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| PTV > SEC Filings for PTV > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Basis of Presentation
Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie's operations have been included in the consolidated financial statements as of that date.
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operated one manufacturing facility in North Carolina with approximately 100 employees. The results of this business have been included in the consolidated financial statements as of that date.
We have three reporting segments:
• Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.
• Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, and other institutional foodservice outlets, food processors, and grocery chains.
• Other includes corporate and administrative service operations and retiree benefit income and expense.
The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of expenses and assets/liabilities are used.
Restructuring and Other
In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. The program is essentially complete with the exception of a small idle plant held for sale. The accrued restructuring balance of $1 million as of June 30, 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 six-month period ended June 30, 2009.
In the first half of 2008, we recorded a charge of $10 million after tax, or $0.08 per share. Cash payments related to restructuring and other charges were $3 million after tax for the six-month period ended June 30, 2008.
Significant Trends, Opportunities and Challenges
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.
CMAI Polystyrene (cents/lb) CMAI Polyethylene (cents/lb)
[[Image Removed: GRAPH]] [[Image Removed: GRAPH]]
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. In the second quarter of 2009, prices rose moderately from the first quarter of 2009. 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 in the first half of 2009.
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 at December 31, 2008. See the "Liquidity and Capital Resources" section for further discussion of the impact on the company of this underfunding.
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.
Results of Continuing Operations
Three Months Ended June 30, 2009, Compared with Three Months Ended June 30, 2008
Sales
Three months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 356 $ 358 $ (2 ) (0.6 )%
Foodservice/Food Packaging 545 593 (48 ) (8.1 )
Total $ 901 $ 951 $ (50 ) (5.3 )%
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Sales declined 5%, reflecting growth in volume of 4%, lower pricing of 8%, and unfavorable foreign exchange of 1%.
Sales for Consumer Products decreased 1%, reflecting lower pricing of 7% due to normal price declines related to lower raw material costs, offset partially by a volume increase of 6%. There was volume growth in all categories, with particular strength in tableware and a rebound in waste bags.
Foodservice/Food Packaging sales fell 8%, driven by lower average selling prices of 9% and unfavorable foreign exchange of 2%, offset partially by volume growth of 3%. The lower pricing was related to decreases in raw material costs and the volume increase primarily was related to strength in sales to quick service restaurants.
Operating Income
Three months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 94 $ 61 $ 33 54.1 %
Foodservice/Food Packaging 89 68 21 30.9
Other (4 ) - (4 ) (100.0 )
Total $ 179 $ 129 $ 50 38.8 %
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Operating income increased primarily as a result of a $46 million improvement in spread (the difference between selling prices and raw material costs), lower operating costs of $17 million driven by productivity and lower freight and utility rates, and higher volume of $17 million. This was offset, in part, by higher selling, general, and administrative (SG&A) expense of $30 million. Approximately half of the SG&A increase was due to higher incentive compensation accruals driven by record first half performance. The remainder of the increase was a combination of higher advertising and promotion expense in support of the launch of Hefty® Odor Block® unscented odor control waste bags and the mark-to-market effect of the increase in our stock price during the quarter on deferred compensation expense.
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
Operating income - three months ended June 30, 2008
GAAP Restructuring and Excluding restructuring
(In millions) basis other charges and other charges
Consumer Products $ 61 $ 2 $ 63
Foodservice/Food Packaging 68 - 68
Other - - -
Total $ 129 $ 2 $ 131
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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.
Three months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 94 $ 63 $ 31 49.2 %
Foodservice/Food Packaging 89 68 21 30.9
Other (4 ) - (4 ) (100.0 )
Total $ 179 $ 131 $ 48 36.6 %
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The increase in operating income for Consumer Products was driven mainly by favorable spread of $32 million, lower operating costs of $9 million, and higher volume of $5 million, offset partially by higher SG&A expense of $15 million.
Higher operating income for Foodservice/Food Packaging was driven primarily by favorable spread of $14 million, increased volume of $12 million, and lower operating costs of $8 million, partially offset by higher SG&A expense of $10 million and unfavorable foreign exchange of $2 million.
The decrease in Other operating income was due mainly to higher general and administrative expense.
Income from Continuing Operations
We recorded income from continuing operations of $97 million, or $0.73 per share, compared with $64 million, or $0.49 per share, in 2008. The change was driven primarily by higher operating income of $31 million ($50 million before tax) as described previously.
Six Months Ended June 30, 2009, Compared with Six Months Ended June 30, 2008
Sales
Six months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 639 $ 648 $ (9 ) (1.4 )%
Foodservice/Food Packaging 1,028 1,111 (83 ) (7.5 )
Total $ 1,667 $ 1,759 $ (92 ) (5.2 )%
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Sales decreased 5%, reflecting lower pricing of 5% and unfavorable foreign exchange of 1%, offset in part by higher volume of 1%. The decrease in pricing was due to normal price declines related to lower raw material costs.
Sales for Consumer Products declined 1%, reflecting lower pricing of 2%, offset partially by an increase in volume of 1%.
Foodservice/Food Packaging sales fell 8%, as higher volume of 1% was more than offset by average selling price decreases of 6% and unfavorable foreign exchange of 1%.
Operating Income
Six months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 168 $ 91 $ 77 84.6 %
Foodservice/Food Packaging 184 115 69 60.0
Other (6 ) 2 (8 ) (400.0 )
Total $ 346 $ 208 $ 138 66.3 %
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Operating income increased primarily as a result of a $128 million improvement in spread, lower operating costs of $28 million driven by productivity and lower freight and utility rates, and lower restructuring costs of $16 million. This was offset, in part, by higher SG&A expense of $39 million, primarily due to higher incentive compensation accruals reflecting record first half performance and increased advertising and promotional expense.
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
Operating income - six months ended June 30, 2008
GAAP Restructuring and Excluding restructuring
(In millions) basis other charges and other charges
Consumer Products $ 91 $ 7 $ 98
Foodservice/Food Packaging 115 8 123
Other 2 1 3
Total $ 208 $ 16 $ 224
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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.
Six months
ended Increase
June 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 168 $ 98 $ 70 71.4 %
Foodservice/Food Packaging 184 123 61 49.6
Other (6 ) 3 (9 ) (300.0 )
Total $ 346 $ 224 $ 122 54.5 %
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The increase in operating income for Consumer Products was driven mainly by favorable spread of $76 million and lower operating costs of $16 million, offset partially by higher SG&A expense of $22 million.
Higher operating income for Foodservice/Food Packaging was driven primarily by favorable spread of $52 million, lower operating costs of $12 million, and higher volume of $9 million, partially offset by increased SG&A expense of $8 million and unfavorable foreign exchange of $2 million.
The decrease in Other operating income was due mainly to higher compensation accruals as a result of the record first half performance, and lower pension income.
Income from Continuing Operations
We recorded income from continuing operations of $188 million, or $1.42 per share, for the six months ended June 30, 2009, compared with $99 million, or $0.75 per share, in 2008. The change was driven primarily by higher operating income of $88 million ($138 million before tax) as described previously.
Liquidity and Capital Resources
Capitalization
June 30, December 31, Increase
(In millions) 2009 2008 (decrease)
Short-term debt, including current maturities of
long-term debt $ - $ - $ -
Long-term debt 1,345 1,345 -
Total debt 1,345 1,345 -
Noncontrolling interest 16 16 -
Pactiv shareholders' equity 853 639 214
Total capitalization $ 2,214 $ 2,000 $ 214
Ratio of total debt to total capitalization 60.7 % 67.3 %
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Cash Flows
Six months
ended
June 30, Increase
(In millions) 2009 2008 (decrease)
Cash provided (used) by:
Operating activities $ 215 $ 64 $ 151
Investing activities (68 ) (86 ) 18
Financing activities - (22 ) 22
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The increase in cash provided by operating activities was driven primarily by higher income from continuing operations of $89 million. In addition, a reduction in accounts receivable compared with an increase in accounts receivable the previous year contributed $74 million, an increase in other current liabilities added $50 million, a smaller inventory build than prior year added $38 million, and an increase in tax accruals added $16 million. This was offset partially by a $200 million pretax contribution to our U.S. pension plan, reduced by related favorable cash tax effects of approximately $70 million.
The increase in cash used by investing activities was driven by lower capital expenditures of $37 million partially offset by the acquisition of the WinCup polypropylene cup business for $20 million.
Cash used by financing activities increased as a result of the repayment of long-term revolving debt of $20 million in 2008.
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $43 million at June 30, 2009. It is anticipated that the majority of these expenditures will be funded from existing cash and short-term investments and internally generated cash.
Contractual Obligations
There has been no material change in the company's aggregate contractual obligations since December 31, 2008.
Liquidity and Off-Balance-Sheet Financing
We use various sources of funding to manage liquidity. Sources of liquidity include cash flow from operations and a 5-year revolving credit facility of $750 million, under which $70 million was outstanding at June 30, 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.
Plus Less
Twelve months Six months Six months Twelve months
ended ended ended ended
(In millions) December 31, 2008 June 30, 2009 June 30, 2008 June 30, 2009
Net income (1) $ 217 $ 187 $ 95 $ 309
Adjustments:
Noncash restructuring and other (2) 12 (1 ) 11 -
Interest expense, net of interest
capitalized (1) 106 47 54 99
Income tax expense (1) 120 112 56 176
Depreciation and amortization (1) 182 92 92 182
Noncontrolling interest (1) 1 - - 1
EBITDA $ 638 $ 437 $ 308 $ 767
EBITDA $ 638 $ 767
Interest expense, net of interest
capitalized (1) 106 99
Interest coverage ratio 6.02 7.75
Total debt (3) $ 1,345 $ 1,345
EBITDA 638 767
Total debt to EBITDA ratio 2.11 1.75
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(1) Amounts per the consolidated statement of income (for 2008 information, refer to our 2008 10-K and second quarter 2008 10-Q).
(2) Amounts per the consolidated statement of cash flows (for 2008 information, refer to our 2008 10-K and second quarter 2008 10-Q).
(3) Amounts per the consolidated statement of financial position.
We also use an asset securitization facility as a form of off-balance-sheet financing. At June 30, 2009, $129 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 are not required to make a contribution to this plan in 2009; however, we have elected to make contributions in 2009 to lessen the impact of possible required contributions in the future. We contributed $200 million pretax in the first half of 2009, and an additional $200 million pretax in July. The related cash tax benefits of the contributions were $140 million ($120 million in 2009 and $20 million that will carry over into 2010).
Having made 2009 contributions totaling $400 million ($280 million after tax), and assuming the plan assets earn an actual rate of return in 2009 equal to our expected long-term rate of return of 9% and the pension funding discount rate as of January 1, 2010, is 6.41%, unchanged from the rate as of June 30, 2009, there would be no required cash contribution in 2010 to the U.S. pension plan. Holding the pension funding discount rate at 6.41%, plan assets could earn a return as low as 8% in 2009 and there would be no required cash contribution in 2010 to the U.S. pension plan.
Holding the pension funding discount rate constant, each one percentage-point increase (decrease) in the annual actual rate of return from 8% up to 13% would reduce (increase) the minimum cash contribution on an
after-tax basis by approximately $17 million. On the same basis, each one percentage-point increase in the actual rate of return above 13% would reduce the minimum required after-tax cash contribution by approximately $6 million.
Holding the actual rate of return constant, each one-half percentage-point increase (decrease) in the pension funding discount rate would reduce (increase) . . .
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