10-K 1 c55895e10vk.htm FORM 10-K e10vk
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
     
 
(Mark 1)
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the fiscal year ended December 31, 2009
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    Commission File Number: 1-15157
 
PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)
 
     
Delaware
  36-2552989
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
1900 West Field Court
Lake Forest, Illinois
(Address of principal executive offices)
  60045
(Zip Code)
 
Registrant’s telephone number, including area code: (847) 482-2000
 
Securities registered pursuant to Section 12 (b) of the Act:
 
     
    Name of each Exchange
Title of each class
 
on which registered
Common Stock ($.01 par value) and associated Preferred
Stock Purchase Rights
  New York Stock Exchange
     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):
 
             
Large accelerated filer ü
  Accelerated filer      Non-accelerated filer      Smaller Reporting company   
    (Do not check if a smaller reporting company)            
 
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.
 
     
Class of Voting Stock and Number of Shares
  Market Value of Common Stock held by
Held by Non-Affiliates at June 30, 2009
 
Non-Affiliates
Common Stock 131,840,454 shares
  $2,860,937,852
 
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:
 
     
    Part of the Form 10-K
Document
 
into which incorporated
Pactiv Corporation’s Definitive Proxy Statement for
the Annual Meeting of Shareholders to be held May 14, 2010
  Part III
 


 

 
TABLE OF CONTENTS
 
                 
PART I
      Business     1  
      Risk Factors     4  
      Unresolved Staff Comments     6  
      Properties     6  
      Legal Proceedings     6  
      Submission of Matters to a Vote of Security Holders     6  
      Executive Officers of the Registrant     6  
      Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities     8  
      Selected Financial Data     10  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     11  
      Quantitative and Qualitative Disclosures About Market Risk     24  
      Financial Statements and Supplementary Data     25  
      Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     64  
      Controls and Procedures     64  
      Other Information     64  
      Directors, Executive Officers, and Corporate Governance     64  
      Executive Compensation     64  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     65  
      Certain Relationships and Related Transactions, and Director Independence     65  
      Principal Accounting Fees and Services     65  
      Exhibits, Financial Statement Schedules     65  
 EX-18
 EX-21
 EX-23
 EX-24
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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ITEM 1.  Business.
 
Overview
 
Pactiv Corporation is a leading producer of consumer and foodservice/food packaging products. With one of the broadest product lines in the specialty packaging industry, we derive more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market share position. Our business operates 43 manufacturing facilities in North America, and 1 in Germany. We also have 2 joint-venture interests in China. In 2009, 96% of our $3.4 billion in sales was generated in North America.
 
We have three reporting segments:
 
  •  Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.
 
  •  Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
 
  •  Other includes corporate and administrative service operations and retiree benefit income and expense.
 
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
 
Our company was incorporated in the state of Delaware in 1965 under the name of Packaging Corporation of America, operating as a subsidiary of Tenneco Inc. (Tenneco). In November 1995, we changed our name to Tenneco Packaging Inc. In November 1999, we were spun-off from Tenneco as an independent company, and changed our name to Pactiv Corporation.
 
In this report, we sometimes refer to Pactiv Corporation and its subsidiaries as “Pactiv” or the “company.”
 
Products and Markets
 
Consumer Products
 
We manufacture, market, and sell consumer products such as plastic storage bags for food and household items; plastic waste bags; aluminum cookware; and foam, pressed paperboard, plastic, and molded fiber tableware. These products are typically used by consumers in their homes and are sold through a variety of retailers, including supermarkets and mass merchandisers. Many of these products are sold under such recognized brand names as:
 
         
•   Hefty®
  •   Hefty® Ultra Flex®   •   Hefty® Hearty Mealstm
•   Hefty® Baggies®
  •   Hefty® Cinch Sak®   •   Hefty® Elegantware®
•   Kordite®
  •   Hefty® The Gripper®   •   Hefty® Zoo Pals®
•   Hefty® OneZip®
  •   Hefty® Kitchen Fresh®   •   Hefty® Easy Grip®
•   Hefty® Odor Block®
  •   Hefty® Renew®   •   Hefty® EZ Foil®
 
In 2009, Consumer Products accounted for 38% of our sales.
 
Foodservice/Food Packaging
 
We are a leading provider of packaging products to the foodservice, supermarket, restaurant, and food packaging markets. Our products are designed to protect food during distribution, aid retailers in merchandising food products, and help customers prepare and serve meals in their homes.


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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.
 
Business Strategy
 
Our business strategy is to grow by expanding our existing businesses and by making strategic acquisitions. Through our broad product lines and custom-design capability, we offer customers a range of products to fit their needs. As a result, we are a primary supplier to several national retailers, restaurant chains, and distributors, and have developed long-term relationships with key participants in the packaging and foodservice distribution markets. These relationships enable us to better identify and penetrate new markets.
 
Market Presence
 
Many of our products have strong market share positions, including those in key markets such as zipper bags, tableware, foam trays, foodservice foam containers, clear rigid-display packaging, and aluminum cookware. In 2009, we derived more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market share position. This is a reflection of the:
 
  •  Strength of our Hefty® brands
  •  Breadth of our product lines
  •  Ability to offer “one-stop shopping” to our customers
  •  Strength of our supply chain capabilities
 
New Products
 
Successful development of new products and value-added product line extensions are essential to our continued growth. Our acquisition of Prairie Packaging, Inc. (Prairie) has broadened our product offering, particularly in the area of cups and cutlery. We spent $33 million on research and development activities in 2009, $32 million in 2008, and $35 million in 2007.
 
Service Capabilities
 
The Foodservice/Food Packaging segment’s “one face to the customer” strategy continues to deliver positive results. The systems and information management infrastructure and distribution network supporting this customer-linked manufacturing process help us to reduce supply chain costs, enhance customer service, and improve productivity.
 
Productivity/Cost Reduction
 
Our continued focus on productivity enhancements and manufacturing and logistics cost reductions is key to improving our profitability. In 2009, approximately 20% of our research and development spending and 15% of our capital spending was devoted to efforts to reduce costs and improve manufacturing and distribution efficiency.


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Strategic Acquisitions
 
Strategic acquisitions have been an important element of our growth strategy. Since the beginning of 2000, $1.3 billion has been invested to acquire businesses that complement and/or expand our core businesses, including $1 billion in 2007 for Prairie. We focus on products that have strong growth characteristics and attractive margins, which provide the opportunity to leverage our existing distribution channels and core capabilities.
 
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina.
 
Marketing, Distribution, and Customers
 
We have a sales and marketing staff of approximately 500 people. Our consumer products are sold through a direct sales force and a national network of brokers and manufacturers’ representatives. We primarily use a direct sales force to sell to our foodservice and food packaging customers.
 
Wal-Mart Stores, Inc., which accounted for approximately 21% of our consolidated sales in 2009 and in 2008, was the only customer that accounted for more than 10% of our sales. Our backlog of orders is not material.
 
Analysis of Sales
 
The following table sets forth information regarding sales from continuing operations.
 
                                                 
    2009     2008     2007  
(In millions)   Amount     % Total     Amount     % Total     Amount     % Total  
 
Consumer Products
  $ 1,285       38 %   $ 1,342       38 %   $ 1,221       38 %
Foodservice/Food Packaging
    2,075       62       2,225       62       2,032       62  
                                                 
Total
  $ 3,360           100 %   $ 3,567           100 %   $ 3,253           100 %
                                                 
 
See Note 14 to the financial statements for additional segment and geographic information.
 
Competition
 
Our businesses face significant competition in all of our product lines from numerous national and regional companies of various sizes. Many of our competitors, particularly in the foodservice industry, are significantly smaller and have lower fixed costs. Certain competitors offer a more specialized variety of packaging materials and concepts and may serve more geographic regions through various distribution channels. Our success in obtaining business is driven primarily by our price, quality, product features, and service.
 
Raw Materials
 
The principal raw materials we use are plastic resins, aluminum, paperboard, and recycled paper. More than 80% of our sales were from products made from different types of plastics, including polystyrene, polyethylene, polypropylene, and amorphous polyethylene terephthalate. These raw materials are readily available from a wide variety of suppliers. Our overall supply of raw materials was adequate in 2009, and we believe that our raw material supply will remain adequate in 2010.
 
Environmental Regulation
 
We are subject to a variety of environmental and pollution control laws and regulations. Costs to continually monitor our compliance with these laws and regulations are a recurring part of our operations. These costs are not a significant percentage of total operating costs. We do not expect continued compliance to have a material impact on our results of operations, financial condition, or cash flows.


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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.
 
Other
 
At December 31, 2009, we employed approximately 12,000 people, including persons employed by our Asian joint ventures. Our relations with employees remain satisfactory.
 
We own a number of U.S. and foreign patents, trademarks, and other intellectual property that are significant with regard to the manufacture, marketing, and distribution of certain products. We also use numerous software licenses. The intellectual property and licensing rights we hold are adequate for our business.
 
Available Information
 
Our website address is www.pactiv.com. Our investor relations link on this website has the following information available free of charge:
 
  •  Annual reports on Form 10-K
  •  Quarterly reports on Form 10-Q
  •  Current reports on Form 8-K
  •  Amendments to these reports
  •  Code of business conduct/ethics
  •  Code of ethical conduct for financial managers
  •  Certain other corporate governance documents
 
Investor relations information is updated on our website as soon as reasonably practical after we electronically file or furnish information to the Securities and Exchange Commission. In addition, copies of our annual report on Form 10-K are made available, free of charge, upon request.
 
ITEM 1A.  Risk Factors.
 
General economic conditions affect demand for our products and impact our production and selling costs. Listed below are some of the factors that may impact our results and cause our performance to differ materially from the results we may project. These are in addition to general economic factors and other items discussed elsewhere in this report (for example, in the Management’s Discussion and Analysis of Financial Condition and Results of Operations).
 
Product Changes and Innovation
 
We operate in a very competitive environment. Historically, product innovation and development have been key to our obtaining and maintaining market share and margins. Our future sales and profitability are partially impacted by our ability to anticipate and react more effectively than our competitors to changes in consumer demand for the types of products we sell. This requires understanding customer desires, creating products that meet those desires, and producing and selling products in a cost effective manner.


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Changes in Customers
 
We must address the demands of both the consumers who ultimately purchase and use our products and the retailers and others who sell our products to end-users. This is necessary for both of our segments, but it is particularly important in our Consumer Products segment. Our sales and margins can be impacted by changes in our distribution channels, customer mix, and merchandising strategies. Examples include customer concentration, consolidation, and substitution of unbranded products for branded products.
 
Although we have a diverse customer base, we have several large customers. These large customers provide us with cost saving opportunities that may not be available with smaller, more diverse accounts. However, large customers can take actions that put pressure on our margins. Moreover, a significant downturn in the financial condition of one or more large customers could have an adverse effect on our business results.
 
Increases in Production Costs
 
Most of our products are made from plastic. Plastic resin prices are impacted by the price of oil, natural gas, and chemical intermediaries, such as benzene and ethylene, which can be volatile and affected by many factors, including overall economic activity, geopolitical situations (particularly in oil exporting regions), natural disasters, and governmental policies and regulation.
 
Our margins can be negatively impacted by the difference in timing of raw material cost increases and corresponding product selling price increases. Similarly, changes in labor, utility, or transportation costs can affect our margins.
 
Laws Relating to Use or Manufacture of Plastic Products
 
Changes in laws or governmental actions regarding the use of disposable plastic products, such as laws relating to recycling or reuse of plastic products, could increase the cost of our products. Such additional costs could make our products less competitive with products made from other materials. Similarly, changes in laws regarding air emissions, including so-called cap and trade legislation, could increase our manufacturing costs.
 
Growth/Acquisitions and Divestitures
 
Growth, internally and through acquisitions, is an important element of our business strategy. We currently have adequate sources of liquidity for our operations. However, our ability to grow could be impacted if our cost of capital were to increase or if capital were to become more difficult to obtain. Our future success will depend somewhat on our ability to integrate new businesses that we may acquire, dispose of businesses or business segments that we may wish to divest, and redeploy proceeds from possible divestitures.
 
International Issues
 
Currently most of our production and sales are in the United States. Competition from products manufactured in countries that have lower labor and other costs than the United States could negatively impact our profitability. Additionally, if we were to manufacture or sell more of our products in countries outside of the United States, we would be exposed to additional economic, political, competitive, and foreign currency exchange risks.
 
Pension Plans
 
At the time of our spin-off from Tenneco in 1999, we became the sponsor of Tenneco (now Pactiv) pension plans. These plans cover most of our employees as well as individuals/beneficiaries from many companies previously owned by Tenneco, but not owned by Pactiv. As a result, while persons who are not current employees do not accrue benefits under the plans, the total number of individuals/beneficiaries covered by these plans is much larger than would have been the case if only Pactiv personnel were participants. For this reason, the impact of the pension plans on our net income, shareholders’ equity and cash from operations is


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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:
 
  •  Assumptions regarding the long-term rate of return on pension assets and other factors
  •  Interest rate used to discount projected benefit obligations
  •  Level of amortization of actuarial gains and losses
  •  Governmental regulations relating to funding of retirement plans in the U.S. and foreign countries
  •  Financial market performance
 
ITEM 1B.  Unresolved Staff Comments.
 
None.
 
ITEM 2.  Properties.
 
Headquarters
 
Our corporate headquarters is located at 1900 West Field Court, Lake Forest, Illinois 60045. Our general telephone number is (847) 482-2000.
 
Manufacturing and Distribution Facilities
 
Our Consumer Products and Foodservice/Food Packaging segments operate 43 manufacturing and 9 distribution facilities in North America (United States, Mexico, and Canada). We also have a manufacturing facility in Germany that supports our Foodservice/Food Packaging segment. In addition, we have research and development centers in Canandaigua, New York, and Vernon Hills, Illinois. We also have joint-venture interests in a corrugated-converting operation in Shaoxing, China (62.5% owned) and in a folding carton operation in Dongguan, China (51% owned).
 
Our plants and equipment are well maintained and in good operating condition. We have satisfactory title to our owned properties, which are subject to certain liens that do not detract materially from the value or use of the properties.
 
ITEM 3.  Legal Proceedings.
 
We are party to other legal proceedings arising from our operations. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances now known, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.
 
ITEM 4.  Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
 
ITEM 4.1.  Executive Officers of the Registrant.
 
Our executive officers, as of February 26, 2010, are listed below. This information is being included in Part I of this Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
 
Richard L. Wambold, 58, Chairman of the Board of Directors, President, and Chief Executive Officer.
Mr. Wambold has served as Chairman since March 2000, President since June 1999, and Chief Executive Officer since our spin-off in November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and General Manager of our foodservice/food packaging and consumer products business units.


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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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PART II
 
ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
 
The outstanding shares of Pactiv Corporation common stock ($0.01 par value) are listed on the New York Stock Exchange under the symbol “PTV.” Stock price and dividend information for 2009 and 2008 are shown below.
 
                                                 
    2009   2008
    Price/share   Dividends
  Price/share   Dividends
    High   Low   paid   High   Low   paid
 
First quarter
  $ 25.31     $ 10.62     $   —     $ 29.52     $ 23.00     $   —  
Second quarter
    23.52       14.01             27.34       20.82        
Third quarter
    26.81       20.04             28.49       18.98        
Fourth quarter
    27.71       22.27             26.95       20.44        
 
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
 
(PERFORMANCE GRAPH)
 
                                                 
    December 31,  
    2004     2005     2006     2007     2008     2009  
 
Pactiv Corp. 
  $ 100     $ 87     $ 141     $ 105     $ 98     $ 95  
S&P 500® Index
  $ 100     $ 105     $ 121     $ 128     $ 81     $ 102  
Custom Composite Index (5 stocks)
  $ 100     $ 108     $ 129     $ 123     $ 95     $ 123  


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ITEM 6.  Selected Financial Data.
 
                                         
For the years ended December 31
                             
(In millions, except per share data)   2009     2008 (1)     2007 (1)     2006 (1)     2005 (1)  
 
Statement of Income
                                       
Sales
                                       
Consumer Products
  $ 1,285     $ 1,342     $ 1,221     $ 1,085     $ 989  
Foodservice/Food Packaging
    2,075       2,225       2,032       1,832       1,767  
                                         
      3,360       3,567       3,253       2,917       2,756  
Income from continuing operations attributable to Pactiv, net of income tax (2)
    308       220       243       278       145  
Discontinued operations, net of tax
    15       (4 )     1       (3 )     (89 )
                                         
Net income attributable to Pactiv
  $ 323     $ 216     $ 244     $ 275     $ 56  
Weighted average number of shares of common stock outstanding
                                       
Diluted
    133.471       132.473       132.870       139.704       148.849  
Earnings (loss) per share attributable to Pactiv common shareholders
                                       
Diluted
                                       
Continuing operations (3)
  $ 2.31     $ 1.66     $ 1.83     $ 1.99     $ 0.97  
Discontinued operations
    0.11       (0.03 )     0.01       (0.02 )     (0.60 )
                                         
    $ 2.42     $ 1.63     $ 1.84     $ 1.97     $ 0.37  
Statement of Financial Position
                                       
Total assets
  $ 3,574     $ 3,761     $ 3,798     $ 2,792     $ 2,854  
Short-term debt, including current maturities of long-term debt
    5                   98       3  
Long-term debt
    1,270       1,345       1,574       771       869  
Pactiv shareholders’ equity
    985       671       1,257       887       854  
Statement of Cash Flows
                                       
Cash provided by operating activities
  $ 161     $ 350     $ 437     $ 372     $ 266  
Cash provided (used) by investing activities
    (129 )     (137 )     (1,164 )     (75 )     283  
Cash provided (used) by financing activities
    (66 )     (226 )     638       (294 )     (595 )
Pension contributions (4)
    550                          
Expenditures for property, plant, and equipment
    111       136       151       78       143  
 
Other Information:
 
The company has never paid a dividend.
 
 
(1) 2008 through 2005 have been adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
(2) Includes restructuring and other charges (credits) of $16 million in 2008, ($1) million in 2006, and $6 million in 2005, as well as a realized foreign currency exchange gain of $31 million in 2006.
 
(3) 2006 includes $0.14 per share for a realized foreign currency exchange gain and $0.21 for income tax liability adjustments.
 
(4) In 2009, pension contributions were $411 million net of income tax.
 
See Note 5 to the financial statements for discontinued operations.


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ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Basis of Presentation
 
Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to the prior years financial information to conform to current year presentation.
 
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
 
We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie’s operations have been included in the consolidated financial statements as of that date.
 
In January 2007, we purchased an additional 1% interest in a folding carton operation in Dongguan, China. This brought our interest to 51%, requiring us to include the joint venture in our consolidated financial statements.
 
On October 12, 2005, we sold substantially all of our protective and flexible packaging businesses. The results of the sold businesses, as well as costs and charges associated with the transaction, are classified as discontinued operations.
 
We have three reporting segments:
 
  •  Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.
 
  •  Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
 
  •  Other includes corporate and administrative service operations and retiree benefit income and expense.
 
The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of income, expenses, assets, and liabilities are used.
 
In 2009, we changed our method of accounting for inventory from a combination of the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method to the FIFO method. In accordance with Accounting Standards Codification (ASC) 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. For more information on the change in inventory accounting method, see the “Inventory Valuation” section and Note 2 to the financial statements. As a result of the accounting change, the discussions included in Item 7 reflect our results adjusted for the accounting change.
 
Subsequent Events
 
In February 2010, the board of directors approved an Agreement and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will acquire PWP Holdings and PWP Industries for $200 million. This transaction is expected to close in the late first quarter or early second quarter of 2010. PWP Industries manufactures and sells amorphous polyethylene terephthalate (APET) products in the food service market.


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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.
 
Executive Overview
 
Business
 
Our primary business involves the manufacture and sale of consumer and specialty packaging products for the consumer and foodservice/food packaging markets. We operate 46 manufacturing facilities in 5 countries.
 
We sell our products to a wide array of customers worldwide. Customers include grocery stores, mass merchandisers, discount chains, restaurants, distributors, and packer processors, who prepare and process food for consumption.
 
Greater than 80% of our sales come from products made from different types of plastic resins, principally polystyrene and polyethylene, and, to a lesser extent, polypropylene and amorphous polyethylene terephthalate.
 
Consumer products include waste bags, food storage bags and disposable tableware and cookware. These products, made from various raw materials including plastic, aluminum, and paper, are sold under such well-known brand names as Hefty®, Hefty® Baggies®, Hefty® OneZip®, Hefty® Cinch Sak®, Hefty® The Gripper®, Hefty® Zoo Pals®, Kordite®, Hefty® Odor Block®, and Hefty® EZ Foil®.
 
Foodservice and food packaging products include foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging for customers in the food distribution channel.
 
Significant Trends, Opportunities, and Challenges
 
Risks
 
Several opportunities and challenges may influence our continued growth.
 
Near-term risks include:
 
  •  The impact of raw material cost volatility
  •  The ability to maintain or increase selling prices
  •  The continued effectiveness of our productivity and procurement initiatives
  •  Economic and financial market conditions
 
Longer-term risks include:
  •  Potential changes in consumer demand or governmental regulations
  •  Possible supplier and customer consolidations
  •  Potential increases in foreign-based competition
  •  Possible growth in market share of unbranded products
 
We expect to continue to be successful by:
 
  •  Adjusting selling prices to offset raw material price movements
  •  Implementing aggressive cost management and productivity programs
  •  Leveraging our existing products into new distribution channels
  •  Introducing innovative new products
  •  Making strategic acquisitions
  •  Growing our business by following, where appropriate, our dual brand/private label strategy


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Raw Materials and Energy-Related Costs
 
The primary raw materials used to manufacture our products are plastic resins, principally polystyrene and polyethylene. Average industry prices for polystyrene and polyethylene as published by Chemical Market Associates, Inc. are depicted in the following graphs.
 
     
Polystyrene (cents/lb.)
  Polyethylene (cents/lb.)
     
(LINE GRAPH)   (LINE 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. At the end of 2009, prices were increasing but still were moderately lower than at the end of 2008. We have historically adjusted our selling prices to reflect changes in raw material costs, although there is usually a lag of several months. Some of our business is pursuant to contracts that have price indices that automatically adjust after a set number of months, usually three or six, to reflect changes in certain raw materials.
 
Our business is sensitive to other energy-related cost movements, particularly those that affect transportation and utility costs. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. As energy costs have declined, we have seen a favorable impact on our margins. However, the extent and duration of energy-related cost reductions is uncertain.
 
Demand
 
The economic downturn that began in late 2007 has impacted consumer spending in many areas and has reduced demand for some of our products. However, our overall volume has not been adversely impacted by the economic downturn.
 
Productivity Improvements
 
In 2006, we began to introduce “lean” principles and tools in many of our operating facilities. We are expanding the use of lean principles to help us accelerate productivity improvements by reducing inventory and scrap levels, providing rapid stock replenishment, shortening scheduling cycles, improving our “one-stop shopping” service, eliminating nonvalue-added activities, and streamlining processes. As this is a long-term process, we expect our ability to use these tools throughout the organization will have a positive effect on our operating results in future years.
 
Pension
 
Worldwide stock markets declined significantly in 2008 and, as a result, our U.S. pension plan was substantially underfunded by approximately $1.1 billion at December 31, 2008. By the end of 2009, our U.S. pension plan underfunding was reduced by approximately one half due to a combination of $550 million of pension contributions, funded completely by cash flow from operations, and a 26% return earned during 2009 on pension plan assets. See the “Liquidity” and “Shareholders’ Equity” sections for further discussion of the impact on the company of its pension plan funding status.


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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.
 
Restructuring
 
In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. In 2008, we recorded a charge of approximately $10 million after tax, or $0.08 per share. Cash payments related to restructuring and other charges were $2 million for the year ended December 31, 2008. Cash payments related to restructuring and other were $1 million pretax for the year ended December 31, 2009. The program is essentially complete with the exception of a small idle plant held for sale.
 
Results of Continuing Operations
 
Year 2009 compared with 2008
 
Sales
 
                                 
                Increase (decrease)  
(In millions)   2009     2008     Amount     Percent  
 
Consumer Products
  $ 1,285     $ 1,342     $ (57 )     (4.2 )%
Foodservice/Food Packaging
    2,075       2,225       (150 )     (6.7 )
                                 
Total
  $ 3,360     $ 3,567     $ (207 )     (5.8 )%
                                 
 
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
 
                                 
                Increase (decrease)  
(In millions)   2009     2008 (1)     Amount     Percent  
 
Consumer Products
  $ 297     $ 207     $ 90       43.5 %
Foodservice/Food Packaging
    300       234       66       28.2  
Other
    (18 )     3       (21 )     (700.0 )
                                 
Total
  $ 579     $ 444     $ 135       30.4 %
                                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
Operating income increased primarily as a result of lower operating costs of $63 million driven by productivity and lower freight and utility rates, an $87 million improvement in spread (the difference between selling prices and raw material costs), higher volume of $42 million and lower restructuring costs of $16 million. This was offset, in part, by higher selling, general, and administrative (SG&A) expense of $68 million. The increase in SG&A expense was primarily a result of higher incentive compensation accruals, increased advertising expense, and lower pension income.


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The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
 
                         
    Operating income - twelve months ended December 31, 2008  
    GAAP
    Restructuring and
    Excluding restructuring
 
(In millions)   basis (1)     other     and other  
 
Consumer Products
  $ 207     $ 5     $ 212  
Foodservice/Food Packaging
    234       10       244  
Other
    3       1       4  
                         
Total
  $ 444     $ 16     $ 460  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
We believe that focusing on operating income excluding the effect of restructuring and other charges is a meaningful alternative way of evaluating our operating results. The restructuring and other charges relate to actions that will have an ongoing effect on our company. Considering such charges as being only applicable to the periods in which they are recognized could make our operating performance in those periods more difficult to evaluate relative to other periods in which there are no such charges. We use operating income excluding restructuring and other charges to evaluate operating performance and, along with other factors, in determining management compensation.
 
The following table shows operating income excluding restructuring and other charges for 2009 and 2008.
 
                                 
                Increase (decrease)  
(In millions)   2009     2008 (1)     Amount     Percent  
 
Consumer Products
  $ 297     $ 212     $ 85       40.1 %
Foodservice/Food Packaging
    300       244       56       23.0  
Other
    (18 )     4       (22 )     (550.0 )
                                 
Total
  $ 579     $ 460     $ 119       25.9 %
                                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The increase in operating income for Consumer Products was driven mainly by favorable spread of $71 million, lower operating costs of $37 million, offset partially by higher SG&A expense of $33 million. The increase in SG&A expense primarily was due to higher advertising expense in support our Hefty® Odor Block® unscented odor control waste bags which launched at the end of 2008.
 
Higher operating income for Foodservice/Food Packaging was driven primarily by increased volume of $33 million and lower operating costs of $27 million, partially offset by higher SG&A expense of $14 million.
 
The decrease in Other operating income was due mainly to lower pension income, higher incentive compensation accruals, and higher legal and insurance costs.
 
Income Taxes
 
Our effective tax rate for 2009 was 36.4%, compared with 35.1% for 2008.
 
Income from Continuing Operations attributable to Pactiv
 
We recorded income from continuing operations of $308 million, or $2.31 per share, compared with $220 million, or $1.66 per share, in 2008. The change was driven primarily by higher operating income of $84 million (including lower restructuring of $10 million after tax) as described previously.


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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:
 
                 
At December 31 (In millions)   2009     2008  
 
Current liabilities
  $   —     $   —  
Noncurrent liabilities
    11       30  
                 
Total liabilities related to discontinued operations
  $ 11     $ 30  
                 
 
Liquidity and Capital Resources
 
Capitalization
 
                         
                Increase
 
At December 31 (In millions)   2009     2008 (1)     (decrease)  
 
Short-term debt, including current maturities of long-term debt (2)
  $ 5     $     $ 5  
Long-term debt
    1,270       1,345       (75 )
                         
Total debt
    1,275       1,345       (70 )
Noncontrolling interest
    16       16        
Pactiv shareholders’ equity
    985       671       314  
                         
Total capitalization
  $ 2,276     $ 2,032     $ 244  
                         
Ratio of total debt to total capitalization
    56.0 %     66.2 %        
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
(2) Short-term debt payable in December 2010.
 
Total equity increased $314 million in 2009 as detailed below.
 
                         
    Pactiv
             
    shareholders’
    Noncontrolling
       
(In millions)   equity     interest     Total  
 
Total equity at December 31, 2008 (1)
  $ 671     $ 16     $ 687  
Increase (decrease) in equity
                       
Pension and postretirement benefit liability adjustments
    (40 )             (40 )
Foreign currency translation adjustments
    13             13  
Gain (loss) on derivatives
    (1 )             (1 )
Net income
    323       1       324  
Stock-based compensation and common stock issued in connection with stock option exercises
    19               19  
Dividends paid to noncontrolling interest
          (1 )     (1 )
                         
Total equity at December 31, 2009
  $ 985     $ 16     $ 1,001  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.


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Cash Flows
 
Cash flows for continuing and discontinued operations were as follows:
 
                         
                Increase
 
                (decrease)
 
(In millions)   2009     2008     in cash flow  
 
Cash provided (used) by:
                       
Operating activities
  $ 161     $ 350     $ (189 )
Investing activities
    (129 )     (137 )     8  
Financing activities
    (66 )     (226 )     160  
 
The decrease in cash provided by operating activities was driven primarily by a $550 million pretax contribution to our U.S. pension plan, reduced by related favorable cash tax effects of approximately $139 million. This was offset partially by favorable working capital of $156 million and higher income from continuing operations of $88 million. The change in working capital was due to the favorable effect of lower raw material costs in 2009 compared to 2008 as well as higher incentive compensation liabilities.
 
The decrease in cash used by investing activities was driven by lower capital expenditures of $25 million, partially offset by the acquisition of the WinCup polypropylene cup business for $20 million.
 
The decrease in cash used by financing activities was a result of long-term revolving debt repayments of $160 million in 2008.
 
Capital Commitments
 
Commitments for authorized capital expenditures totaled approximately $61 million at December 31, 2009. It is anticipated that the majority of these expenditures will be funded over the next 12 months from existing cash and short-term investments and internally generated cash.
 
Contractual Obligations
 
We enter into arrangements that obligate us to make future payments under long-term contracts. Our long-term contractual obligations at December 31, 2009, were as follows:
 
                                         
          Due in  
          Less than 1
                More than
 
(In millions)   Total     year     1-3 years     3-5 years     5 years  
 
Long-term debt obligations (1)
  $ 2,275     $ 99     $ 431     $ 158     $ 1,587  
Operating lease obligations
    137       30       43       24       40  
Purchase obligations (2)
    408       275       133              
Other long-term liabilities (3)
    158       20       30       44       64  
                                         
Total
  $ 2,978     $ 424     $ 637     $ 226     $ 1,691  
                                         
 
 
(1) Includes fixed rate notes, plus related interest payment obligations, based on rates in effect at December 31, 2009.
 
(2) Includes open capital commitments, amounts related to the purchase of minimum quantities of raw materials at current market prices under supply agreements and other long-term vendor agreements with specific payment provisions and early termination penalties.
 
(3) Includes undiscounted workers’ compensation obligations, and undiscounted and unfunded postretirement medical and supplemental pension funding requirements.
 
Liquidity and Off-Balance Sheet Financing
 
We use various sources of funding to manage liquidity. Sources of liquidity include cash flow from operations and a 5-year revolving credit facility of $750 million, under which no balance was outstanding at December 31,


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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.
 
         
    Twelve months ended
 
(In millions)   December 31, 2009  
 
Net income attributable to Pactiv (1)
  $ 323  
Adjustments:
       
Noncash restructuring and other (2)
    (1 )
Discontinued operations, net of tax (l)
    (15 )
Interest expense, net of interest capitalized (1)
    94  
Income tax expense (1)
    177  
Depreciation and amortization (1)
    184  
Noncontrolling interest (1)
    1  
         
EBITDA
  $ 763  
         
         
EBITDA
  $ 763  
Interest expense, net of interest capitalized (1)
    94  
         
Interest coverage ratio
    8.12  
         
         
Total debt (3)
  $ 1,275  
EBITDA
    763  
         
Total debt to EBITDA ratio
    1.67  
         
 
 
(1) Amounts per the consolidated statement of income.
 
(2) Amounts per the consolidated statement of cash flows.
 
(3) Amounts per the consolidated statement of financial position.
 
There have been no stated events of default, which would permit the lenders to accelerate the debt if not cured within applicable grace periods, or any cross default provisions in our debt agreements.
 
We also use an asset securitization facility as a form of off-balance-sheet financing. At December 31, 2009, $110 million was securitized under this facility, and $130 million was securitized at December 31, 2008. We do not participate in financial commercial paper markets.
 
We have a U.S. qualified pension plan that covers approximately 7,000 of our employees, as well as approximately 65,000 others, mostly retirees and persons who worked for predecessor companies that were part of Tenneco. The requirement to make contributions to this plan is a function of several factors, the most important of which are the return on plan assets and applicable funding discount rate used in calculating plan liabilities. We were not required to make a contribution to this plan in 2009, however, we elected to make contributions in 2009 of $550 million pretax. The related cash tax benefits of the contributions are $193 million, of which $139 million was realized in 2009 and $54 million will carry over into 2010.
 
In 2009, the plan assets earned approximately 26% and as of December 31, 2009, the Employee Retirement Income Security Act (ERISA) funding discount rate was 6.6% based on the 24-month average as of September 2009.
 
As of December 31, 2009, our U.S. pension plan was 94% funded on an ERISA basis, which determines the minimum funding requirements for the plan. As long as our funded ratio is above 60%, there is no meaningful


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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
 
                                 
                Increase (decrease)  
(In millions)   2008     2007     Amount     Percent  
 
Consumer Products
  $ 1,342     $ 1,221     $ 121       9.9 %
Foodservice/Food Packaging
    2,225       2,032       193       9.5  
                                 
Total
  $ 3,567     $ 3,253     $ 314         9.7 %
                                 
 
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
 
                                 
                Increase (decrease)  
(In millions)   2008 (1)     2007 (1)     Amount     Percent  
 
Consumer Products
  $ 207     $ 226     $ (19 )     (8.4 )%
Foodservice/Food Packaging
    234       245       (11 )     (4.5 )
Other
    3       (2 )     5       250.0  
                                 
Total
  $ 444     $ 469     $ (25 )       (5.3 )%
                                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
Operating income declined as favorable volume of $36 million and lower advertising and promotional (A&P) costs of $5 million were more than offset by higher operating costs of $29 million, restructuring charges of $16 million, acquisition-related depreciation and amortization of $16 million, and unfavorable spread of $6 million. The higher operating costs were driven primarily by the impact of higher utility and freight costs.
 
The following table shows the impact of restructuring and other charges on 2008 operating income by segment.
 
                         
    Operating income - twelve months ended December 31, 2008  
    GAAP
    Restructuring and
    Excluding restructuring
 
(In millions)   basis (1)     other     and other  
 
Consumer Products
  $ 207     $ 5     $ 212  
Foodservice/Food Packaging
    234       10       244  
Other
    3       1       4  
                         
Total
  $ 444     $ 16     $ 460  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.


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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.
 
                                 
                Increase (decrease)  
(In millions)   2008 (1)     2007 (1)     Amount     Percent  
 
Consumer Products
  $ 212     $ 226     $ (14 )     (6.2 )%
Foodservice/Food Packaging
    244       245       (1 )     (0.4 )
Other
    4       (2 )     6       300.0  
                                 
Total
  $ 460     $ 469     $ (9 )       (1.9 )%
                                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The decline in operating income for the Consumer Products business was driven principally by unfavorable spread of $27 million and higher operating costs of $6 million, offset partially by higher volume of $13 million and lower A&P costs of $5 million.
 
Operating income for the Foodservice/Food Packaging business was essentially flat, reflecting higher volume of $23 million and favorable spread of $21 million, offset by higher operating costs of $23 million, acquisition-related depreciation and amortization of $15 million, higher SG&A expense of $3 million, and unfavorable foreign currency exchange of $2 million. The increase in operating costs was driven primarily by higher utility and freight costs.
 
The increase in operating income for the Other segment primarily reflects lower legal-related expenses.
 
Income Taxes
 
Our effective tax rate for 2008 was 35.1%, compared with 35.5% for 2007.
 
Income from Continuing Operations attributable to Pactiv
 
We recorded income from continuing operations of $220 million, or $1.66 per share, compared with $243 million, or $1.83 per share, in 2007. The decline was driven primarily by lower operating income of $16 million (including a restructuring charge of $10 million after tax) as described previously, and higher interest costs of $6 million after tax related to the financing of the Prairie acquisition.
 
Discontinued Operations
 
Income (Loss) from Discontinued Operations
 
In 2008, we recorded expense from discontinued operations of $4 million, which was attributed to taxes associated with business dispositions which occurred in prior years. In 2007, we recorded income from discontinued operations of $1 million, which was related to final working capital adjustments and taxes associated with business dispositions.
 
In 2007, $27 million of deferred taxes was reclassified as liabilities related to discontinued operations as a result of the adoption of certain provisions of Financial Accounting Standards Board (FASB) ASC 740-10, “Income Taxes.”


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Changes in Accounting Principles
 
The FASB has issued a number of accounting pronouncements effective in 2009 or 2008, as disclosed in Note 2 to the financial statements. None of these changes in accounting principles had a material effect upon adoption in 2008 or 2009.
 
The FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets,” which is effective for interim and annual periods beginning after November 15, 2009. SFAS No. 166, which is not yet included in the Codification, requires additional information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures. We are currently reviewing SFAS No. 166, and evaluating the impact of its adoption on our financial statements.
 
Critical Accounting Policies
 
Following are our accounting policies that involve the exercise of considerable judgment and the use of estimates. These have the most significant impact on our financial condition and results of operations.
 
Revenue Recognition
 
We recognize sales when the risks and rewards of ownership have transferred to customers, which generally occurs as products are shipped. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs. These include volume rebates, early payment discounts, and coupon offerings. Estimates are based on historical trends and are reviewed quarterly for possible revision. In addition, we pay slotting fees and participate in cooperative advertising programs. The costs for all such programs are accounted for as reductions to revenues. In the event that future sales deduction trends vary significantly from past or expected trends, reported sales may increase or decrease by a material amount.
 
Inventory Valuation
 
Our inventories are stated at the lower of cost or market using the FIFO method. We periodically review inventory balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors, including new product introductions, changes in consumer demand patterns, and historical usage trends.
 
In 2009, we changed our method of accounting for inventory from a combination of the LIFO method and the FIFO method to the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. We believe the new method of accounting for inventory is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position, provides better matching of revenue and expenses under our business model, and provides uniformity across our operations with respect to the method of inventory accounting for financial reporting.
 
In accordance with ASC 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. The cumulative effect of the change in accounting principle on periods prior to those presented has been reflected as an adjustment to the opening balance of retained earnings as of January 1, 2005. For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the years ended December 31, 2008, and 2007, see Note 2 to the financial statements. For a summary of the effect on the unaudited interim quarters of 2009, see Note 16 to the financial statements.
 
Pension Plans
 
The FASB issued ASC 715-20, “Compensation — Retirement Benefits” of which we adopted the recognition and disclosure provisions on December 31, 2006. See “Changes in Accounting Principles” in Note 2 to the financial statements for additional information. Total pretax pension plan income was $36 million in 2009,


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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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CAUTIONARY STATEMENT FOR PURPOSES OF “SAFE HARBOR” PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
Certain statements included in this Annual Report on Form 10-K, including statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and in the notes to the financial statements, are “forward-looking statements.” All statements other than statements of historical fact, including statements regarding prospects and future results, are forward-looking. These forward-looking statements generally can be identified by the use of terms and phrases such as “will,” “believe,” “anticipate,” “may,” “might,” “could,” “expect,” “estimated,” “projects,” “intends,” “foreseeable future,” and similar terms and phrases. These forward-looking statements are not based on historical facts, but rather on our current expectations or projections about future events. Accordingly, these forward-looking statements are subject to known and unknown risks and uncertainties. While we believe that the assumptions underlying these forward-looking statements are reasonable and make the statements in good faith, actual results almost always vary from expected results, and differences could be material.
 
In the “Risk Factors” section (Item 1A), we have attempted to list some of the factors that we believe could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. These factors include the following:
 
  •  Changes in consumer demand and selling prices for our products, including new products that our competitors or we may introduce that could impact sales and margins.
 
  •  Material substitutions and changes in costs of raw materials, including plastic resins, labor, utilities, or transportation that could impact our expenses and margins.
 
  •  Changes in laws or governmental actions, including changes in regulations such as those relating to air emissions or plastics generally.
 
  •  The availability or cost of capital could impact growth or acquisition opportunities.
 
  •  Workforce factors such as strikes or other labor interruptions.
 
  •  The general economic, political, and competitive conditions in countries in which we operate, including currency fluctuations and other risks associated with operating outside of the U.S.
 
  •  Changes in (1) assumptions regarding the long-term rate of return on pension assets and other factors, (2) the discount rate, and (3) the level of amortization of actuarial gains and losses.
 
  •  Changes in U.S. and/or foreign governmental regulations relating to pension plan funding.
 
  •  Changes enacted by the Securities and Exchange Commission, the Financial Accounting Standards Board, or other regulatory or accounting bodies. See “Changes in Accounting Principles.”
 
  •  Competition from producers located in countries that have lower labor and other costs.
 
  •  Our ability to integrate new businesses that we have acquired and may acquire or to dispose of businesses or business segments that we may wish to divest.


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ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
Derivative Financial Instruments
 
We are exposed to market risks related to changes in foreign currency exchange rates, interest rates, and commodity prices. To manage these risks we may enter into various hedging contracts in accordance with established policies and procedures. We do not use hedging instruments for trading purposes and are not a party to any transactions involving leveraged derivatives.
 
Commodity Derivatives
 
During the fourth quarter of 2009, we entered into natural gas purchase agreements with third parties, hedging a portion of the first half of 2010 purchases of natural gas used in the production processes at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2009, were immaterial.
 
Cash Flow Hedges
 
To minimize volatility in our margins due to large fluctuations in the price of commodities, in the second quarter of 2009 we entered into swap contracts to manage risks associated with market fluctuations in resin prices. These contracts were designated as cash flow hedges of forecasted commodity purchases. All monthly swap contracts entered into in the third quarter of 2009 have expired. There were no contracts outstanding as of December 31, 2009, and no gains are expected to be reclassified to earnings in the first quarter of 2010.
 
Interest Rates
 
At December 31, 2009, we had public debt securities of $1.276 billion outstanding, with fixed interest rates and maturities ranging from 2 to 18 years. Should we decide to redeem these securities prior to their stated maturity, we would incur costs based on the fair value of the securities at that time.
 
In addition, we have a 5-year revolving credit facility of $750 million, which expires in 2011, under which no balance was outstanding at December 31, 2009.
 
As a part of the acquisition of Prairie Packaging Inc. (Prairie), we assumed Prairie’s liability for $5 million borrowed from the Illinois Development Finance Authority (IDFA), which were funded by industrial development revenue bonds issued by the IDFA. The debt matures on December 1, 2010, and bears interest at varying rates (0.4% as of December 31, 2009) not to exceed 12% per annum.
 
The following table provides information about Pactiv’s financial instruments that are sensitive to interest rate risks.
 
                                 
    Maturities        
(In millions, except percentages)   2010     2012     Thereafter     Total  
 
Fixed rate debt
          $ 250     $ 1,026     $ 1,276  
Average interest rate
            5.7 %     7.7 %     7.3 %
Fair value
          $ 267     $ 1,195     $ 1,462  
Floating rate debt
  $ 5                     $ 5  
Average interest rate
    0.4 %                     0.4 %
Fair value
  $ 5                     $ 5  
 
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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ITEM 8.   Financial Statements and Supplementary Data.
 
Index of the Financial Statements of Pactiv Corporation
and Consolidated Subsidiaries
 
         
    Page
 
    26  
    27  
    29  
    30  
    31  
    32  
    33  
    34  


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Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
We assessed the effectiveness of our internal controls over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, we concluded that Pactiv’s internal control over financial reporting at December 31, 2009, was effective.
 
Our internal control over financial reporting as of December 31, 2009, was audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the company’s consolidated financial statements. Ernst & Young’s attestation report on the company’s internal control over financial reporting appears on page 28.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of Pactiv Corporation
 
We have audited the accompanying consolidated statement of financial position of Pactiv Corporation (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pactiv Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed its method of accounting for inventory and in 2008 the Company adopted the requirement to measure the funded status of its defined benefit pension and postretirement healthcare plans as of the date of the year-end statement of financial position.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pactiv Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.
 
/s/  ERNST & YOUNG LLP
 
Chicago, Illinois
February 26, 2010


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of Pactiv Corporation
 
We have audited Pactiv Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Pactiv Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Pactiv Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Pactiv Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2009, and our report dated February 26, 2010 expressed an unqualified opinion thereon.
 
/s/  ERNST & YOUNG LLP
 
Chicago, Illinois
February 26, 2010


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Consolidated Statement of Income
 
                         
For years ended December 31
                 
(In millions, except share and per share data)   2009     2008 (1)     2007 (1)  
 
Sales
                       
Consumer Products
  $ 1,285     $ 1,342     $ 1,221  
Foodservice/Food Packaging
    2,075       2,225       2,032  
                         
      3,360       3,567       3,253  
                         
Costs and expenses
                       
Cost of sales, excluding depreciation and amortization
    2,241       2,638       2,325  
Selling, general, and administrative
    349       281       286  
Depreciation and amortization
    184       182       166  
Other
    7       6       7  
Restructuring and other
          16        
                         
      2,781       3,123       2,784  
Operating income
    579       444       469  
Other income (expense)
                       
Interest income
    1       2       5  
Interest expense, net of interest capitalized
    (94 )     (106 )     (96 )
                         
Income before income taxes
    486       340       378  
Income tax expense
    177       119       133  
                         
Income from continuing operations
    309       221       245  
Discontinued operations, net of tax
    15       (4 )     1  
                         
Net income
    324       217       246  
                         
Less: Net income attributable to the noncontrolling interest
    1       1       2  
                         
Net income attributable to Pactiv
  $ 323     $ 216     $ 244  
                         
Amounts attributable to Pactiv common shareholders
                       
Income from continuing operations, net of tax
  $ 308     $ 220     $ 243  
Discontinued operations, net of tax
    15       (4 )     1  
                         
Net income
  $ 323     $ 216     $ 244  
                         
Earnings per share
                       
Weighted-average number of shares of common stock outstanding
                       
Basic
    131,967,907       130,925,861       130,912,229  
Diluted
    133,471,047       132,473,458       132,869,555  
Basic earnings per share of common stock attributable to Pactiv common shareholders
                       
Continuing operations
  $ 2.33     $ 1.68     $ 1.85  
Discontinued operations
    0.12       (0.03 )     0.01  
                         
Total
  $ 2.45     $ 1.65     $ 1.86  
                         
Diluted earnings per share of common stock attributable to Pactiv common shareholders
                       
Continuing operations
  $ 2.31     $ 1.66     $ 1.83  
Discontinued operations
    0.11       (0.03 )     0.01  
                         
Total
  $ 2.42     $ 1.63     $ 1.84  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The accompanying notes to the financial statements are an integral part of this statement.


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Consolidated Statement of Financial Position
 
                 
At December 31 (In millions, except share data)   2009     2008 (1)  
 
Assets
               
Current assets
               
Cash and temporary cash investments
  $ 46     $ 80  
Accounts and notes receivable
               
Trade, less allowances of $6 and $7 at the respective dates
    277       264  
Other
    51       47  
                 
Total accounts and notes receivable
    328       311  
                 
Inventories
               
Finished goods
    240       209  
Work in process
    39       55  
Raw materials
    63       78  
Other materials and supplies
    48       49  
                 
Total inventories
    390       391  
                 
Deferred income tax assets
    53        
                 
Other
    15       15  
                 
Total current assets
    832       797  
                 
Property, plant, and equipment, net
    1,172       1,209  
                 
Other assets
               
Goodwill
    1,135       1,128  
Intangible assets, net
    372       396  
Noncurrent deferred income tax asset
          161  
Other
    63       70  
                 
Total other assets
    1,570       1,755  
                 
Total assets
  $ 3,574     $ 3,761  
                 
Liabilities and equity
               
Current liabilities
               
Short-term debt, including current maturities of long-term debt
  $ 5     $  
Accounts payable
    144       115  
Taxes accrued
    24       14  
Interest accrued
    20       20  
Accrued promotions, rebates, and discounts
    73       68  
Accrued payroll and benefits
    97       66  
Other
    54       55  
                 
Total current liabilities
    417       338  
                 
Long-term debt
    1,270       1,345  
                 
Deferred income taxes
    61        
                 
Pension and postretirement benefits
    694       1,266  
                 
Other
    120       95  
                 
Noncurrent liabilities related to discontinued operations
    11       30  
                 
Pactiv shareholders’ equity
               
Common stock — $0.01 par value, 350,000,000 shares authorized, 132,334,417 and 131,510,270 shares issued and outstanding, after deducting 39,448,760 and 40,272,907 shares held in treasury, at the respective dates
    1       1  
Premium on common stock and other capital surplus
    729       710  
Accumulated other comprehensive income (loss)
               
Currency translation adjustment
    (3 )     (16 )
Pension and postretirement plans
    (1,729 )     (1,689 )
Gain (loss) on derivatives
    6       7  
Retained earnings
    1,981       1,658  
                 
Total Pactiv shareholders’ equity
    985       671  
Noncontrolling interest
    16       16  
                 
Total equity
    1,001       687  
                 
Total liabilities and equity
  $ 3,574     $ 3,761  
                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The accompanying notes to the financial statements are an integral part of this statement.


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Consolidated Statement of Cash Flows
 
                         
For the twelve months ended December 31 (In millions)   2009     2008 (1)     2007 (1)  
 
Operating activities
                       
Net income
  $ 324     $ 217     $ 246  
Discontinued operations
    (15 )     4       (1 )
                         
Income from continuing operations
    309       221       245  
Adjustments to reconcile income from continuing operations to cash provided (used) by operating activities:
                       
Depreciation and amortization
    184       182       166  
Deferred income taxes
    208       112       37  
Restructuring and other
    (1 )     12        
Pension income
    (36 )     (49 )     (50 )
Noncash compensation expense
    16       16       9  
Pension contributions
    (550 )            
Changes in components of working capital
                       
(Increase) decrease in receivables
    (16 )     (14 )     103  
(Increase) decrease in inventories
    7       22       4  
(Increase) decrease in prepayments and other current assets
    1       (2 )      
Increase (decrease) in accounts payable
    28       (45 )     (26 )
Increase (decrease) in taxes accrued
    (30 )     (66 )     (16 )
Increase (decrease) in interest accrued
          (2 )     15  
Increase (decrease) in other current liabilities
    36       (23 )     (37 )
Other
    8       (6 )     (5 )
                         
Cash provided (used) by operating activities — continuing operations
    164       358       445  
Cash provided (used) by operating activities — discontinued operations
    (3 )     (8 )     (8 )
                         
Cash provided (used) by operating activities
  $ 161     $ 350     $ 437  
                         
Investing activities
                       
Expenditures for property, plant, and equipment
  $ (111 )   $ (136 )   $ (151 )
Acquisitions of businesses and assets
    (20 )           (1,015 )
Net proceeds from the sale of a business or assets
                2  
Other investing activities
    2       (1 )      
                         
Cash provided (used) by investing activities
  $ (129 )   $ (137 )   $ (1,164 )
                         
Financing activities
                       
Issuance of common stock
  $ 6     $ 8     $ 19  
Purchase of common stock
          (2 )     (108 )
Issuance of long-term debt, net of discounts
                498  
Retirement of long-term debt
                (99 )
Revolving credit facility borrowings
                432  
Revolving credit facility payment
    (70 )     (230 )     (132 )
Dividends paid to noncontrolling interest
    (1 )     (1 )     (1 )
Other
    (1 )     (1 )     29  
                         
Cash provided (used) by financing activities
  $ (66 )   $ (226 )   $ 638  
                         
Effect of foreign exchange rate changes on cash and temporary cash investments
          (2 )     3  
                         
Increase (decrease) in cash and temporary cash investments
    (34 )     (15 )     (86 )
Cash and temporary cash investments, January 1
    80       95       181  
                         
Cash and temporary cash investments, December 31
  $ 46     $ 80     $ 95  
                         
Supplemental disclosure of cash flow information
                       
Cash paid for interest
  $ 93     $ 109     $ 81  
Cash paid for income taxes — continuing operations
    4       59       94  
Cash paid for income taxes — discontinued operations
    4       7       8  
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The accompanying notes to the financial statements are an integral part of this statement.


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Consolidated Statement of Changes in Equity
 
                                                 
    Pactiv Shareholders              
          Premium on
          Accumulated
             
          common stock
          other
             
    Common
    and other
    Retained
    comprehensive
    Noncontrolling
    Total
 
(In millions, except share amounts)   stock     capital surplus     earnings     income (loss)     interest     equity  
 
Balance, December 31, 2006 (1)
  $   1     $ 757     $ 1,191     $ (1,063 )   $   10     $ 896  
Premium on common stock issued (1,138,286 shares)
            19                               19  
Treasury stock repurchased (3,374,821 shares)
            (108 )                             (108 )
Translation of foreign currency statements
                            15       1       16  
Stock-based compensation
            15                               15  
Gain (loss) on derivatives
                            8               8  
Pension and postretirement benefit liability adjustments, net of tax of $116
                            178               178  
Dividends paid to noncontrolling interest
                                    (1 )     (1 )
Purchase of equity from noncontrolling interest
                                    3       3  
Net income
                    244               2       246  
                                                 
Balance, December 31, 2007 (1)
  $ 1     $ 683     $ 1,435     $ (862 )   $ 15     $ 1,272  
                                                 
Premium on common stock issued (1,028,245 shares)
            25                               25  
Treasury stock repurchased (75,218 shares)
            (2 )                             (2 )
Translation of foreign currency statements
                            (40 )     1       (39 )
Stock-based compensation
            4                               4  
Gain (loss) on derivatives
                            (1 )             (1 )
Impact of adopting ASC 715-20-65 measurement date change, net of tax of $4
                    7                       7  
Pension and postretirement benefit liability adjustments, net of tax of $(468)
                            (795 )             (795 )
Dividends paid to noncontrolling interest
                                    (1 )     (1 )
Net income
                    216               1       217  
                                                 
Balance, December 31, 2008 (1)
  $ 1     $ 710     $ 1,658     $ (1,698 )   $ 16     $ 687  
                                                 
Premium on common stock issued (806,759 shares)
            19                               19  
Translation of foreign currency statements
                            13               13  
Stock-based compensation
                                           
Gain (loss) on derivatives
                            (1 )             (1 )
Pension and postretirement benefit liability adjustments, net of tax of $16
                            (40 )             (40 )
Dividends paid to noncontrolling interest
                                    (1 )     (1 )
Net income
                    323               1       324  
                                                 
Balance, December 31, 2009
  $ 1     $ 729     $ 1,981     $ (1,726 )   $ 16     $ 1,001  
                                                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The accompanying notes to the financial statements are an integral part of this statement.


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Consolidated Statement of Comprehensive Income (Loss)
 
                         
    Twelve Months Ended December 31,  
(In millions)   2009     2008 (1)     2007 (1)  
 
Net income
  $ 324     $ 217     $ 246  
Other comprehensive income (loss)
                       
Pension and postretirement plans
    (40 )     (795 )     178  
Net currency translation gain (loss)
    13       (39 )     16  
Gain (loss) on derivatives
    (1 )     (1 )     8  
                         
Total other comprehensive income (loss)
    (28 )     (835 )     202  
                         
Consolidated comprehensive income (loss)
    296       (618 )     448  
Comprehensive income (loss) attributable to the noncontrolling interest
    1       2       3  
                         
Comprehensive income (loss) attributable to Pactiv
  $ 295     $ (620 )   $ 445  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The accompanying notes to the financial statements are an integral part of this statement.


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Notes to Financial Statements
 
Note 1.  Basis of Presentation
 
Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied, except for changes in accounting principles disclosed in Note 2. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior years financial information to conform to current year presentation.
 
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
 
We have three reporting segments:
 
  •  Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks such as Hefty®.
 
  •  Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains.
 
  •  Other includes corporate and administrative service operations and retiree benefit income and expense.
 
The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of expenses and assets/liabilities are used.
 
In 2009, we changed our method of accounting for inventory from a combination of the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method to the FIFO method. In accordance with Accounting Standards Codification (ASC) 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting. For more information on the change in inventory accounting method, see Note 2 to the financial statements.
 
Subsequent Events
 
In February 2010, the board of directors approved an Agreement and Plan of Merger with PWP Holdings, Inc. whereby Pactiv will acquire PWP Holdings and PWP Industries for $200 million. This transaction is expected to close in the late first quarter or early second quarter of 2010. PWP Industries manufactures and sells amorphous polyethylene terephthalate (APET) products in the food service market.
 
In February 2010, the board of directors also approved the repurchase of an additional 10 million shares of our common stock. This amount is in addition to the remaining 522,361 shares authorized to be repurchased as of December 31, 2009.
 
We have evaluated subsequent events through the filing date of this Form 10-K, and have determined that there were no other subsequent events to recognize or disclose in these financial statements.
 
Note 2.  Summary of Accounting Policies
 
Consolidation
 
Our financial statements include all majority-owned subsidiaries. Investments in 20% to 50% owned companies in which we have the ability to exert significant influence over operating and financial policies are accounted for using the equity method of accounting. All inter-company transactions are eliminated.


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Notes to Financial Statements — (Continued)
 
Foreign Currency Translation
 
Financial statements of international operations are translated into U.S. dollars using end-of-period exchange rates for assets and liabilities and weighted-average exchange rates for sales, expenses, gains, and losses. Translation adjustments are recorded as a component of shareholders’ equity.
 
Cash and Temporary Cash Investments
 
We define cash and temporary cash investments as checking accounts, money market accounts, certificates of deposit, and U.S. Treasury notes having an original maturity of 90 days or less.
 
Accounts and Notes Receivable
 
Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts. We record such allowances based on a number of factors, including historical trends and specific customer situations.
 
On a recurring basis, we sell an undivided interest in a pool of trade receivables meeting certain criteria to a third party as an alternative to debt financing. Such sales, which represent a form of off-balance-sheet financing, are recorded as a reduction of accounts and notes receivable in the statement of financial position. Related proceeds are included in cash provided by operating activities in the statement of cash flows. At December 31, 2009, receivables aggregating $110 million were sold, while receivables totaling $130 million were sold at December 31, 2008. Discounts and fees related to such sales were $1 million in 2009, and $4 million in both 2008 and 2007. These expenses are included in “other expense” in the statement of income. In the event that either Pactiv or the third-party purchaser of the trade receivables were to discontinue this program, our debt would increase, or our cash balance would decrease, by an amount corresponding to the level of sold receivables at such time.
 
Inventories
 
Our inventories are stated at the lower of cost or market using the FIFO method. We periodically review inventory balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors, including new product introductions, changes in consumer demand patterns, and historical usage trends.
 
In 2009, we changed our method of accounting for inventory from a combination of the LIFO method and the FIFO method to the FIFO method. All of our businesses now use the FIFO method of accounting for inventory. We believe the new method of accounting for inventory is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position, provides better matching of revenue and expenses under our business model, and provides uniformity across our operations with respect to the method of inventory accounting for financial reporting.
 
In accordance with ASC 250-10 “Accounting Changes and Error Corrections,” all prior periods presented have been retrospectively adjusted to apply the new method of accounting.


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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.
 
                                 
    Year Ended
  Year Ended
    December 31, 2008   December 31, 2007
    As Originally
      As Originally
   
(In millions, except per share data)   Reported   As Adjusted   Reported   As Adjusted
 
Cost of Sales, excluding depreciation and amortization
  $ 2,636     $ 2,638     $ 2,322     $ 2,325  
Operating income
    446       444       472       469  
Income tax expense
    120       119       135       133  
Income from continuing operations
    222       221       246       245  
Net income attributable to Pactiv
    217       216       245       244  
Earnings (loss) per share of common stock:
                               
Basic
  $ 1.66     $ 1.65     $ 1.87     $ 1.86  
Diluted
  $ 1.64     $ 1.63     $ 1.85     $ 1.84  
 
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.
 
                 
    December 31, 2008
    As Originally
   
(In millions)   Reported   As Adjusted
 
Inventories
  $ 344     $ 391  
Deferred income tax assets
    14        
Goodwill
    1,124       1,128  
Other current liabilities
    50       55  
Retained earnings
    1,626       1,658  
 
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.
 
                                 
    Year Ended
  Year Ended
    December 31, 2008   December 31, 2007
    As Originally
      As Originally
   
(In millions)   Reported   As Adjusted   Reported   As Adjusted
 
Net income
  $ 218     $ 217     $ 247     $ 246  
Deferred income taxes
    113       112       38       37  
(Increase) decrease in inventories
    20       22       1       4  


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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.
 
                                 
    Year Ended
    Year Ended
 
    December 31, 2008     December 31, 2007  
    As Originally
          As Originally
       
(In millions)   Reported     As Adjusted     Reported     As Adjusted  
 
Operating income (loss)
                               
Consumer Products
  $ 207     $ 207     $ 227     $ 226  
Foodservice/Food Packaging
    236       234       247       245  
Other
    3       3       (2 )     (2 )
                                 
Total operating income (loss)
  $ 446     $ 444     $ 472     $ 469  
                                 
Total assets
                               
Consumer Products
  $ 1,307     $ 1,326     $ 1,345     $ 1,365  
Foodservice/Food Packaging
    2,070       2,102       2,125       2,159  
Other
    348       333       295       274  
                                 
Total assets
  $ 3,725     $ 3,761     $ 3,765     $ 3,798  
                                 
 
For a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the interim quarters of 2009, see Note 16 to the financial statements.
 
Property, Plant, and Equipment, Net
 
Depreciation is recorded on a straight-line basis over the estimated useful lives of assets. Useful lives range from 10 to 40 years for buildings and improvements and from 3 to 25 years for machinery and equipment. Depreciation expense totaled $158 million in 2009, $155 million in 2008, and $143 million in 2007.
 
We capitalize certain costs related to the purchase and development of software used in our business. Such costs are amortized over the estimated useful lives of the assets, ranging from 3 to 12 years. Capitalized software development costs, net of amortization at December 31 were $16 million in 2009, and $20 million in 2008.
 
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets to determine if adjustments are warranted. We use estimates of undiscounted cash flows from long-lived assets to determine whether the book value of such assets is recoverable over the assets’ remaining useful lives.
 
Goodwill and Intangibles, Net
 
We review the carrying value of our goodwill and indefinite-lived intangibles for possible impairment on an annual basis. Our annual review is conducted in the fourth quarter of the year, or earlier if warranted by events or changes in circumstances.
 
Possible impairment of goodwill is determined using a two-step process.
 
  •  The first step requires that the fair value of individual reporting units be compared with their respective carrying values. If the carrying value of a reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment, if any.
 
  •  The second step requires that the fair value of a reporting unit be allocated to all of its assets and liabilities, including indefinite-lived intangibles. Any remaining fair value is the implied goodwill, which is then compared with the carrying value of goodwill.
 
We test goodwill for impairment at the reporting unit level. Our four reporting units are Institutional, Specialty (both part of the Foodservice reporting segment), Consumer, and Other (Corporate functions). Our operating


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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.
 
Environmental Liabilities
 
We are subject to a variety of environmental and pollution control laws and regulations. From time to time, we identify costs or liabilities arising from compliance with environmental laws and regulations. When related liabilities are probable and can be reasonably estimated, we establish appropriate reserves. Estimated liabilities may change as additional information becomes available. We appropriately adjust our reserves as new information on possible clean-up costs, expense and effectiveness of alternative clean-up methods, and other potential liabilities is received. We do not expect that any additional liabilities recorded as a result of the availability of new information will have a material adverse effect on our financial position. However, such costs could have a material effect on our results of operations or cash flows in a particular period.
 
Revenue Recognition
 
We recognize sales when the risks and rewards of ownership have transferred to customers, which generally occurs as products are shipped. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs. These include volume rebates, early payment discounts, and coupon offerings. Estimates are based on historical trends and are reviewed quarterly for possible revision. In addition, we pay slotting fees and participate in cooperative advertising programs. The cost for all such programs are accounted for as reductions to revenues.
 
Freight
 
We record amounts billed to customers for shipping and handling as sales, and record shipping and handling expenses as cost of sales.


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Notes to Financial Statements — (Continued)
 
General and Administrative Expenses
 
Total noncash pension income was as follows:
 
                         
For the years ended December 31 (In millions)   2009     2008     2007  
 
Pension income (recorded as an offset to selling, general, and administrative costs)
  $ 44     $ 54     $ 54  
Pension service costs associated with production operations (recorded in cost of sales)
    (8 )     (5 )     (4 )
                         
Total noncash pension income
  $ 36     $ 49     $ 50  
                         
 
Research and Development
 
Research and development costs, which are expensed as incurred, totaled $33 million in 2009, $32 million in 2008, and $35 million in 2007.
 
Advertising
 
Advertising production costs are expensed as incurred, while advertising media costs are expensed in the period in which the related advertising first takes place. Advertising expenses were $28 million in 2009, $8 million in 2008, and $13 million in 2007.
 
Stock-Based Compensation
 
We account for stock-based compensation under ASC 718-10 “Compensation — Stock Compensation,” which requires that the fair value of all share-based payments to employees, including stock options, be recognized in financial statements. ASC 718-10 superseded prior authoritative guidance which required that the intrinsic-value method be used in determining compensation expense for share-based payments to employees. Employee compensation expense is based on the grant date fair value of awards, and is recognized in the Statement of Income over the period that recipients of awards are required to provide related service (normally the vesting period).
 
Income Taxes
 
We use the asset and liability method of accounting for income taxes. This method requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. If we determine that it is more likely than not that a portion of deferred tax assets will not be realized in a future period, we reduce deferred tax assets by recording a valuation allowance. Estimates used to recognize deferred tax assets are subject to revision in subsequent periods based on new facts or circumstances.
 
We do not accrue for U.S. federal income taxes on unremitted earnings of foreign subsidiaries because we intend to reinvest those earnings in foreign operations. Unremitted earnings of foreign subsidiaries totaled $50 million at December 31, 2009, and $47 million at December 31, 2008. The unrecognized deferred tax liability associated with unremitted earnings totaled approximately $10 million at December 31, 2009, and $7 million at December 31, 2008.
 
Earnings Per Share
 
Basic earnings per share is computed by dividing income attributable to Pactiv common shareholders by the weighted-average number of shares outstanding. Diluted earnings per share is calculated in the same manner; however, adjustments are made to reflect the potential issuance of dilutive shares.


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Notes to Financial Statements — (Continued)
 
Risk Management
 
From time to time, we use derivative financial instruments to hedge our exposure to changes in foreign currency exchange rates, principally using foreign currency purchase and sale contracts with terms of less than 1 year. We do so to mitigate our exposure to exchange rate changes related to third-party trade receivables and accounts payable. Net gains or losses on such contracts are recognized in the statement of income as offsets to foreign currency exchange gains or losses on the underlying transactions. In the statement of cash flows, cash receipts and payments related to hedging contracts are classified in the same way as cash flows from the transactions being hedged. We had no open foreign currency contracts as of December 31, 2009.
 
Interest rate risk management is accomplished through the use of swaps. Interest rate swaps are booked at their fair value at each reporting date, with an equal offset recorded either in earnings or accumulated other comprehensive income depending on the designation (or lack thereof) of each swap as a hedging instrument.
 
From time to time, we employ commodity forward or other derivative contracts to hedge our exposure to adverse changes in the price of certain commodities used in our production processes. We do not use derivative financial instruments for speculative purposes. See Note 7 for additional information.
 
Changes in Accounting Principles
 
The Financial Accounting Standards Board (FASB) issued ASC 105-10, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which was effective for fiscal years, and interim periods within such fiscal years, ending after September 15, 2009. ASC 105-10 establishes an authoritative United States GAAP superseding all pre-existing accounting standards and literature. ASC 105-10 did not have a material effect on our financial statements upon adoption or as of December 31, 2009. We have updated all references to specific authoritative guidance within our annual financial reporting to reflect the new Accounting Standards Codification structure.
 
The FASB issued ASC 820-10, “Fair Value Measurements and Disclosures” which was effective as of January 1, 2008. ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. ASC 820-10, which does not require the use of any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. ASC 820-10 did not have a material effect on our financial statements upon adoption and as of December 31, 2009.
 
The FASB issued ASC 715-20, “Compensation — Retirement Benefits,” of which we adopted the recognition and disclosure provisions on December 31, 2006. We recorded a charge to accumulated other comprehensive income of $41 million upon adoption. We adopted the measurement provisions of ASC 715-20-65 on January 1, 2008, using the transition method based on the data as of our September 30, 2007, measurement date. As a result, we increased “retained earnings” by $7 million after tax in 2008.
 
The FASB issued ASC 825-10, “Financial Instruments” which was effective January 1, 2008. ASC 825-10 permits entities to choose to measure many financial instruments and certain other items at fair value as of specified election dates. ASC 825-10 expands the use of fair value measurement, but does not eliminate disclosure requirements of other accounting standards, including ASC 820-10. ASC 825-10 did not impact our financial statements upon adoption and as of December 31, 2009. We did not choose to measure any financial instruments at fair value as permitted under the statement.
 
The FASB issued ASC 805-10, “Business Combinations,” which replaces prior authoritative guidance on business combinations, and was effective on a prospective basis for all business combinations that occur in fiscal years beginning after December 15, 2008, with the exception of accounting for valuation allowances on deferred taxes and acquired tax contingencies. ASC 805-10 retains the underlying concepts of the prior authoritative guidance in that all business combinations are still required to be accounted for at fair value using the acquisition method of accounting, but it changes the application of the acquisition method in a number of significant ways. In this regard, the pronouncement requires that (1) acquisition-related costs


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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.
 
Estimates
 
Financial statement presentation requires management to make estimates and assumptions that affect reported amounts for assets, liabilities, sales, and expenses. Actual results may differ from such estimates.
 
Note 3.  Restructuring and Other
 
In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. The program is essentially complete with the exception of a small idle plant held for sale. The accrued restructuring balance of $1 million as of December 31, 2009, and $2 million as of December 31, 2008, is for remaining severance payments. Cash payments related to restructuring and other were $1 million pretax for the year ended December 31, 2009. In 2008, we recorded a charge of approximately $10 million after tax, or $0.08 per share. Cash payments related to restructuring and other charges were $2 million for the year ended December 31, 2008.
 
                                 
          Asset
             
(In millions)   Severance     write-offs     Other (1)     Total  
 
Restructuring costs for the year ended December 31, 2008
                               
Consumer Products
  $  2     $ 7     $ (4 )   $ 5  
Foodservice/Food Packaging
    6       2       2       10  
Other
    1                   1  
                                 
Total
  $ 9     $ 9     $ (2 )   $ 16  
                                 
 
 
(1) Consists principally of a gain on the sale of one of our facilities and asset removal and transfer costs.
 
Note 4.  Business Combinations
 
On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operates one manufacturing facility in North Carolina. The results of this business have been included in the consolidated financial statements as of that date.
 
The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on their respective fair values. Goodwill and other intangible assets recorded in connection with the acquisition totaled $1 million and $3 million, respectively, and all of the goodwill is expected to be deductible for tax purposes. Recorded intangible assets pertain to customer relationships and are being amortized over a 15-year period.
 
Appraisals of the fair-market value and physical counts of the assets acquired during the third quarter of 2009 resulted in goodwill being decreased by $1 million, and property, plant, and equipment being increased by the same amount.


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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.
 
         
(In millions)      
 
Current assets
  $ 4  
Property, plant, and equipment
    13  
Intangible assets
    3  
Goodwill
    1  
         
Total assets acquired
    21  
         
Current liabilities
    1  
         
Total liabilities assumed
    1  
         
Net assets acquired
  $ 20  
         
 
We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie’s operations have been included in the consolidated financial statements as of that date.
 
Note 5.  Discontinued Operations
 
On October 12, 2005, we sold substantially all of our protective and flexible packaging businesses. The results of the sold businesses, as well as costs and charges associated with the transaction, are classified as discontinued operations.
 
In 2009, we recorded $15 million of income from discontinued operations primarily related to the expiration of the statute of limitations on the 2005 tax year for tax liabilities which had been recorded in conjunction with divested businesses. In 2008, we recorded expense from discontinued operations of $4 million, which was attributed to taxes associated with the disposition of a business. Liabilities related to discontinued operations, which included obligations related to income taxes, certain royalty payments, and the costs of closing a facility in Europe, were as follows:
 
                 
At December 31 (In millions)   2009     2008  
 
Current liabilities
  $   —     $   —  
Noncurrent liabilities
    11       30  
                 
Total liabilities related to discontinued operations
  $ 11     $ 30  
                 


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Notes to Financial Statements — (Continued)
 
 
Note 6.  Long-Term Debt, Short-Term Debt, and Financing Arrangements
 
Long-Term Debt
 
                 
At December 31 (In millions)   2009     2008  
 
Notes due 2010, effective interest rate of 0.4%
  $     $ 5  
Borrowings under a 5-year, $750 million revolving credit facility
          70  
Notes due 2012, effective interest rate of 5.7%
    250       250  
Notes due 2017, effective interest rate of 8.1%
    300       300  
Notes due 2018, effective interest rate of 6.3%, net of $1 million of unamortized discount
    249       249  
Notes due 2025, effective interest rate of 7.9%, net of $1 million of unamortized discount
    275       275  
Notes due 2027, effective interest rate of 8.4%, net of $4 million of unamortized discount
    196       196  
                 
Total long-term debt
  $ 1,270     $ 1,345  
                 
 
Short-Term Debt
 
                 
At December 31 (In millions)   2009   2008
 
Current maturities of long-term debt
  $   5     $  —  
 
At December 31, 2009, the aggregate maturities of debt outstanding were $5 million due in 2010, $250 million due in 2012, and $1.026 billion thereafter.
 
We were in full compliance with financial and other covenants in our various credit agreements at December 31, 2009.
 
There have been no stated events of default which would permit the lenders to accelerate the debt if not cured within applicable grace periods, or any cross default provisions in our debt agreements. We had no short-term borrowings as of December 31, 2009.
 
In 1999, our former parent, Tenneco realigned certain of its debt in preparation for the spin-off of Pactiv. In conjunction with this realignment, we entered into an interest rate swap to hedge our exposure to interest rate movement. We settled this swap in November 1999 at a loss of $43 million. The loss on the swap is being recognized as additional interest expense over the life of the underlying notes. At December 31, 2009, the unamortized balance was $35 million.
 
Note 7.  Financial Instruments
 
Asset and Liability Instruments
 
At December 31, 2009, and 2008, the fair value of cash and temporary cash investments, short- and long-term receivables, accounts payable, and short-term debt were the same as, or not materially different from, the amount recorded for these assets and liabilities. The fair value of long-term debt was approximately $1.5 billion at December 31, 2009, and approximately $1.4 billion at December 31, 2008. The recorded amount was $1.3 billion at December 31, 2009, and at December 31, 2008. The fair value of long-term debt was based on quoted market prices for our debt instruments.
 
Instruments with Off-Balance Sheet Risk (Including Derivatives)
 
We use derivative instruments, principally swaps, forward contracts, and options, to manage our exposure to movements in foreign currency values, interest rates, and commodity prices.


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Notes to Financial Statements — (Continued)
 
Cash Flow Hedges
 
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the hedge instruments are reclassified from OCI to earnings if the hedge ceases to be highly effective or if the hedged transaction is no longer probable.
 
Foreign Currency
 
From time to time, we use derivative financial instruments to hedge our exposure to changes in foreign currency exchange rates, principally using foreign currency purchase and sale contracts with terms of less than one year. We do so to mitigate our exposure to exchange rate changes related to third-party trade receivables and accounts payable. Net gains or losses on such contracts are recognized in the statement of income as offsets to foreign currency exchange gains or losses on the underlying transactions. In the statement of cash flows, cash receipts and payments related to hedging contracts are classified in the same way as cash flows from the transactions being hedged. We had no open foreign currency contracts as of December 31, 2009.
 
Interest Rates
 
We entered into interest rate swap agreements in connection with the acquisition of Prairie. The agreements were terminated on June 20, 2007, resulting in a gain of $9 million. This gain is being recorded as a reduction of interest expense over the average life of the underlying debt. Amounts recognized in earnings related to our hedging transactions were $1 million for the year ended December 31, 2009, and December 31, 2008.
 
Commodity
 
During the fourth quarter of 2009, we entered into natural gas purchase agreements with third parties, hedging a portion of the first half of 2010 purchases of natural gas used in the production processes at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2009, were immaterial.
 
To minimize volatility in our margins due to large fluctuations in the price of commodities, in the second quarter of 2009 we entered into swap contracts to manage risks associated with market fluctuations in resin prices. These contracts were designated as cash flow hedges of forecasted commodity purchases. All monthly swap contracts entered into in the third quarter of 2009 have expired. There were no contracts outstanding as of December 31, 2009, and no gains are expected to be reclassified to earnings in the first quarter of 2010.
 
Fair Value Measurements
 
Financial assets and liabilities that are recorded at fair value consist of derivative contracts that are used to hedge exposures to interest rate, commodity, and currency risks. ASC 820-10-35 sets out a fair value hierarchy that groups fair value measurement inputs into three classifications: Level 1, Level 2, or Level 3. Level 1 inputs are quoted prices in an active market for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. All of our fair value measurements for derivative contracts use Level 2 inputs.
 
There were no outstanding derivative instruments recorded in the consolidated balance sheet as of December 31, 2009, and as of December 31, 2008.


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Notes to Financial Statements — (Continued)
 
The following table indicates the amounts recognized in OCI for those derivatives designated as cash flow hedges for the years ended December 31, 2009, and 2008.
 
                                     
                (Gain) or Loss
                Reclassified from OCI into
    Gain or (Loss)
      Income
    Recognized in OCI
  Location of Gain or (Loss)
  (Effective
    (Effective Portion)   Reclassified from OCI into
  Portion)
(In millions)   2009   2008   Income (Effective Portion)   2009   2008
 
Commodity Contracts
  $   —     $   —     Cost of Sales   $ (2 )   $   —  
Interest Rate Contracts
  $     $     Interest Expense   $ (1 )   $ (1 )
 
There were no transactions that ceased to qualify as a cash flow hedge in the years ended December 31, 2009, or 2008.
 
Note 8.  Goodwill and Intangible Assets
 
Changes in the carrying value of goodwill during 2009 and 2008 by reporting segment are shown in the following table.
 
                         
    Consumer
    Foodservice/
       
(In millions)   Products     Food Packaging     Total  
 
Balance, December 31, 2007 (1)
  $ 288     $ 839     $ 1,127  
Goodwill adjustment
    3       13       16  
Foreign currency translation adjustment
          (15 )     (15 )
                         
Balance, December 31, 2008 (1)
  $ 291     $ 837     $ 1,128  
Goodwill additions
          1       1  
Goodwill adjustment
          (1 )     (1 )
Foreign currency translation adjustment
          7       7  
                         
Balance, December 31, 2009
  $ 291     $ 844     $ 1,135  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
Goodwill and other intangible assets recorded in connection with the WinCup acquisition totaled $1 million and $3 million, respectively. Recorded intangible assets pertain to customer relationships and are being amortized over a 15-year period.
 
Details of intangible assets are shown in the following table.
 
                                 
    December 31, 2009     December 31, 2008  
          Accumulated
          Accumulated
 
(In millions)   Carrying value     amortization     Carrying value     amortization  
 
Intangible assets subject to amortization
                               
Patents
  $ 87     $ 74     $ 87     $ 69  
Customer relationships
    209       36       206       21  
Other
    145       88       145       81  
                                 
      441       198       438       171  
Intangible assets not subject to amortization (primarily trademarks)
    129             129        
                                 
                                 
    $ 570     $ 198     $ 567     $ 171  
                                 


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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.
 
Note 9.  Property, Plant, and Equipment, Net
 
                 
(In millions)   December 31, 2009     December 31, 2008  
 
Original cost
               
Land, buildings, and improvements
  $ 667     $ 654  
Machinery and equipment
    1,929       1,808  
Other, including construction in progress
    96       125  
                 
    $ 2,692     $ 2,587  
Less accumulated depreciation and amortization
    (1,520 )     (1,378 )
                 
Net property, plant, and equipment
  $ 1,172     $ 1,209  
                 
 
Capitalized interest was $1 million in 2009, and $2 million in both 2008 and 2007.
 
Note 10.  Income Taxes
 
Details of income (loss) from continuing operations before income taxes are shown in the following table.
 
                         
(In millions)   2009     2008 (1)     2007 (1)  
 
Income (loss) from continuing operations before income taxes
                       
U.S. operations
  $ 458     $ 321     $ 357  
Foreign operations
    28       19       21  
                         
Total
  $ 486     $ 340     $ 378  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
Shown below are details of income tax expense for continuing operations.
 
                         
(In millions)   2009     2008 (1)     2007 (1)  
 
Current
                       
Federal
  $ (35 )   $ 10     $ 71  
State and local
    (2 )     (4 )     14  
Foreign
    7       1       12  
                         
      (30 )     7       97  
                         
Deferred
                       
Federal
    186       101       31  
State and local
    19       7       3  
Foreign
    2       4       2  
                         
      207       112       36  
                         
Total income tax expense
  $ 177     $ 119     $ 133  
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.


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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.
 
                         
    2009     2008 (1)     2007 (1)  
 
U.S. statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
Increase (decrease) in income tax rate
                       
Foreign income taxed at various rates
    (0.2 )     (0.5 )     0.5  
State and local taxes on income, net of federal income tax benefit
    2.3       (0.3 )     3.0  
Domestic production deduction
    0.0       (0.1 )     (1.3 )
Research and experimentation credit
    (0.2 )     (0.1 )     (0.3 )
Income tax reserve increase
    0.5       2.8       1.4  
Income tax reserve decrease
    (0.9 )     (1.8 )     (2.2 )
Other
    (0.1 )     0.1       (0.8 )
                         
Effective income tax rate
    36.4 %     35.1 %     35.5 %
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The components of our net deferred tax assets and liabilities are summarized in the following table.
 
                 
December 31 (In millions)   2009     2008 (1)  
 
Deferred tax assets
               
Tax loss carryforwards
               
Federal
  $ 42     $ 15  
State and local
    3        
Foreign
    12       18  
Tax Credits
    15       5  
Pensions (2)
    240       412  
Postretirement benefits
    37       38  
Benefits of ASC 740-10
    11       11  
Other items
    29       14  
Valuation allowance (3)
    (35 )     (33 )
                 
Total deferred tax assets
  $ 354     $ 480  
                 
Deferred tax liabilities
               
Property and equipment
    362       324  
                 
Total deferred tax liabilities
    362       324  
                 
Net deferred tax (assets) liabilities
  $ 8     $ (156 )
                 
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
(2) Decrease mainly due to realized tax benefits from pension contributions.
 
(3) Related to federal and foreign tax loss and tax credit carryforwards.
 
We had federal net operating loss carryforwards of $77 million as of December 31, 2009, which will expire in 2030 and federal capital loss carryforwards of $44 million as of December 31, 2009, which will expire in 2011. State net operating loss carryforwards of $3 million at December 31, 2009, will expire at various dates


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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.
 
                 
(In millions)   2009     2008  
 
Balance at January 31
  $ 57     $ 53  
Increases related to prior year tax positions
    20       12  
Decreases related to prior year tax positions
    (4 )     (1 )
Increases pertaining to current year tax positions
    1       5  
Settlements
    (2 )     (11 )
Expiration of statute of limitations
    (14 )     (1 )
                 
Balance at December 31
  $ 58     $ 57  
                 
 
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.


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Notes to Financial Statements — (Continued)
 
 
Note 11.  Common Stock
 
We have 350 million shares of common stock ($0.01 par value) authorized, of which 132,334,417 shares were issued and outstanding as of December 31, 2009.
 
Reserves
 
Reserved shares at December 31, 2009, were as follows:
 
         
(In thousands)      
 
Thrift plans
    860  
2002 incentive compensation plan
    15,151  
         
Total
    16,011  
         
 
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:
 
         
    Performance
 
    shares  
 
Outstanding, December 31, 2007
    2,058,968  
Granted
    655,850  
Canceled
    (128,089 )
Paid
    (867,663 )
         
Outstanding, December 31, 2008
    1,719,066  
Granted
    606,325  
Canceled
    (152,692 )
Paid
    (604,410 )
         
Outstanding, December 31, 2009
    1,568,289  
         
 
Additional information related to performance shares is as follows:
 
                                 
    Weighted-average
           
    grant date
  Pretax
  Associated
   
    fair value
  compensation
  tax
  Impact on
(In millions, except per share data)   per share   expense   benefit   net income
 
2009
  $ 20.10     $ 16     $ 6     $ 10  
2008
    28.31       16       6       10  
2007
    32.64       13       5       8  
 
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.
 
                 
    Shares under
    Weighted-average
 
    option     exercise price  
 
Outstanding, January 1, 2008
    5,407,096     $ 22.69  
Exercised
    (559,703 )     14.52  
Canceled
    (117,096 )     32.81  
                 
Outstanding, December 31,2008
    4,730,297       23.41  
                 
Exercisable, December 31,2008
    4,730,297       23.41  
                 
Outstanding, January 1, 2009
    4,730,297       23.41  
Exercised
    (429,190 )     13.87  
Canceled
    (683,824 )     37.88  
                 
Outstanding, December 31,2009
    3,617,283       21.80  
                 
Exercisable, December 31,2009
    3,617,283       21.80  
                 
 
Summarized below is information regarding stock options outstanding and exercisable at December 31, 2009.
 
                         
    Outstanding options
            Weighted-
        Weighted-average
  average
        remaining
  exercise
Range of exercise price   Number   contractual life   price
 
$ 7 to $12
    153,691       0.8     $ 11.72  
$13 to $21
    2,040,042       2.9       18.51  
$22 to $29
    983,839       4.7       23.98  
$30 to $37
    263,671       8.0       32.86  
$38 to $45
    176,040       6.3       40.00  
                         
      3,617,283                  
                         
 
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.


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Notes to Financial Statements — (Continued)
 
Earnings Per Share
 
Earnings from continuing operations per share of common stock outstanding were computed as follows:
 
                         
(In millions, except share and per share data)   2009     2008 (1)     2007 (1)  
 
Basic earnings per share
                       
Income from continuing operations attributable to Pactiv
  $ 308     $ 220     $ 243  
                         
Weighted-average number of shares of common stock outstanding
    131,967,907       130,925,861       130,912,229  
                         
Basic earnings from continuing operations per share attributable to Pactiv
  $ 2.33     $ 1.68     $ 1.85  
                         
Diluted earnings per share
                       
Income from continuing operations attributable to Pactiv
  $ 308     $ 220     $ 243  
                         
                         
Weighted-average number of shares of common stock outstanding
    131,967,907       130,925,861       130,912,229  
Effect of dilutive securities
                       
Stock options
    328,072       648,682       1,149,964  
Performance shares
    1,175,068       897,216       805,085  
Restricted shares
          1,699       2,277  
                         
Weighted-average number of shares of common stock outstanding, including dilutive securities
    133,471,047       132,473,458       132,869,555  
                         
Diluted earnings from continuing operations per share attributable to Pactiv
  $ 2.31     $ 1.66     $ 1.83  
                         
                         
 
 
(1) Adjusted for the change in inventory accounting method, as described in Note 2 to the financial statements.
 
The following table summarizes annual repurchases of our common stock for 2007 through 2009.
 
                         
        Average price
   
(In millions)   Number of shares   paid per share   Total outlay
 
2009
        $     $  
2008
    75,218     $ 26.38     $ 2  
2007
    3,374,821     $ 32.14     $ 108  
 
Note 12.  Preferred Stock
 
Pactiv has 50 million shares of preferred stock ($0.01 par value) authorized, none of which was issued at December 31, 2009.
 
Note 13.  Pension Plans and Other Postretirement Benefits
 
We have pension plans that cover the majority of our employees. Benefits are based on years of service and, for most salaried employees, final average compensation. Assets of our U.S. qualified plan consist principally of equity and fixed income securities.
 
We have postretirement health care and life insurance plans that cover certain of our salaried and hourly employees who retire in accordance with the various provisions of such plans. Benefits may be subject to deductibles, co-payments, and other limitations. These postretirement plans are not funded, and we reserve the right to change them.


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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.


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Notes to Financial Statements — (Continued)
 
Financial data pertaining to our pension and postretirement benefit plans is shown on the following tables.
 
                                 
    Pension plans     Postretirement plans  
(In millions)   2009     2008     2009     2008  
 
Changes in projected benefit obligations (1)
                               
Benefit obligations at beginning of year
  $ 3,707     $ 3,907     $ 73     $ 85  
Currency rate conversion
    1       (5 )            
Service cost of benefits earned
    15       20       1       1  
Interest cost of benefit obligations
    240       300       4       7  
Actuarial (gains) losses
    403       (166 )     (5 )     (13 )
Benefits paid
    (282 )     (350 )     (11 )     (15 )
Participant contributions
                5       7  
Plan amendments
          1              
Medicare Part D reimbursement
                1       1  
                                 
Projected benefit obligations at December 31
  $ 4,084     $ 3,707     $ 68     $ 73  
                                 
Changes in fair value of plan assets (1)
                               
Fair value at beginning of year
  $ 2,506     $ 3,920     $     $  
Currency rate conversion
    2       (6 )            
Actual return on plan assets
    665       (1,069 )            
Employer contributions
    556       11       6       8  
Participant contributions
                5       7  
Benefits paid
    (282 )     (350 )     (11 )     (15 )
                                 
Fair value of plan assets at December 31
  $ 3,447     $ 2,506     $     $  
                                 
Development of amounts recognized in the statement of financial position
                               
Funded status at December 31
  $ (637 )   $ (1,201 )   $ (68 )   $ (73 )
                                 
Amounts recognized in the statement of financial position
                               
Noncurrent assets
  $ 2     $ 5     $     $  
Current liabilities
    (8 )     (8 )     (6 )     (7 )
Noncurrent liabilities
    (631 )     (1,198 )     (62 )     (66 )
                                 
Net asset (liability) at December 31
  $ (637 )   $ (1,201 )   $ (68 )   $ (73 )
                                 
Pretax amounts recognized in accumulated other comprehensive income (loss) at December 31
                               
Net actuarial gains (losses)
  $ (2,751 )   $ (2,722 )   $ 2     $ (2 )
Prior service credit costs
    2       2       (1 )     (1 )
                                 
    $ (2,749 )   $ (2,720 )   $ 1     $ (3 )
                                 
Other changes in plan assets and projected benefit obligations recognized in other comprehensive income (loss) during year
                               
Net actuarial gains (losses)
  $ (79 )           $ 5          
Amortization of net actuarial gains
    51                        
Prior service costs
                           
Amortization of prior service costs
                  (1 )        
                                 
Total other comprehensive income (loss)
  $ (28 )           $ 4          
                                 
                                 
    Pension
          Postretirement
       
    plans           plans        
 
Effect of amortization of net actuarial losses and prior service credits
                               
on 2010 net periodic benefit income (expense)
                               
Net actuarial gains (losses)
  $ 75             $          
Prior service costs
                           
                                 
    $ 75             $          
                                 
 
 
(1) For 2008, the change in benefit obligation and plan assets are for the period beginning October 1, 2007 and ending December 31, 2008, including amounts recorded in the statement of income and in “other comprehensive income” in 2008.


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Notes to Financial Statements — (Continued)
 
 
Benefit payments expected to be made under the pension and postretirement benefit plans over the next 10 years are summarized in the following table.
 
                 
        Postretirement
        plans, net of expected
(In millions)   Pension plans   Medicare subsidy
 
2010
  $ 297     $ 5  
2011
    296       5  
2012
    300       5  
2013
    304       4  
2014
    318       4  
2015-2019
    1,522       23  
 
We expect to contribute $15 million to our pension and post retirement plans in 2010.
 
The impact of pension plans on pretax income from continuing operations was as follows:
 
                         
(In millions)   2009     2008     2007  
 
Components of net periodic benefit income (expense)
                       
Service cost of benefits earned
  $ (15 )   $ (16 )   $ (18 )
Interest cost of benefit obligations
    (240 )     (240 )     (228 )
Expected return on plan assets
    342       349       344  
Amortization of:
                       
Unrecognized net actuarial losses
    (50 )     (44 )     (47 )
Unrecognized prior service costs
                 
Additional cost due to ASC 715-20 (1)
    (1 )           (1 )
                         
Total net periodic benefit income (expense)
  $ 36     $ 49     $ 50  
                         
 
 
(1) ASC 715-20, “Compensation — Retirement Benefits, Defined Benefit Plans.”
 
In 2009, our nonqualified and foreign plans had net periodic benefit expense of $12 million.
 
Pension plan actuarial assumptions used to determine projected benefit obligations are as follows:
 
                         
    December 31,
  December 31,
  September 30,
    2009   2008   2007
 
Actuarial assumptions
                       
Discount rate
    5.75 %     6.74 %     6.39 %
Compensation increases
    4.00       4.00       4.00  
Return on assets
    9.00       9.00       9.00  
 
The net periodic benefit income for 2009 was determined using the assumptions listed for 2008.
 
For all of our worldwide pension plans, accumulated benefit obligations totaled $4.045 billion in 2009 and $3.677 billion in 2008.
 
Pension plans with accumulated benefit obligations in excess of plan assets were as follows:
 
                 
    December 31,
  December 31,
(In millions)   2009   2008
 
Projected benefit obligations
  $ 4,067     $ 3,695  
Accumulated benefit obligations
    4,029       3,665  
Fair value of plan assets
    3,428       2,490  


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Notes to Financial Statements — (Continued)
 
The discount rate assumption for our U.S. qualified plan is based on the composite yield of a portfolio of high quality corporate bonds constructed with durations to match the plan’s future benefit obligations. A one-percentage-point change in the discount rate impacts the projected benefit obligation by approximately $360 million.
 
Plan Assets
 
In developing the assumption for the return on pension plan assets, we receive independent input on asset allocation strategies, projections regarding long-term rates of return on various asset classes, risk free rates of return, and long-term inflation rates. Since 1976, our U.S. qualified pension plan’s annual rate of return on assets has averaged 10%. At December 31, 2009, the percentage of pension plan assets invested in equity and fixed income securities was approximately 72% and 28%, respectively. The investment policy of the pension plan is to achieve a rate of return sufficient to meet the immediate and long-term benefit obligations of the plan. The investment strategy seeks to maximize long-term return within an acceptable level of risk by balancing investments in assets with higher expected rates of return such as equity securities and assets with lower expected volatility such as fixed-income securities. Risk tolerances are based on careful consideration of plan liabilities, plan funded status, and the company’s financial condition. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. The plan generally maintains an asset allocation of approximately 70% in equities and 30% in fixed income securities. Equity investments include U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization stocks. Other equity like asset classes, such as private equity investments, are used to enhance long-term returns, while increasing portfolio diversification. Fixed-income investments include corporate bonds, government bonds, asset backed securities (including mortgages), and cash. After considering all of these factors, we concluded that a 9% rate of return on assets assumption for our U.S. plan was appropriate for 2009 and 2008.
 
The majority of the pension plan assets are invested in equities of which a substantial portion is invested in U.S. equities. A broad-based decline in equity values around the world or a general decline in U.S. equity values would have a significant adverse effect on the pension plan. The plan also has a large holding of bonds that pay a fixed rate of interest. A material increase in interest rates would reduce the value these bonds.


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Notes to Financial Statements — (Continued)
 
The fair values of pension plan assets at December 31, 2009, by asset category are as follows:
 
                                 
          Fair value measurements at December 31, 2009  
          Quoted prices in
    Significant
    Significant
 
          active markets for
    observable
    unobservable
 
(In millions)
        identical assets
    inputs
    inputs
 
Asset category   Total     (Level 1)     (Level 2)     (Level 3)  
 
Cash and cash equivalents
  $ 92     $     $ 92     $   —  
Equity securities:
                               
Common collective funds (a)
    664             664        
International companies
    31       31              
US large cap companies
    1,251       1,251              
US mid cap companies
    360       360              
US small cap companies
    122       122              
Fixed income securities:
                               
Common collective funds
    4             4        
Corporate bonds
    61             61        
Corporate bonds (S&P rating of A or higher)
    325             325        
Corporate bonds (S&P rating of lower than A)
    328             328        
Government securities
    151             151        
Mortgage backed securities
    7             7        
Other fixed income (b)
    20             20        
Other investments
                               
Common collective funds
    1             1        
Private equity funds (c)
    30                   30  
                                 
Total
  $ 3,447     $ 1,764     $ 1,653     $ 30  
                                 
 
 
(a) This asset category includes funds that invest in international companies including companies from countries classified as Emerging Markets by MSCI.
 
(b) This asset category includes municipal bonds.
 
(c) This asset category includes venture capital funds.
 
The change in the fair value of pension plan assets using Level 3 or significant unobservable inputs during the year ended December 31, 2009, is detailed in the table below.
 
                 
    Fair value measurements using
 
    significant unobservable inputs  
    Private equity
       
(In millions)   funds     Total  
 
Beginning balance at December 31, 2008
  $ 36     $ 36  
Actual return on plan assets:
               
Relating to assets still held at the reporting date
    (9 )     (9 )
Relating to assets sold during the period
    (1 )     (1 )
Purchases, sales, and settlements
    4       4  
Transfers in and/or out of Level 3
           
                 
Ending balance at December 31, 2009
  $ 30     $ 30  
                 
 
We use a market-related method for calculating the value of plan assets. This method recognizes the difference between actual and expected returns on plan assets over time. The market-related value of plan assets (MRVA)


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Notes to Financial Statements — (Continued)
 
as of January 1, 2010, is $4.191 billion. Each year, the expected gain on plan assets (MRVA multiplied by the expected rate of return) is compared with the change in fair market value of assets (adjusted for pension benefit payments and expenses) during the year to determine the asset gain or loss for the year just ended.
 
The asset gain or loss for the year just ended is amortized over five years to the pool of amortizable actuarial gains or losses accumulated from prior years. Also added to the amortizable pool are all other actuarial gains or losses, which have occurred during the year just ended. The pool is amortized using the “corridor approach” in ASC 715-20. The corridor amount is 10% of the greater of the MRVA or the pension benefit obligation. The amount of actuarial gains or losses to be amortized as a component of pension income is the amount of the pool in excess of the corridor amount. The accumulated pool of amortizable losses as of January 1, 2010, was $1.543 billion. The amortization period is determined by the weighted-average of the life expectancy of inactive plan participants and the remaining service expectancy of active plan