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| PTV > SEC Filings for PTV > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 September 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 nine-month period ended September 30, 2009.
In the first nine months of 2008, we recorded a charge of $9 million after tax, or $0.07 per share. Cash payments related to restructuring and other charges were cash neutral for the nine-month period ended September 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: (PERFORMANCE GRAPH)]] [[Image Removed: (PERFORMANCE 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 third quarter of 2009, prices rose moderately from the second 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 nine months 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 September 30, 2009, Compared with Three Months Ended
September 30, 2008
Sales
Three months
ended Increase
September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 312 $ 342 $ (30 ) (8.8 )%
Foodservice/Food Packaging 527 583 (56 ) (9.6 )
Total $ 839 $ 925 $ (86 ) (9.3 )%
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Sales declined 9%, reflecting lower pricing of 11% offset partially by volume growth of 2%.
Sales for Consumer Products decreased 9%, reflecting lower pricing of 8% and a volume decline of 1%. The price decline reflects normal reductions due to lower raw material costs. Volume was negatively impacted by a decline in waste bags, which was offset partially by strength in tableware. Waste bag volume was down due to a decline in the overall waste bag market, as well as lower shipments related to Hefty® waste bag promotions in the non-grocery channels.
Foodservice/Food Packaging sales fell 10%, driven by lower average selling prices of 13% and unfavorable foreign exchange of 1%, offset partially by volume growth of 4%. The lower pricing was related to decreases in raw material costs. The volume increase primarily was related to continued growth in cups and cutlery, as well as growth in a number of other product areas, including polypropylene and paper-based items.
Operating Income
Three months
ended Increase
September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 72 $ 51 $ 21 41.2 %
Foodservice/Food Packaging 70 52 18 34.6
Other (5 ) (1 ) (4 ) (400.0 )
Total $ 137 $ 102 $ 35 34.3 %
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Operating income increased primarily as a result of lower operating costs of $23 million driven by productivity and lower freight and utility rates, a $19 million improvement in spread (the difference between selling prices and raw material costs), and higher volume of $10 million. This was offset, in part, by higher selling, general, and administrative (SG&A) expense of $16 million. The increase in SG&A expense was primarily a result of more normal advertising spending and incentive compensation accruals this year, as well as lower pension income.
The following table shows the impact of restructuring and other charges (credits) on 2008 operating income by segment.
Operating income - three months ended September 30, 2008
GAAP Restructuring and Excluding restructuring
(In millions) basis other and other
Consumer Products $ 51 $ (3 ) $ 48
Foodservice/Food Packaging 52 1 53
Other (1 ) - (1 )
Total $ 102 $ (2 ) $ 100
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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 Increase
ended September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 72 $ 48 $ 24 50.0 %
Foodservice/Food Packaging 70 53 17 32.1
Other (5 ) (1 ) (4 ) (400.0 )
Total $ 137 $ 100 $ 37 37.0 %
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The increase in operating income for Consumer Products was driven mainly by favorable spread of $21 million, lower operating costs of $11 million, offset partially by higher SG&A expense of $8 million. The increase in SG&A expense primarily was due to higher advertising expense in support of the launch of Hefty® Odor Block® unscented odor control waste bags.
Higher operating income for Foodservice/Food Packaging was driven primarily by lower operating costs of $12 million, and increased volume of $11 million, partially offset by higher SG&A expense of $4 million.
The decrease in Other operating income was due mainly to lower pension income.
Income from Continuing Operations
We recorded income from continuing operations of $73 million, or $0.54 per share, compared with $54 million, or $0.40 per share, in 2008. The change was driven primarily by higher operating income of $22 million ($35 million before tax) as described previously.
Discontinued Operations
Income (Loss) from Discontinued Operations
In the third quarter of 2009, we recorded $15 million of income from discontinued operations 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.
Nine Months Ended September 30, 2009, Compared with Nine Months Ended
September 30, 2008
Sales
Nine months Increase
ended September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 951 $ 990 $ (39 ) (3.9 )%
Foodservice/Food Packaging 1,555 1,694 (139 ) (8.2 )
Total $ 2,506 $ 2,684 $ (178 ) (6.6 )%
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Sales decreased 7%, reflecting lower pricing of 7% 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 4%, reflecting lower pricing.
Foodservice/Food Packaging sales fell 8%, as higher volume of 2% was more than offset by average selling price decreases of 8% and unfavorable foreign exchange of 2%.
Operating Income
Nine months
ended Increase
September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 240 $ 142 $ 98 69.0 %
Foodservice/Food Packaging 254 167 87 52.1
Other (11 ) 1 (12 ) (1,200.0 )
Total $ 483 $ 310 $ 173 55.8 %
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Operating income increased primarily as a result of a $147 million improvement in spread, lower operating costs of $51 million driven by productivity and lower freight and utility rates, and lower restructuring costs of $14 million. This was offset, in part, by higher SG&A expense of $55 million, primarily due to higher incentive compensation accruals, increased advertising expense, and lower pension income.
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
Operating income - nine months ended September 30, 2008
GAAP Restructuring and Excluding restructuring
(In millions) Basis other and other
Consumer Products $ 142 $ 4 $ 146
Foodservice/Food Packaging 167 9 176
Other 1 1 2
Total $ 310 $ 14 $ 324
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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.
Nine months
ended Increase
September 30, (decrease)
(In millions) 2009 2008 Amount Percent
Consumer Products $ 240 $ 146 $ 94 64.4 %
Foodservice/Food Packaging 254 176 78 44.3
Other (11 ) 2 (13 ) (650.0 )
Total $ 483 $ 324 $ 159 49.1 %
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The increase in operating income for Consumer Products was driven mainly by favorable spread of $98 million and lower operating costs of $28 million, offset partially by higher SG&A expense of $29 million, primarily related to higher advertising expense as well as higher incentive compensation accruals.
Higher operating income for Foodservice/Food Packaging was driven primarily by favorable spread of $49 million, lower operating costs of $23 million, and higher volume of $21 million, partially offset by increased SG&A expense of $14 million, primarily related to increased incentive compensation accruals.
The decrease in Other operating income was due mainly to higher compensation accruals and lower pension income.
Income from Continuing Operations
We recorded income from continuing operations of $261 million, or $1.96 per share, for the nine months ended September 30, 2009, compared with $153 million, or $1.15 per share, in 2008. The change was driven primarily by higher operating income of $109 million ($173 million before tax) as described previously.
Discontinued Operations
Income (Loss) from Discontinued Operations
In 2009, we recorded $14 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 business dispositions, which occurred in prior years.
Liquidity and Capital Resources
Capitalization
September 30, December 31, Increase
(In millions) 2009 2008 (decrease)
Short-term debt, including current maturities of
long-term debt $ - $ - $ -
Long-term debt 1,275 1,345 (70 )
Total debt 1,275 1,345 (70 )
Noncontrolling interest 16 16 -
Pactiv shareholders' equity 952 639 313
Total capitalization $ 2,243 $ 2,000 $ 243
Ratio of total debt to total capitalization 56.8 % 67.3 %
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Cash Flows
Nine months Increase
ended September 30, (decrease)
(In millions) 2009 2008 in cash flow
Cash provided (used) by:
Operating activities $ 191 $ 204 $ (13 )
Investing activities (96 ) (109 ) 13
Financing activities (71 ) (152 ) 81
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The decrease in cash provided by operating activities was driven primarily by a $400 million pretax contribution to our U.S. pension plan, reduced by related favorable cash tax effects of approximately
$100 million. This was offset partially by higher income from continuing operations of $108 million. In addition, a smaller inventory build versus prior year added $55 million, a reduction in accounts receivable compared with an increase in accounts receivable the previous year contributed $48 million, an increase in other current liabilities added $41 million, an increase in tax accruals added $23 million, and lower pension income accounted for $10 million.
The decrease in cash used by investing activities was driven by lower capital expenditures of $31 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 lower long-term revolving debt repayments of $80 million.
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $75 million at September 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 no balance was outstanding at September 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 Nine months Nine months Twelve months
ended ended ended ended
(In millions) December 31, 2008 September 30, 2009 September 30, 2008 September 30, 2009
Net income attributable to Pactiv (1) $ 217 $ 274 $ 148 $ 343
Adjustments:
Noncash restructuring and other (2) 12 (1 ) 13 (2 )
Discontinued operations, net of tax (1) - (14 ) - (14 )
Interest expense, net of interest
capitalized (1) 106 70 79 97
Income tax expense (1) 120 153 80 193
Depreciation and amortization (1) 182 138 138 182
Noncontrolling interest (1) 1 1 1 1
EBITDA $ 638 $ 621 $ 459 $ 800
EBITDA $ 638 $ 800
Interest expense, net of interest
capitalized (1) 106 97
Interest coverage ratio 6.02 8.25
Total debt (3) $ 1,345 $ 1,275
EBITDA 638 800
Total debt to EBITDA ratio 2.11 1.59
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(1) Amounts per the consolidated statement of income (for 2008 information, refer to our 2008 10-K and third quarter 2008 10-Q).
(2) Amounts per the consolidated statement of cash flows (for 2008 information, refer to our 2008 10-K and third 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 September 30, 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 Inc. 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 $400 million pretax in the first nine months of 2009. The related cash tax benefits of the contributions are $140 million ($120 million to be realized in 2009 and $20 million that will carry over into 2010). . . .
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