PACKAGING CORP OF AMERICA (PKG) FY 2023 MD&A

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of historical results of operations and financial condition should be read in conjunction with the audited financial statements and the notes thereto which appear elsewhere in this Form 10-K. This discussion includes forward-looking statements regarding our expectations with respect to our future performance, liquidity, ESG goals, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. See our discussion regarding forward-looking statements included under “Part I, Item 1A. Risk Factors” of this Form 10-K. For our discussion and analysis of our results of operations, financial condition and cash flows for the year ended December 31, 2021, the earliest of the years presented in the accompanying audited financial statements included in Item 8 herein, please refer to our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 23, 2023. Such information is presented in Item 7 of such report under the subcaptions “Results of Operations —Year Ended December 31, 2022, Compared with Year Ended December 31, 2021” and “Liquidity and Capital Resources” and is incorporated by reference herein.

Overview

PCA is the third largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. We operate eight mills and 86 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell UFS papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

Executive Summary

Net sales were $7.8 billion for the year ended December 31, 2023 and $8.5 billion for 2022. We reported $765 million of net income, or $8.48 per diluted share, in 2023, compared to $1,030 million, or $11.03 per diluted share, in 2022. Net income included $19 million of expense for special items in 2023, compared to $10 million of expense for special items in 2022. Special items in both periods are described later in this section. Excluding special items, we recorded $784 million of net income, or $8.70 per diluted share, in 2023, compared to $1,040 million, or $11.14 per diluted share, in 2022. The decrease was driven primarily by lower prices and mix in our Packaging segment and lower volumes in our Packaging and Paper segments, partially offset by higher prices and mix in our Paper segment, lower operating and converting costs, and lower annual outage expense. For additional detail on special items included in reported GAAP results, as well as segment income (loss) excluding special items, earnings before non-operating pension expense, interest, income taxes, and depreciation, amortization, and depletion (EBITDA), and EBITDA excluding special items, see “Item 7. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” PCA ended the year with $1,206 million of cash and marketable debt securities and, including borrowing availability under its revolving credit facility, $1,529 million in liquidity.

Packaging segment income from operations was $1,074 million in 2023, compared to $1,424 million for 2022. Packaging segment EBITDA excluding special items was $1,556 million in 2023, compared to $1,849 million in 2022. The decrease was driven primarily by lower containerboard and corrugated products prices and mix, lower volumes, and higher freight and logistic expenses, partially offset by lower operating and converting costs and lower annual outage expense. Packaging volumes were down during the first half of the year as challenging economic conditions continued in 2023, with customers reducing orders to manage their inventories. Customer ordering patterns began to normalize, and volumes began to improve mid-year, and by the fourth quarter, corrugated shipments were up 6.9% in total over fourth quarter 2022. Overall, our corrugated products shipments were down (4.6%) for the year.

In order to match our supply with the demand for our products, we reduced production of containerboard at our packaging mills during the first three quarters of 2023, including idling the Wallula, WA mill in June. We began ramping up production in the fourth quarter to meet increasing demand and restarted the No. 3 machine at the Wallula mill. For more information on our containerboard production and corrugated products shipments, refer to the table presented under the caption “Production and Shipments” in “Part I, Item 1. Business” of this Form 10-K.

After increasing during the first three quarters of 2022, containerboard prices published by industry publications began to decline during the fourth quarter of 2022 and continued to decline throughout 2023. We notified customers of a $70 per ton price increase for linerboard and a $100 per ton price increase for medium effective January 1, 2024.

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Over the past several years, we made extensive capital investments throughout the packaging segment to improve productivity and efficiencies at our containerboard mills and corrugated products facilities and believe that our success in execution of these capital investments has helped us to mitigate cost inflation and better serve our customers.

Paper segment income from operations was $119 million in 2023, compared to $103 million in 2022. Paper segment EBITDA excluding special items was $151 million in 2023, compared to $132 million in 2022. The increase was due primarily to higher paper prices and mix and lower freight and logistic expenses, partially offset by lower volumes and higher operating costs. Lower volumes were driven by declining uncoated freesheet demand and sales of remaining paper at the Jackson, AL mill in 2022.

We have undertaken activities to convert the Jackson mill from production of paper products, which the mill historically produced, to production of containerboard. For more information, see the Packaging caption in “Part I, Item 1. Business” and Note 1, Nature of Operations and Basis of Presentation, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Special Items and Earnings per Diluted Share, Excluding Special Items

Earnings per diluted share, excluding special items, in 2023 and 2022 were as follows:

(a)
For 2023, includes $14.4 million of charges related to the closure of corrugated products facilities and design centers, partially offset by a gain on sale of a corrugated products facility. For 2022, includes $0.7 million of charges consisting of closure costs related to corrugated products facilities. These costs were partially offset by insurance proceeds received for a natural disaster at one of the corrugated products facilities, a gain on sale of assets related to a corrugated products facility, and a favorable lease buyout for a closed corrugated products facility.

(b)
For 2023 and 2022, includes $11.1 million and $14.1 million, respectively, of charges related to the announced discontinuation of production of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.

(c)
Includes $1.0 million of income from a favorable inventory adjustment related to the December 2021 Advance Packaging Corporation acquisition, partially offset by acquisition and integration related costs.

(d)
Amount may not foot due to rounding.

Management excludes special items, as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted earnings per share to diluted earnings per share excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included later in Item 7 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

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Industry and Business Conditions

Trade publications reported North American industry-wide corrugated products shipments were down (5.0%) during 2023, compared to 2022. Reported industry containerboard production decreased (3.1%) compared to 2022, and reported industry containerboard inventories at the end of 2023 were approximately 2.6 million tons, down (3.1%) compared to 2022. Reported containerboard export shipments increased 2.6% compared to 2022. For linerboard, index prices decreased $10 per ton in January 2023, followed by additional decreases of $20 per ton in February 2023, $20 per ton in May 2023, and $20 per ton in November 2023, a total decrease of $70 per ton during 2023. For corrugating medium, index prices decreased $30 per ton in January 2023, followed by additional decreases of $20 per ton in February 2023, $40 per ton in May 2023, and $20 per ton in November 2023, a total decrease of $110 per ton during 2023.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. Trade publications reported North American uncoated freesheet paper shipments decreased (9.7%) in 2023, compared to 2022. Although average prices reported by a trade publication for cut size office papers were higher by $57 per ton, or 4%, in 2023 compared to 2022, index prices declined throughout the year. For cut size office papers, index prices decreased $20 per ton in April 2023, followed by additional decreases of $10 per ton in June 2023 and $20 per ton in October 2023, a total decrease of $50 per ton during 2023. For offset printing papers, index prices decreased $30 per ton in April 2023, followed by additional decreases of $10 per ton in June 2023, $20 per ton in August 2023, $10 per ton in September 2023, and $15 per ton in November 2023, a total decrease of $85 per ton during 2023.

Outlook

For the first quarter of 2024, compared to the fourth quarter of 2023, in our Packaging segment, we expect higher total corrugated products shipments from continued strong demand along with two additional shipping days in the first quarter. Containerboard volume is expected to be lower due to a prolonged outage at the Jackson mill for the conversion of the No. 3 machine and a scheduled maintenance outage at our Counce, TN mill. We have restarted the No. 2 machine at the Wallula mill, which will partially offset the effect of these outages. Prices and mix should be slightly higher as we implement our January price increases, which will be partially offset by a decrease in the published prices that occurred late in 2023. We expect export containerboard prices to be flat. In our Paper segment, we expect an improved mix to move prices slightly higher with flat sales volume. Recycled fiber and energy prices will be higher, and seasonally colder weather will negatively impact usages and yields for energy, wood and chemicals along with higher operating costs associated with the restart of full operations at the Wallula mill compared to fourth quarter operations. Labor and benefits costs will have seasonal timing-related increases that occur at the beginning of a new year related to annual wage and benefit increases, the restart of payroll taxes, and share-based compensation expenses. Scheduled outage expenses will be higher and will include the significant first quarter impact of the conversion outage at our Jackson mill. Considering these items, we expect first quarter earnings to be lower than the fourth quarter of 2023.

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Results of Operations

Year Ended December 31, 2023, Compared with Year Ended December 31, 2022

The historical results of operations of PCA for the years ended December 31, 2023 and 2022 are set forth below (dollars in millions):

(a)
See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

Net Sales

Net sales decreased $676 million, or (8.0%), to $7,802 million in 2023, compared to $8,478 million in 2022.

Packaging. Net sales decreased $645 million, or (8.3%), to $7,136 million, compared to $7,781 million in 2022, due to lower prices and mix ($397 million) and lower volumes ($248 million). In 2023, our domestic containerboard prices decreased (10.5%) and export prices decreased (29.7%) compared to 2022. Our containerboard outside shipments decreased (1.1%), and total corrugated products shipments were down (4.6%) in total and (4.3%) per workday, compared to 2022.

Paper. Net sales decreased $27 million, or (4.3%), to $595 million, compared to $622 million in 2022. The decrease was due to lower volume ($65 million), partially offset by higher prices and mix ($38 million).

Gross Profit

Gross profit decreased $392 million in 2023, compared to 2022. The decrease was driven primarily by lower prices and mix in our Packaging segment, and lower volumes in our Packaging and Paper segments, partially offset by higher prices and mix in our Paper segment, lower operating and converting costs, and lower annual outage expense. In 2023, gross profit included $15 million of special items expense related to Jackson mill conversion-related activities and corrugated facility closure and other costs, compared to $7 million of special items expense related to Jackson mill conversion-related activities, corrugated facility closure and other costs, and income related to acquisition and integration-related activities in 2022.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (SG&A) decreased $28 million in 2023 compared to 2022. The decrease was primarily due to lower employee-related expenses, outside services, and bad debt expense.

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Other Expense, Net

Other expense, net for the years ended December 31, 2023 and 2022 are set forth below (dollars in millions):

We discuss these items in more detail in Note 6, Other Expense, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K.

Income from Operations

Income from operations decreased $346 million, or (24.3%), for the year ended December 31, 2023, compared to 2022. Income from operations in 2023 included $25 million of expense for special items compared to $14 million in 2022. Special items in 2023 included $14 million of expense related to corrugated facility closure and other costs and $11 million for Jackson mill conversion-related activities. Special items in 2022 consisted of $14 million of expense for Jackson mill conversion-related activities, $1 million of corrugated facility closure and other costs, and $1 million of income related to acquisition and integration-related activities.

Packaging. Segment income from operations decreased $349 million to $1,074 million, compared to $1,424 million in 2022. The decrease in 2023 related primarily to lower containerboard and corrugated products prices and mix ($373 million), lower sales and production volumes ($123 million), higher depreciation expense ($47 million), and higher freight expense ($14 million), partially offset by lower operating and converting costs ($163 million), lower annual outage expense ($36 million), and other costs ($18 million). Special items in 2023 included $14 million of expense for corrugated facility closure and other costs. Special items in 2022 included $5 million of expense for Jackson mill conversion-related activities, corrugated facility closure and other costs, and income related to acquisition and integration-related activities.

Paper. Segment income from operations increased $16 million to $119 million, compared to $103 million in 2022. The increase, excluding special items, primarily related to higher paper prices and mix ($40 million), lower freight expense ($14 million), and lower other costs ($2 million), partially offset by lower sales and production volumes ($23 million), higher operating costs ($13 million), and higher annual outage expense ($1 million). Special items in 2023 included $11 million of expense for Jackson mill conversion-related activities. Special items in 2022 included $9 million of expense for Jackson mill conversion-related activities.

Non-Operating Pension Expense, Interest Expense, Net and Income Taxes

During 2023, non-operating pension expense increased $22 million compared to 2022. The increase in non-operating pension expense was related to unfavorable 2022 asset performance, partially offset by favorable assumption changes.

Interest expense, net, during 2023 decreased $17 million compared to 2022. The decrease in interest expense, net in 2023 was primarily due to higher interest income due to higher rates on invested cash balances compared to 2022.

During 2023, we recorded $249 million of income tax expense, compared to $335 million of income tax expense during 2022. The effective tax rate for both 2023 and 2022 was 24.5%.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. We ended the year with $648 million of cash and cash equivalents, $558 million of marketable debt securities, and $323 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. On November 30, 2023, we issued $400 million of 5.70% senior notes due 2033 through a registered public offering and invested the net proceeds received from this issuance in time deposits, which are included in marketable debt securities. We intend to use the net proceeds from this issuance, together with a portion of cash on hand, to redeem, repurchase, or otherwise repay at or prior to maturity our outstanding 3.65% senior notes due 2024, which mature on September 15, 2024. See Note 10, Debt, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K as well as information provided below under “—Investing Activities” and “—Financing Activities” for further information.

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Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.

Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):

Operating Activities

Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as other factors described below. Cash requirements for operating activities are subject to PCA’s operating needs and the timing of collection of receivables and payments of payables and expenses.

During 2023, net cash provided by operating activities was $1,315 million, compared to $1,495 million for 2022, a decrease of $180 million. Cash from operations excluding changes in cash used for operating assets and liabilities decreased $258 million, primarily due to lower income from operations in 2023 as discussed above. Cash increased by $78 million due to changes in operating assets and liabilities, primarily due to the following:

a)
a net favorable change in income taxes due to lower tax payments during 2023 compared to 2022;

b)
a net favorable change in inventories in 2023 compared to 2022 due to a smaller increase in Packaging segment inventory levels in 2023, primarily in raw materials and finished goods, partially offset by an increase in Paper segment inventory levels due to softening demand during 2023; and

c)
a net favorable change in accounts payable in 2023 compared to 2022 primarily related to higher production volumes during the last quarter of 2023 compared to 2022.

These favorable changes were partially offset by:

a)
a net unfavorable change in accounts receivable levels in 2023 compared to 2022 due to higher sales and production volumes in the Packaging segment during the latter portion of 2023, partially offset by lower pricing in the Packaging segment in 2023; and

b)
a net unfavorable change in accrued liabilities in 2023 compared to 2022 primarily related to lower accruals for employee compensation and benefit liabilities and a decrease in customer rebates related to the timing of payments and lower sales volumes in 2023.

Investing Activities

We used $875 million for investing activities in 2023, compared to $834 million in 2022. In 2023, we spent $470 million for internal capital investments, compared to $824 million in 2022. Additionally, in November 2023, we invested the net proceeds received from the issuance of our $400 million of 5.70% senior notes due 2033 in time deposits, which are included in marketable debt securities.

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The details of capital expenditures for property and equipment, excluding acquisitions, by segment for the years ended December 31, 2023 and 2022 are included in the table below (dollars in millions).

We expect capital investments in 2024 to be between $470 million and $490 million. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $15 million in 2024. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations. For additional information, see “Environmental Matters” in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Financing Activities

In 2023, net cash used for financing activities was $112 million, compared to $960 million of cash used for financing activities in 2022, a decrease of $848 million. We paid $449 million in dividends on our common stock in 2023, compared to $420 million paid in 2022. We repurchased and retired 0.3 million shares of the Company's common stock for $42 million in 2023, compared to repurchases of 4.0 million shares for $523 million in 2022.

In November 2023, we issued $400 million of 5.70% senior notes due 2033 through a registered public offering. The Company paid $4 million of debt issuance costs associated with the new notes, of which $3 million was funded using the net proceeds received from the issuance of new notes and $1 million was funded using cash on hand. The net proceeds received from the issuance of the new notes were invested in time deposits. We intend to use the net proceeds from this issuance, together with a portion of cash on hand, to redeem, repurchase, or otherwise repay at or prior to maturity our outstanding 3.65% senior notes due 2024, which mature on September 15, 2024.

See Note 10, Debt, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our debt.

Commitments

Contractual Obligations

Our cash requirements greater than twelve months from contractual obligations and commitments include:

•
Debt obligations and interest payments. See Note 10, Debt, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our debt obligations and interest payments and the timing of expected future payments.

•
Operating and finance leases. See Note 3, Leases, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our lease obligations and the timing of expected future payments.

•
Asset retirement obligations. See Note 13, Asset Retirement Obligations, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our asset retirement obligation at the end of the period.

•
Purchase commitments. Purchase commitments relate to various purchase agreements for items such as minimum amounts of energy and fiber purchases. See Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our purchase commitments and the timing of expected future payments.

•
Employee benefit obligations. See Note 12, Employee Benefits Plans and Other Postretirement Benefits, of the Consolidated Financial Statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information on our employee benefit obligations and the timing of expected future benefit payments under our pension plans and postretirement plans.

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Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as of December 31, 2023.

Inflation and Other General Cost Increases

We are subject to both contractual, inflation, and other general cost increases. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflation and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity.

In 2023, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $6.7 billion, and excluding non-cash costs (depreciation, depletion and amortization, pension and postretirement expense, and share-based compensation expense) was $6.1 billion. A 1% increase in COS and SG&A costs would increase costs by $67 million and cash costs by $61 million.

Certain items of product input costs have historically been subject to more cost volatility including fiber, purchased energy, and chemicals.

Energy

Our mills represent about 90% of our total purchased fuel costs. In 2023, our Packaging and Paper mills consumed about 93 million MMBTUs of fuel, including internally generated and externally purchased, to produce both steam and electricity. The following table for 2023 provides the total MMBTUs purchased externally by fuel type each quarter and the average cost per MMBTU by fuel type for the year. The cost per MMBTU includes the cost of the fuel plus our transportation and delivery costs.

In addition, the mills purchased 21.03 million CkWh (hundred kilowatt-hours) of electricity in 2023. The purchases by quarter and the average cost per CkWh were as follows:

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Regulatory and Environmental Matters

Our operations are subject to our compliance with the laws and regulations in the jurisdictions in which we operate, primarily in the United States. Of particular importance are laws and regulations relating to the environment and health and safety matters.

Environmental compliance requirements are a significant factor affecting our business. We employ processes in the manufacture of containerboard, paper, and pulp, which result in various discharges, emissions and waste disposal. These processes are subject to numerous federal, state, local and foreign environmental laws and regulations. We operate and expect to continue to operate, under environmental permits and similar authorizations from various governmental authorities that regulate such discharges, emissions, and waste disposal. The most significant of these laws affecting the Company are:

•
Resource Conservation and Recovery Act (RCRA);

•
Clean Water Act (CWA);

•
Clean Air Act (CAA);

•
The Emergency Planning and Community Right-to-Know-Act (EPCRA);

•
Toxic Substance Control Act (TSCA); and

•
Safe Drinking Water Act (SDWA).

We believe that we are currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. The Company works diligently to anticipate and budget for the impact of applicable environmental regulations and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition. For both the years ended December 31, 2023 and 2022, we spent $50 million, and in 2021, we spent $44 million, to comply with the requirements of these and other environmental laws. Additionally, we had $14 million of environmental capital expenditures in 2023, $11 million in 2022, and $10 million in 2021.

In January 2013, the U.S. Environmental Protection Agency (the “EPA”) established a three-year deadline for compliance with the Boiler MACT regulations, establishing air emissions standards and certain other requirements for industrial boilers. PCA's compliance actions involved modifying or replacing certain boilers, and all PCA mills are in full compliance with Boiler MACT requirements. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how this decision will impact our existing Boiler MACT compliance efforts or whether we will incur additional costs to comply with any revised standards.

As is the case with any industrial operation, PCA has, in the past, incurred costs associated with the remediation of soil or groundwater contamination, as required by the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the federal “Superfund” law, and analogous state laws. Cleanup requirements arise with respect to properties the Company currently owns or operates, former facilities and off-site facilities where the Company has disposed of hazardous substances. As part of the sale to PCA of the containerboard and corrugated products business of Pactiv Corporation in April 1999, Pactiv agreed to retain all liability for all former facilities and all sites associated with pre-closing off-site waste disposal. Pactiv also retained environmentally impaired real property in Filer City, Michigan unrelated to current mill operations. In addition, OfficeMax (now an indirect, wholly owned subsidiary of ODP) retains responsibility for certain environmental liabilities related to some of the businesses, facilities, and assets we acquired from Boise. Generally, this responsibility relates to hazardous substance releases and other environmental incidents that arose before 2004. Some of these liabilities could be significant; however, ODP may not have sufficient funds to satisfy its indemnification obligations, and in some cases, we may not be entitled to such indemnification.

Because liability for remediation costs under environmental laws is strict, meaning that liability is imposed without fault, joint and several, meaning that liability is imposed on each party without regard to contribution, and retroactive, PCA could receive notifications of cleanup liability in the future and this liability could be material. From 2006 through 2023, there were no significant environmental remediation costs at PCA's mills and corrugated plants. As of December 31, 2023, we maintained an environmental reserve of $25.8 million relating to on-site landfills and surface impoundments as well as ongoing and anticipated remedial projects. The Company believes that it is not reasonably possible that future environmental expenses above the $25.8 million accrued at December 31, 2023, will have a material impact on its financial condition, results of operations, and cash flows.

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While legislation regarding the regulation of greenhouse gas emissions has been proposed at the federal level, it is uncertain whether such legislation will be passed and, if so, what the breadth and scope of such legislation will be. The result of the regulation of greenhouse gas emissions could be an increase in our future environmental compliance costs through carbon cap and trade systems, carbon or other related taxes, or additional capital expenditures to modify facilities to reduce carbon emissions, which may be material. However, climate change legislation and the resulting future energy policy could also provide us with opportunities if the use of renewable energy is encouraged. We currently self-generate the majority of our power requirements at our mills using renewable biogenic fuel such as bark, black liquor and biomass, which are derived from renewable and sustainable resources. While we believe we are well-positioned to take advantage of any renewable energy incentives, it is uncertain what the ultimate costs and opportunities of any climate change legislation will be and how our business and industry will be affected.

We are seeking to further improve our environmental impact and have voluntarily set goals to reduce our absolute Scope 1 and 2 (market-based) greenhouse gas emissions by 35% by 2030 from a 2021 baseline year and to reach net-zero carbon emissions within our own operations and our value chain by 2050. In addition, we and our industry support the American Forest & Paper Association's goal of a 50% reduction in Scope 1 and Scope 2 greenhouse gas emissions intensity by 2030 from a 2005 baseline. We have a carbon neutrality team, consisting of a cross-functional group of key operational, engineering, environmental, and sustainability personnel to lead our efforts. Our strategy to achieve greenhouse gas emissions reductions is premised upon the carbon neutrality of the biogenic fuels used in our operations and we believe that meaningful reductions in greenhouse gas emissions can be achieved through investment in more efficient operations utilizing carbon-neutral fuels and in emerging and advancing technologies. We regularly work to identify and implement projects that will improve our efficiency. To what extent and when we embark upon major capital projects to reduce emissions will depend in part upon technology advancements, emerging regulatory and tax policies involving greenhouse gas emissions and incentives to invest in projects that reduce emissions. We also regularly assess the use of alternative, non-emitting energy sources at our own facilities (such as solar) and opportunities to support additive carbon-free grid power via renewable energy certificates (RECs) and power purchase agreements (PPAs), where feasible to do so, and partnering with utilities to procure carbon-free power where opportunities exist. We annually report key data to our stakeholders regarding our greenhouse gas emissions, among other things, in our responsibility report. Our responsibility report is available on our website and is not intended to be incorporated by reference herein.

We are also subject to extensive federal, state and local laws related to workplace health and safety, and our safety management system includes measures to assure compliance with these laws and regulations. We do not believe that future compliance with health and safety laws and regulations will have a material adverse effect on our financial condition, results of operations or cash flows.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, PCA evaluates its estimates, including those related to business combinations, goodwill and intangible assets, pensions and other postretirement benefits, environmental liabilities, income taxes, and long-lived asset impairment, among others. PCA bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our Board of Directors. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:

Pensions

The Company accounts for defined benefit pension plans in accordance with Accounting Standards Codification (“ASC”) 715, Compensation - Retirement Benefits. The calculation of pension expense and pension liabilities requires decisions about a number of key assumptions that can significantly affect expense and liability amounts, including discount rates, expected return on plan assets, expected rate of compensation increases, longevity and service lives of participants, expected contributions, and other factors. The pension assumptions used to measure pension expense and liabilities are discussed in Note 12, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

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We recognize the funded status of our pension plans on our Consolidated Balance Sheet and recognize the actuarial and experienced gains and losses and the prior service costs and credits as a component of “Accumulated Other Comprehensive Loss” in our Consolidated Statement of Changes in Stockholders' Equity. Actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2023, we had $70.7 million of actuarial losses and prior service costs, net of tax, recorded in “Accumulated other comprehensive loss” on our Consolidated Balance Sheet. Accumulated losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of assets will be recognized on a straight-line basis over the average remaining service period of active employees in the PCA plans (which is between six and nine years) and over the average remaining lifetime of inactive participants of the Boise plan (which is approximately 23 years), to the extent that losses are not offset by gains in subsequent years. While we believe that the assumptions used to measure our pension obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension obligations and future expense.

We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period. As discussed above, the future effects of pension plans on our financial position and results of operations will depend on economic conditions, employee demographics, mortality rates, retirement rates, investment performance, and funding decisions, among other factors. The following table presents selected assumptions used and expected to be used in the measurement of pension expense in the following periods (dollars in millions):

A change of 0.25% in either direction to the discount rate or the expected rate of return on plan assets would have had the following effect on 2023 and 2024 pension expense (dollars in millions):

(a)
The sensitivities shown above are specific to 2023 and 2024. The sensitivities may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.

For more information related to our pension benefit plans, see Note 12, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

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Reconciliations of Non-GAAP Financial Measures to Reported Amounts

Net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the years ended December 31, 2023 and 2022 follow (dollars in millions):

(a)
For 2023, includes charges related to the closure of corrugated products facilities and design centers. These costs were partially offset by a gain on sale of a corrugated products facility. For 2022, includes charges consisting of closure costs related to corrugated products facilities. These costs were partially offset by insurance proceeds received for a natural disaster at one of the corrugated products facilities, a gain on sale of assets related to a corrugated products facility, and a favorable lease buyout for a closed corrugated products facility.

(b)
For 2023 and 2022, includes charges related to the announced discontinuation of production of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.

(c)
Includes income from a favorable inventory adjustment related to the December 2021 Advance Packaging Corporation acquisition, partially offset by acquisition and integration related costs.

The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):

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The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items (dollars in millions):