Pactiv Third Quarter Sales Grow 7 Percent; EPS from Continuing Operations Reaches $0.28; Posts Significant Free Cash Flow
Income from continuing operations was $42 million, or $0.28 per share, compared with $49 million, or $0.32 per share, in 2004, as new product launch costs, lower volume, and higher manufacturing and logistics costs more than offset favorable spread (the difference between raw material costs and selling prices). Excluding restructuring and other credits in the third quarter of 2004, earnings per share were $0.28 in 2005 compared with $0.31 in 2004. Net income including discontinued operations was $39 million, or $0.26 per share, compared with $56 million, or $0.37 per share, in 2004.
"In the third quarter, our margin rebounded as a result of pricing actions, productivity gains, and cost control efforts. Over the short term, principally as a result of the impact of the hurricanes on the petrochemical industry along the Gulf Coast, we expect raw material costs to challenge our industry. We plan to pursue the same actions that have successfully offset these costs in the past. The new products we introduced in our Hefty(R) business, while temporarily pressuring profitability, have been well received and will enhance our position in the higher end of the disposable tableware market," said Richard L. Wambold, Pactiv's chairman and chief executive officer.
Gross margin of 27.1 percent declined from 28.8 percent in the third quarter last year, but increased from 25.7 percent in the second quarter of 2005. The sequential improvement reflects the impact of favorable spread, productivity initiatives, and cost control. The year-over-year decline reflects the impact of higher pricing offset by new product launch costs, higher raw material costs, and higher energy-related manufacturing and logistics expenses. Operating margin was 12.4 percent compared with 15.2 percent. Excluding the 2004 restructuring and other credits, operating margin was 12.4 percent compared with 14.9 percent last year and 11.0 percent in the second quarter of 2005.
Free cash flow from continuing operations in the third quarter was $112 million after approximately $15 million in after-tax payments related to the previously discussed Tenneco Packaging litigation settlement. Third quarter 2004 free cash flow was $104 million. The increase is based primarily on improved working capital management. During the third quarter the Company repurchased 6.5 million shares of its common stock.
For the nine-month period, sales of $2.02 billion rose 7 percent from $1.88 billion, based on a 9-percent price increase, which offset a 2-percent volume decline. Income from continuing operations was $100 million, or $0.67 per share, compared with $96 million, or $0.62 per share, last year. Excluding the restructuring and other charges in both years, income from continuing operations was $104 million, or $0.69 per share, compared with $142 million, or $0.92 per share, in 2004. Net income including discontinued operations was $19 million, or $0.13 per share, compared with $108 million, or $0.70 per share, last year. Net income in 2005 includes a loss from discontinued operations of $81 million, or $0.54 per share, which includes a net goodwill impairment of $36 million, estimated tax expense of $10 million on unremitted foreign earnings, an estimated $42 million net loss on the divestiture, and $8 million of transaction-related expenses.
Year-to-date free cash flow from continuing operations was $102 million after the aforementioned Tenneco litigation payments, compared with $215 million in 2004. The decline primarily is due to lower earnings excluding restructuring and other charges, higher capital expenditures for future growth, Tenneco litigation payments, and higher finished goods inventories to support new product launches.
Business Segment Results
Hefty(R) Consumer Products
Sales of $247 million rose 4 percent from $238 million reflecting a 6-percent price impact, partially offset by a volume decline of 2 percent. Volume trends improved sequentially in foam tableware and waste bags. Rollout of Hefty(R) Serve 'n Store(TM) plates and bowls and Hefty(R) Easy Grip(TM) party cups continued in the third quarter. Both new products are on track to meet targeted 2005 sales levels, and early trends regarding repeat purchases are encouraging.
Operating income was $25 million compared with $44 million last year, primarily reflecting approximately $15 million related to product launch costs, as well as a higher LIFO valuation expense. New product launch spending is tracking as expected. Operating margin was 10.1 percent compared with 18.5 percent last year.
For the nine-month period, sales of $712 million rose 5 percent from $675 million as a 7-percent price increase offset a 2-percent volume decline. Operating income was $75 million compared with $129 million last year. Excluding restructuring and other charges in both years, operating income was $76 million compared with $133 million. On the same basis, operating margin was 10.7 percent compared with 19.7 percent.
Foodservice/Food Packaging
Sales of $448 million rose 8 percent from $414 million last year based on price gains of 9 percent and a volume decline of 1 percent. Volume reflects the inclusion of the Newspring Industrial Corporation acquisition that occurred in March. The decline in base volume was due to softness in the marketplace, coupled with eliminating unprofitable products to improve mix.
Operating income was $61 million compared with $53 million last year. Excluding the restructuring and other credit in 2004, operating income was $61 million in 2005 compared with $50 million in 2004 as favorable spread and mix more than offset higher logistics costs and lower volume. On the same basis, operating margin was 13.6 percent compared with 12.1 percent last year.
For the nine-month period, sales of $1.30 billion increased 8 percent from $1.21 billion based on a pricing gain of 9 percent and a volume decline of 1 percent. Operating income was $135 million compared with $77 million in 2004. Excluding restructuring and other charges in both years, operating income was $140 million compared with $144 million. On the same basis, operating margin was 10.7 percent compared with 11.9 percent in 2004.
Outlook
For the continuing operations of Pactiv, the fourth quarter earnings per share outlook is a range of $0.20 to $0.26. For the full year, the earnings per share outlook excluding restructuring charges is a range of $0.89 to $0.95. The full year outlook includes non-cash pension income of $35 million after tax, or $0.23 per share.
Free cash flow for continuing operations for 2005 is anticipated to be approximately $105 million to $115 million, after the Tenneco litigation payments of approximately $15 million after tax. Capital expenditures are expected to be approximately $135 million, and depreciation and amortization expense will be approximately $145 million. For the full year, selling, general, and administrative expense is estimated to be in a range of $250 million to $260 million. The 2005 tax rate is expected to be 36 percent.
Other
This press release includes certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to GAAP is shown in the "Consolidated Statement of Income", as well as the attached "Regulation G GAAP Reconciliations" or in the attached "Operating Results by Segment". The "Operating Results by Segment" also details the impact on sales of acquisitions and foreign exchange. Schedules reclassifying prior period results to reflect the divestiture of substantially all of the protective and flexible businesses and the inclusion of the remaining businesses in that segment into the Foodservice/Food Packaging segment are posted on the Company's website (www.pactiv.com).
Cautionary Statements
This press release includes certain "forward-looking statements" such as those in the Outlook section, as well as "we expect raw material costs to challenge our industry", "plan to pursue the same actions that have successfully offset these costs in the past", "...will enhance our position in the higher end of the disposable tableware market", "...products are on track to meet targeted 2005 sales levels and early trends regarding repeat purchases are encouraging". A variety of factors may cause actual results to differ materially from these expectations including a slowdown in economic growth, changes in the competitive market, increased cost of raw materials, and changes in the regulatory environment. More detailed information about these and other factors is contained in the Company's Annual Report on Form 10-K at page 56 filed with the Securities and Exchange Commission as revised and updated by Forms 10-Q and 8-K as filed with the Commission.
Company Information
Pactiv Corporation is a leading producer of specialty packaging products for the consumer and foodservice/food packaging markets. With sales of $2.5 billion, Pactiv has one of the broadest product lines in the specialty packaging industry, and derives more than 80 percent of its sales from market sectors in which it holds the No. 1 or No. 2 market-share position. For more information about Pactiv, log on to the company's website at www.pactiv.com.
Pactiv Corporation
Consolidated Statement of Income
(In millions, except per-share data)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
--------- -------- -------- --------
Sales $695 $652 $2,015 $1,881
Costs and expenses
Cost of sales (excluding
depreciation and amortization) 507 464 1,495 1,312
Depreciation and amortization 37 36 108 105
Selling, general, and
administrative 63 55 186 173
Other (income) expense 2 - 3 2
--------- -------- -------- --------
Operating income before
restructuring and other 86 97 223 289
Restructuring and other - (2) 6 73
--------- -------- -------- --------
Operating income 86 99 217 216
Interest expense, net 20 22 60 64
Income tax expense 24 28 57 56
--------- -------- -------- --------
Income from continuing
operations 42 49 100 96
Income (loss) on discontinued
operations,
net of tax (3) 7 (81) 12
--------- -------- -------- --------
Net income $39 $56 $19 $108
========= ======== ======== ========
Average common shares outstanding
(diluted) 149.0 151.7 150.3 154.6
Earnings (loss) per share
Income from continuing
operations before
restructuring and other $0.28 $0.31 $0.69 $0.92
Restructuring and other - 0.01 (0.02) (0.30)
--------- -------- -------- --------
Income from continuing
operations 0.28 0.32 0.67 0.62
Income (loss) on discontinued
operations (0.02) 0.05 (0.54) 0.08
--------- -------- -------- --------
Net $0.26 $0.37 $0.13 $0.70
========= ======== ======== ========
Gross margin (before deprec. &
amort.) 27.1% 28.8% 25.8% 30.2%
Operating margin
Excluding restructuring and
other 12.4% 14.9% 11.1% 15.4%
Restructuring & other 0.0% 0.3% -0.3% -3.9%
Including restructuring and
other 12.4% 15.2% 10.8% 11.5%
Pactiv Corporation
Consolidated Statement of Financial Position
(In millions)
September 30, 2005 December 31, 2004
------------------ -----------------
Assets
Current assets
Cash and temporary cash
investments $110 $222
Accounts and notes receivable 297 278
Inventories 331 311
Other 40 42
Assets of discontinued
operations held for sale 661 735
------------------ -----------------
Total current assets 1,439 1,588
------------------ -----------------
Property, plant, and equipment,
net 1,154 1,137
------------------ -----------------
Other assets
Goodwill 532 466
Intangible assets, net 265 270
Pension assets, net 10 214
Other 64 66
------------------ -----------------
Total other assets 871 1,016
------------------ -----------------
Total assets $3,464 $3,741
================== =================
Liabilities and shareholders'
equity
Current liabilities
Short-term debt, including
current maturities of long-
term debt $302 $471
Accounts payable 189 182
Other 279 226
Liabilities related to assets
of discontinued operations
held for sale 199 145
------------------ -----------------
Total current liabilities 969 1,024
------------------ -----------------
Long-term debt 1,011 869
Pension and postretirement
benefits 345 473
Other liabilities 242 283
Minority interest 9 9
Shareholders' equity 888 1,083
------------------ -----------------
Total liabilities and
shareholders' equity $3,464 $3,741
================== =================
Pactiv Corporation
Consolidated Statement of Cash Flows
(In millions)
Nine months ended September 30, 2005 2004
------------------- -----------------
Operating activities
Income from continuing
operations $100 $96
Adjustments to reconcile income
from continuing operations
to cash provided by continuing
operations
Depreciation and amortization 108 105
Deferred income taxes 26 31
Restructuring and other - 35
Noncash retirement benefits,
net (40) (43)
Working capital 4 42
Other (9) 4
------------------- -----------------
Cash provided by operating
activities - continuing
operations 189 270
Cash provided by operating
activities - discontinued
operations 42 43
------------------- -----------------
Cash provided by operating
activities 231 313
------------------- -----------------
Investing activities
Expenditures for property,
plant, and equipment -
continuing operations (97) (55)
Acquisitions of businesses and
assets (98) -
Other continuing operations
investing activities 2 2
------------------- -----------------
Cash used by investing
activities - continuing
operations (193) (53)
Expenditures for property,
plant, and equipment -
discontinued operations (21) (13)
------------------- -----------------
Cash used by investing
activities (214) (66)
------------------- -----------------
Financing activities
Issuance of common stock 14 24
Purchase of common stock (122) (230)
Retirement of long-term debt (180) -
Issuance of long-term debt 153 -
Other 10 -
------------------- -----------------
Cash used by financing
activities - continuing
operations (125) (206)
Cash used by financing
activities - discontinued
operations - -
------------------- -----------------
Cash used by financing
activities (125) (206)
------------------- -----------------
Effect of foreign-currency
exchange rate changes on cash
and temporary cash investments (4) -
------------------- -----------------
Increase (decrease) in cash and
temporary cash investments (112) 41
Cash and temporary cash
investments, January 1 222 140
------------------- -----------------
Cash and temporary cash
investments, September 30 $110 $181
=================== =================
Pactiv Corporation
Operating Results by Segment
(In millions)
Consumer Foodservice / Other Continuing
Food Packaging operations
--------- -------------- --------- -----------
Three months ended
September 30, 2005
------------------------
Sales $247 $448 $- $695
Acquisitions (a) - (15) - (15)
--------- -------------- --------- -----------
Adjusted sales (c) 247 433 - 680
--------- -------------- --------- -----------
Operating income before
restructuring & other $25 $61 $- $86
Restructuring & other - - - -
--------- -------------- --------- -----------
Operating income 25 61 - 86
--------- -------------- --------- -----------
Operating margin
Excluding restructuring
and other 10.1% 13.6% NA 12.4%
Restructuring & other 0.0% 0.0% NA 0.0%
Including restructuring
and other 10.1% 13.6% NA 12.4%
Three months ended
September 30, 2004
------------------------
Sales $238 $414 $- $652
Foreign exchange (b) - 2 - 2
--------- -------------- --------- -----------
Adjusted sales (c) 238 416 - 654
--------- -------------- --------- -----------
Operating income before
restructuring & other $44 $50 $3 $97
Restructuring & other - (3) 1 (2)
--------- -------------- --------- -----------
Operating income 44 53 2 99
--------- -------------- --------- -----------
Operating margin
Excluding restructuring
and other 18.5% 12.1% NA 14.9%
Restructuring & other 0.0% 0.7% NA 0.3%
Including restructuring
and other 18.5% 12.8% NA 15.2%
Nine months ended
September 30, 2005
------------------------
Sales $712 $1,303 $- $2,015
Acquisitions (a) - (34) - (34)
--------- -------------- --------- -----------
Adjusted sales (c) 712 1,269 - 1,981
--------- -------------- --------- -----------
Operating income before
restructuring & other $76 $140 $7 $223
Restructuring & other 1 5 - 6
--------- -------------- --------- -----------
Operating income 75 135 7 217
--------- -------------- --------- -----------
Operating margin
Excluding restructuring
and other 10.7% 10.7% NA 11.1%
Restructuring & other -0.2% -0.3% NA -0.3%
Including restructuring
and other 10.5% 10.4% NA 10.8%
Nine months ended
September 30, 2004
------------------------
Sales $675 $1,206 $- $1,881
Foreign exchange (b) - 5 - 5
--------- -------------- --------- -----------
Adjusted sales (c) 675 1,211 - 1,886
--------- -------------- --------- -----------
Operating income before
restructuring & other $133 $144 $12 $289
Restructuring & other 4 67 2 73
--------- -------------- --------- -----------
Operating income 129 77 10 216
--------- -------------- --------- -----------
Operating margin
Excluding restructuring
and other 19.7% 11.9% NA 15.4%
Restructuring & other -0.6% -5.5% NA -3.9%
Including restructuring
and other 19.1% 6.4% NA 11.5%
(a) Adjustment to current year sales for incremental sales from
acquisitions.
(b) Adjustment of prior year sales to current year foreign exchange
rates.
(c) Sales adjusted for acquisitions and foreign exchange.
Pactiv Corporation
Regulation G GAAP Reconciliation
Income from Continuing Operations and Earnings per Share
(In millions, except per-share amounts)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Income from continuing
operations - US GAAP basis $42 $49 $100 $96
Adjustments (net of tax) to
exclude:
Restructuring and other
charges - (1) 4 46
--------- --------- --------- ---------
Net income - US GAAP basis
excluding restructuring and
other charges (a) $42 $48 $104 $142
========= ========= ========= =========
Average common shares
outstanding (diluted) 149.0 151.7 150.3 154.6
Diluted earnings (loss) per
share
Income from continuing
operations - US GAAP basis $0.28 $0.32 $0.67 $0.62
Adjustments (net of tax) to
exclude:
Restructuring and other
charges - (0.01) 0.02 0.30
--------- --------- --------- ---------
Net - US GAAP basis excluding
restructuring and other
charges (a) $0.28 $0.31 $0.69 $0.92
========= ========= ========= =========
Percent change - 2005 vs. 2004 -9.7% -25.0%
(a) In accordance with generally accepted accounting principles (US
GAAP), reported net income includes the after-tax impacts of
restructuring and other charges. The company's management believes
that by adjusting reported net income to exclude the effects of these
items, the resulting earnings present an operationally- oriented
depiction of the company's performance. The company's management uses
earnings excluding the after-tax impacts of restructuring and other
charges to evaluate operating performance, to value various business
units, and, along with other factors, in determining management
compensation.
Regulation G GAAP Reconciliation
Free Cash Flow
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Cash flow provided by
operating activities -
continuing operations (US
GAAP basis) $53 $130 $189 $270
Less:
Capital expenditures -
continuing operations (36) (26) (97) (55)
(Increase) decrease in
asset securitization
program 95 - 10 -
--------- --------- --------- ---------
Free cash flow - continuing
operations (b) $112 $104 $102 $215
========= ========= ========= =========
(b) Free cash flow is defined as cash flow provided by operating
activities less amounts for capital expenditures and changes in the
usage of the company's asset securitization program. These amounts
have been calculated in accordance with US GAAP. The company's
management believes free cash flow, as defined, provides a useful
measure of the company's liquidity. The company's management uses free
cash flow as a measure of cash available to fund required or early
debt retirement and incremental investing and/or financing activities,
such as, but not limited to, acquisitions and share repurchases.
However, free cash flow has limitations, as it does not represent
residual cash flows available for discretionary expenditures. Some of
the company's expenditures are mandatory. The amount of mandatory
versus discretionary expenditures can vary significantly between
periods.
Pactiv Corporation
Regulation G GAAP Reconciliation
Outlook for 2005
Three months ended Twelve months ended
December 31, 2005 December 31, 2005
--------------------- ---------------------
Diluted earnings per share Low High Low High
estimate estimate estimate estimate
---------- ---------- ---------- ----------
Continuing operations - US
GAAP basis $0.20 $0.26 $0.87 $0.93
Adjustments to exclude
restructuring and
other charges - - 0.02 0.02
---------- ---------- ---------- ----------
Continuing operations
excluding restructuring
and other charges (a) $0.20 $0.26 $0.89 $0.95
========== ========== ========== ==========
Twelve months ended Twelve months ended
December 31, 2005 December 31, 2005
-------------------- -------------------
Free cash flow (in millions)
Low High
Cash flow provided by operating
activities - US GAAP basis $230 $240
Less:
Capital expenditures -
continuing operations (135) (135)
(Increase) decrease in asset
securitization program 10 10
-------------------- -------------------
Free cash flow (b) $105 $115
==================== ====================
(a) In accordance with generally accepted accounting principles (US
GAAP), reported net income from continuing operations includes the
after-tax effects of restructuring and other charges. The company's
management believes that by adjusting reported net income from
continuing operations to exclude the effects of these items, the
resulting earnings present an operationally-oriented depiction of the
company's performance. The company's management uses earnings
excluding restructuring and other charges to evaluate operating
performance, to value various business units, and, along with other
factors, in determining management compensation.
(b) Free cash flow is defined as cash flow provided by operating
activities less amounts for capital expenditures and changes in the
usage of the company's asset securitization program. These amounts
have been calculated in accordance with US GAAP. The company's
management believes free cash flow, as defined, provides a useful
measure of the company's liquidity. The company's management uses free
cash flow as a measure of cash available to fund required or early
debt retirement and incremental investing and/or financing activities,
such as, but not limited to, acquisitions and share repurchases.
However, free cash flow has limitations, as it does not represent
residual cash flows available for discretionary expenditures. Some of
the company's expenditures are mandatory. The amount of mandatory
versus discretionary expenditures can vary significantly between
periods.
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