon adoption. We
adopted the measurement provisions of ASC
715-20-65 on
January 1, 2008, using the transition method based on the
data as of our September 30, 2007, measurement date. As a
result, we increased “retained earnings” by
$7 million after tax in 2008.
The FASB issued ASC
825-10,
“Financial Instruments” which was effective
January 1, 2008. ASC
825-10
permits entities to choose to measure many financial instruments
and certain other items at fair value as of specified election
dates. ASC
825-10
expands the use of fair value measurement, but does not
eliminate disclosure requirements of other accounting standards,
including ASC
820-10. ASC
825-10 did
not impact our financial statements upon adoption and as of
December 31, 2009. We did not choose to measure any
financial instruments at fair value as permitted under the
statement.
The FASB issued ASC
805-10,
“Business Combinations,” which replaces prior
authoritative guidance on business combinations, and was
effective on a prospective basis for all business combinations
that occur in fiscal years beginning after December 15,
2008, with the exception of accounting for valuation allowances
on deferred taxes and acquired tax contingencies. ASC
805-10
retains the underlying concepts of the prior authoritative
guidance in that all business combinations are still required to
be accounted for at fair value using the acquisition method of
accounting, but it changes the application of the acquisition
method in a number of significant ways. In this regard, the
pronouncement requires that (1) acquisition-related costs
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Notes to
Financial Statements — (Continued)
generally be expensed as incurred, (2) noncontrolling
interests be recorded at fair value, (3) in-process
research and development costs be recorded at fair value as an
indefinite lived intangible asset, (4) restructuring costs
associated with a business combination generally be expensed
subsequent to the date of such a combination, and
(5) changes in valuation allowances on deferred tax assets
and income tax uncertainties after the acquisition date
generally be recorded as income tax expense. ASC
805-10
amends ASC
740-10,
“Income Taxes” such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective
date of ASC
805-10 would
also be subject to the provisions of ASC
805-10. ASC
805-10 was
effective on January 1, 2009, and did not have a material
impact on our financial statements upon adoption and as of
December 31, 2009.
The FASB issued ASC
810-10-45,
“Consolidation” which was effective for fiscal years,
and interim periods within such fiscal years, beginning on or
after December 15, 2008. ASC
810-10-45
requires that noncontrolling (minority) interests be recognized
as equity (but separate from the parent’s equity) in
consolidated financial statements, and that net earnings related
to noncontrolling interests be included in consolidated net
income, but identified separately on the face of the income
statement. ASC
810-10-45
also amends prior authoritative guidance, and expands disclosure
requirements regarding the interests of parents and
noncontrolling interests. ASC
810-10-45
was effective on January 1, 2009, and did not have a
material impact on our financial statements upon adoption and as
of December 31, 2009.
The FASB issued the disclosure requirements within ASC
815-10-65,
“Derivatives and Hedging” which was effective for
fiscal years, and interim periods within such fiscal years,
beginning on or after November 15, 2008. ASC
815-10
requires (1) enhanced disclosures about an entity’s
derivative and hedging activities, specifically how and why an
entity uses derivative instruments, (2) how derivative
instruments and related hedged items are accounted for under ASC
815-10 and
its related interpretations, and (3) how derivative
instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. ASC
815-10 was
effective on January 1, 2009, and did not have a material
impact on our financial statements upon adoption and as of
December 31, 2009.
The FASB issued the disclosure requirements within ASC
825-10-65,
“Financial Instruments” which was effective for
interim reporting periods ending after June 15, 2009. ASC
825-10-65
amends prior authoritative guidance to require disclosures about
fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual
financial statements. ASC
825-10-65
also amends ASC
270-10,
“Interim Reporting,” to require those disclosures in
summarized financial information at interim reporting periods.
ASC
825-10-65
was effective for our June 30, 2009 interim reporting, and
did not have a material effect on our financial statements upon
adoption and as of December 31, 2009.
The FASB issued ASC
855-10,
“Subsequent Events” which was effective for fiscal
years, and interim periods within such fiscal years, ending
after June 15, 2009. ASC
855-10
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. ASC
855-10 was
effective for our June 30, 2009 interim reporting, and did
not have a material effect on our financial statements upon
adoption and as of December 31, 2009.
The FASB issued the disclosure requirements within ASC
715-20-65
“Compensation — Retirement Benefits” which
was effective for fiscal years ending after December 15,
2009. ASC
715-20-65
requires enhanced disclosures about plan assets in an
employer’s defined benefit pension or other postretirement
plan, including (1) information on investment policies and
strategies, (2) the fair value of each major category of
plan assets, (3) the inputs and valuation techniques used
to measure the fair value of plan assets, (4) the effect of
fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period,
and (5) significant concentrations of risk within plan
assets. ASC
715-20-65
was effective for our December 31, 2009, reporting, and did
not have a material impact on our financial statements upon
adoption.
The FASB issued Statement of Financial Accounting Standards
(SFAS) No. 166, “Accounting for Transfers of Financial
Assets,” which is effective for interim and annual periods
beginning after November 15, 2009.
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Notes to
Financial Statements — (Continued)
SFAS No. 166, which is not yet included in the
Codification, requires additional information about transfers of
financial assets and where companies have continuing exposure to
the risk related to transferred financial assets.
SFAS No. 166 eliminates the concept of a qualifying
special purpose entity, changes the requirements for
derecognizing financial assets, and requires additional
disclosures. We are currently reviewing SFAS No. 166,
and evaluating the impact of its adoption on our financial
statements.
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.
In 2008, we implemented a cost reduction program that included
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. The program is
essentially complete with the exception of a small idle plant
held for sale. The accrued restructuring balance of
$1 million as of December 31, 2009, and
$2 million as of December 31, 2008, is for remaining
severance payments. Cash payments related to restructuring and
other were $1 million pretax for the year ended
December 31, 2009. In 2008, we recorded a charge of
approximately $10 million after tax, or $0.08 per share.
Cash payments related to restructuring and other charges were
$2 million for the year ended December 31, 2008.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operates
one manufacturing facility in North Carolina. The results of
this business have been included in the consolidated financial
statements as of that date.
The total cost of the acquisition was allocated to the assets
acquired and the liabilities assumed based on their respective
fair values. Goodwill and other intangible assets recorded in
connection with the acquisition totaled $1 million and
$3 million, respectively, and all of the goodwill is
expected to be deductible for tax purposes. Recorded intangible
assets pertain to customer relationships and are being amortized
over a
15-year
period.
Appraisals of the fair-market value and physical counts of the
assets acquired during the third quarter of 2009 resulted in
goodwill being decreased by $1 million, and property,
plant, and equipment being increased by the same amount.
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Notes to
Financial Statements — (Continued)
The following table summarizes the preliminary estimated fair
values of the assets acquired and liabilities assumed as of the
acquisition date.
We acquired 100% of the stock of Prairie Packaging, Inc.
(Prairie) on June 5, 2007. The results of Prairie’s
operations have been included in the consolidated financial
statements as of that date.
On October 12, 2005, we sold substantially all of our
protective and flexible packaging businesses. The results of the
sold businesses, as well as costs and charges associated with
the transaction, are classified as discontinued operations.
In 2009, we recorded $15 million of income from
discontinued operations primarily related to the expiration of
the statute of limitations on the 2005 tax year for tax
liabilities which had been recorded in conjunction with divested
businesses. In 2008, we recorded expense from discontinued
operations of $4 million, which was attributed to taxes
associated with the disposition of a business. Liabilities
related to discontinued operations, which included obligations
related to income taxes, certain royalty payments, and the costs
of closing a facility in Europe, were as follows:
Table of Contents
Notes to
Financial Statements — (Continued)
At December 31, 2009, the aggregate maturities of debt
outstanding were $5 million due in 2010, $250 million
due in 2012, and $1.026 billion thereafter.
We were in full compliance with financial and other covenants in
our various credit agreements at December 31, 2009.
There have been no stated events of default which would permit
the lenders to accelerate the debt if not cured within
applicable grace periods, or any cross default provisions in our
debt agreements. We had no short-term borrowings as of
December 31, 2009.
In 1999, our former parent, Tenneco realigned certain of its
debt in preparation for the spin-off of Pactiv. In conjunction
with this realignment, we entered into an interest rate swap to
hedge our exposure to interest rate movement. We settled this
swap in November 1999 at a loss of $43 million. The loss on
the swap is being recognized as additional interest expense over
the life of the underlying notes. At December 31, 2009, the
unamortized balance was $35 million.
At December 31, 2009, and 2008, the fair value of cash and
temporary cash investments, short- and long-term receivables,
accounts payable, and short-term debt were the same as, or not
materially different from, the amount recorded for these assets
and liabilities. The fair value of long-term debt was
approximately $1.5 billion at December 31, 2009, and
approximately $1.4 billion at December 31, 2008. The
recorded amount was $1.3 billion at December 31, 2009,
and at December 31, 2008. The fair value of long-term debt
was based on quoted market prices for our debt instruments.
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.
Table of Contents
Notes to
Financial Statements — (Continued)
For derivative instruments that are designated and qualify as
cash flow hedges, the effective portion of the gain or loss on
the derivative is reported as a component of other comprehensive
income (OCI) and reclassified into earnings in the same period
or periods in which the hedged transaction affects earnings.
Financial instruments designated as cash flow hedges are
assessed both at inception and quarterly thereafter to ensure
they are effective in offsetting changes in the cash flows of
the related underlying exposures. The fair value of the hedge
instruments are reclassified from OCI to earnings if the hedge
ceases to be highly effective or if the hedged transaction is no
longer probable.
From time to time, we use derivative financial instruments to
hedge our exposure to changes in foreign currency exchange
rates, principally using foreign currency purchase and sale
contracts with terms of less than one year. We do so to mitigate
our exposure to exchange rate changes related to third-party
trade receivables and accounts payable. Net gains or losses on
such contracts are recognized in the statement of income as
offsets to foreign currency exchange gains or losses on the
underlying transactions. In the statement of cash flows, cash
receipts and payments related to hedging contracts are
classified in the same way as cash flows from the transactions
being hedged. We had no open foreign currency contracts as of
December 31, 2009.
We entered into interest rate swap agreements in connection with
the acquisition of Prairie. The agreements were terminated on
June 20, 2007, resulting in a gain of $9 million. This
gain is being recorded as a reduction of interest expense over
the average life of the underlying debt. Amounts recognized in
earnings related to our hedging transactions were
$1 million for the year ended December 31, 2009, and
December 31, 2008.
During the fourth quarter of 2009, we entered into natural gas
purchase agreements with third parties, hedging a portion of the
first half of 2010 purchases of natural gas used in the
production processes at certain of our plants. These purchase
agreements are marked to market, with the resulting gains or
losses recognized in earnings when hedged transactions are
recorded. The
mark-to-market
adjustments at December 31, 2009, were immaterial.
To minimize volatility in our margins due to large fluctuations
in the price of commodities, in the second quarter of 2009 we
entered into swap contracts to manage risks associated with
market fluctuations in resin prices. These contracts were
designated as cash flow hedges of forecasted commodity
purchases. All monthly swap contracts entered into in the third
quarter of 2009 have expired. There were no contracts
outstanding as of December 31, 2009, and no gains are
expected to be reclassified to earnings in the first quarter of
2010.
Fair
Value Measurements
Financial assets and liabilities that are recorded at fair value
consist of derivative contracts that are used to hedge exposures
to interest rate, commodity, and currency risks. ASC
820-10-35
sets out a fair value hierarchy that groups fair value
measurement inputs into three classifications: Level 1,
Level 2, or Level 3. Level 1 inputs are quoted
prices in an active market for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs
are unobservable inputs for the asset or liability. All of our
fair value measurements for derivative contracts use
Level 2 inputs.
There were no outstanding derivative instruments recorded in the
consolidated balance sheet as of December 31, 2009, and as
of December 31, 2008.
Table of Contents
Notes to
Financial Statements — (Continued)
The following table indicates the amounts recognized in OCI for
those derivatives designated as cash flow hedges for the years
ended December 31, 2009, and 2008.
There were no transactions that ceased to qualify as a cash flow
hedge in the years ended December 31, 2009, or 2008.
Changes in the carrying value of goodwill during 2009 and 2008
by reporting segment are shown in the following table.
Goodwill and other intangible assets recorded in connection with
the WinCup acquisition totaled $1 million and
$3 million, respectively. Recorded intangible assets
pertain to customer relationships and are being amortized over a
15-year
period.
Details of intangible assets are shown in the following table.
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Notes to
Financial Statements — (Continued)
The weighted-average amortization period used for patents and
other intangible assets subject to amortization is 15 years
and 18 years, respectively. Amortization of intangible
assets was $26 million for the year ended December 31,
2009. Amortization expense is estimated to total
$25 million in 2010, $24 million in 2011,
$23 million in 2012, $19 million in 2013, and
$19 million in 2014.
Capitalized interest was $1 million in 2009, and
$2 million in both 2008 and 2007.
Details of income (loss) from continuing operations before
income taxes are shown in the following table.
Shown below are details of income tax expense for continuing
operations.
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Notes to
Financial Statements — (Continued)
A reconciliation of the difference between the
U.S. statutory federal income tax rate and our effective
income tax rate is shown in the following table.
The components of our net deferred tax assets and liabilities
are summarized in the following table.
We had federal net operating loss carryforwards of
$77 million as of December 31, 2009, which will expire
in 2030 and federal capital loss carryforwards of
$44 million as of December 31, 2009, which will expire
in 2011. State net operating loss carryforwards of
$3 million at December 31, 2009, will expire at
various dates
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Notes to
Financial Statements — (Continued)
from 2015 to 2030. Foreign net operating loss carryforwards at
December 31, 2009, totaled $47 million, and have an
unlimited life.
We had federal tax credit carryforwards of $5 million, as
of December 31, 2009, which will expire at various dates
from 2017 to 2030. State tax credit carryforwards at
December 31, 2009, totaled $13 million
($8 million, net of the federal benefit of state tax), of
which $10 million will expire at various dates from 2011 to
2024, with the balance having an unlimited life. Foreign tax
credit carryforwards of $2 million at December 31,
2009, will expire in 2019 and 2020.
The FASB issued certain provisions within ASC
740-10
“Income Taxes” which clarifies the application of
prior authoritative guidance and was effective as of
January 1, 2007. ASC
740-10
establishes a threshold condition that a tax position must meet
for any part of the benefit of such a position to be recognized
in the financial statements. In addition, ASC
740-10
provides guidance regarding measurement, derecognition,
classification, and disclosure of tax positions.
Changes in the balance of unrecognized income tax benefits are
detailed below.
The total amount of unrecognized income tax benefits that, if
recognized, would favorably impact our effective tax rate for
continuing operations in future periods was $50 million as
of December 31, 2009. As of December 31, 2009, it is
reasonably possible that the balance of unrecognized income tax
benefits may increase or decrease during the following twelve
months. However, it is not expected that any such changes would
significantly affect, individually or in total, our operating
results or financial condition.
It is our continuing practice to record accruals for interest
and penalties related to income tax matters in income tax
expense. Such accruals totaled $11 million as of
December 31, 2009, and $10 million as of
December 31, 2008. Expense recorded through
December 31, 2009, for interest and penalties related to
continuing operations was $3 million.
U.S. federal income tax returns filed for the years 2006
through 2008 are open for examination by the Internal Revenue
Service. Various state, local, and foreign tax returns filed for
the years 2002 through 2008 are open for examination by tax
authorities in those jurisdictions.
Included in unrecognized income tax benefits at
December 31, 2009, was $1 million related to
discontinued operations, all of which, if recognized, would
impact income from discontinued operations in future periods. In
2009, an income tax benefit of $15 million was recorded,
which included the reversal of $2 million of interest and
penalties as a result of the expiration of the 2005 tax year
statute of limitations.
In connection with the adoption of ASC
718-10
“Compensation — Stock Compensation,” we
elected to use the simplified method in calculating our
additional paid-in capital pool upon adoption of ASC
718-10, as
described in prior authoritative guidance. ASC
718-10
requires that tax deductions for compensation costs in excess of
amounts recognized for accounting purposes be reported as cash
flow from financing activities, rather than as cash flow from
operating activities. Such “excess” amounts were
$1 million in 2009, immaterial in 2008, and
$23 million in 2007.
Table of Contents
Notes to
Financial Statements — (Continued)
We have 350 million shares of common stock ($0.01 par
value) authorized, of which 132,334,417 shares were issued
and outstanding as of December 31, 2009.
Reserved shares at December 31, 2009, were as follows:
Stock
Plans
2002 Incentive Compensation Plan — In
November 1999, we initiated a stock ownership plan that permits
the granting of a variety of incentives, including common stock,
restricted stock, performance shares, stock appreciation rights,
and stock options, to directors, officers, and employees. In May
2002, the 1999 plan was succeeded by the 2002 plan, and all
balances under the 1999 plan were transferred to the new plan,
which remains in effect until amended or terminated. Under the
2002 plan, up to 27 million shares of common stock can be
issued (including shares issued under the prior plan), of which
17 million were issued or granted as of December 31,
2009.
Restricted stock, performance share, and stock option awards
generally require that, among other things, grantees remain with
the company for certain periods of time. Performance shares
granted under the plan vest upon the attainment of specified
performance goals in the 3 years following the date of
grant.
Changes in performance share balances were as follows:
Additional information related to performance shares is as
follows:
There was $20 million after tax of unamortized performance
share expense at December 31, 2009, of which
$8 million will be charged against net income in 2010 and
$12 million in 2011.
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Notes to
Financial Statements — (Continued)
Summarized below are changes in stock option balances.
Summarized below is information regarding stock options
outstanding and exercisable at December 31, 2009.
See Note 2 for additional information regarding stock-based
compensation accounting.
Employee 401(k) Plans — We have qualified
401(k) plans for employees, under which eligible participants
may make contributions equal to a percentage of their annual
salary. We matched a portion of such contributions with Pactiv
common stock until February 2006. Effective March 2006, all
matching contributions are in cash. The company or plan
participants may contribute additional amounts in accordance
with the plans’ terms. We incurred 401(k) plan expense of
$10 million in 2009, 2008, and 2007.
Rabbi Trust — In November 1999, we established
a rabbi trust and reserved 3,200,000 shares of Pactiv
common stock for the trust. These shares were issued to the
trust in January 2000. This trust is designed to assure the
payment of deferred compensation and supplemental pension
benefits. These shares are not considered outstanding for
purposes of financial reporting.
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 2007 through 2009.
Pactiv has 50 million shares of preferred stock
($0.01 par value) authorized, none of which was issued at
December 31, 2009.
We have pension plans that cover the majority of our employees.
Benefits are based on years of service and, for most salaried
employees, final average compensation. Assets of our
U.S. qualified plan consist principally of equity and fixed
income securities.
We have postretirement health care and life insurance plans that
cover certain of our salaried and hourly employees who retire in
accordance with the various provisions of such plans. Benefits
may be subject to deductibles, co-payments, and other
limitations. These postretirement plans are not funded, and we
reserve the right to change them.
Table of Contents
Notes to
Financial Statements — (Continued)
On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 was enacted. Starting
in 2006, this act expanded Medicare coverage, primarily by
adding a prescription drug benefit for Medicare-eligible
participants. The act provides employers currently sponsoring
prescription drug programs for Medicare-eligible participants
with a range of options to coordinate with the new government
sponsored program to potentially reduce employers’ costs.
These options include supplementing the government program on a
secondary payor basis, or accepting a direct subsidy from the
government to support a portion of the costs of employers’
programs.
Our plans currently provide prescription drug benefits that are
coordinated with the related Medicare benefits. As a result,
subsidies from Medicare for prescription drug benefits will
average approximately $1.1 million per year.
Effective December 31, 2006, we adopted the recognition and
disclosure provisions of ASC
715-10. See
Note 2.
During 2009 we contributed $550 million pretax to the plan
and plan assets earned a return of approximately 26%. As of
December 31, 2009, our U.S. pension plan was 94%
funded on an Employee Retirement Income Security Act (ERISA)
basis, which determines the minimum funding requirements for the
plan. As long as our funded ratio is above 60%, there is no
meaningful impact on us or to the plan. We do not expect to make
additional sizeable contributions to the plan for the
foreseeable future.
Table of Contents
Notes to
Financial Statements — (Continued)
Financial data pertaining to our pension and postretirement
benefit plans is shown on the following tables.
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