PACKAGING CORP OF AMERICA (PKG) FY 2022 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, 2020, 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, 2021, filed with the Securities and Exchange Commission on February 24, 2022. Such information is presented in Item 7 of such report under the subcaptions “Results of Operations —Year Ended December 31, 2021, Compared with Year Ended December 31, 2020” 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 89 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 $8.5 billion for the year ended December 31, 2022 and $7.7 billion for 2021. We reported $1,030 million of net income, or $11.03 per diluted share, in 2022, compared to $841 million, or $8.83 per diluted share, in 2021. Net income included $10 million of expense for special items in 2022, compared to $53 million of expense for special items in 2021. Special items in both periods are described later in this section. Excluding special items, we recorded $1,040 million of net income, or $11.14 per diluted share, in 2022, compared to $894 million, or $9.39 per diluted share, in 2021. The increase was driven primarily by higher prices and mix in our Packaging and Paper segments, partially offset by lower volumes in our Packaging and Paper segments, higher operating and converting costs, higher freight and logistic expenses, and higher 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 $470 million of cash and marketable debt securities and, including borrowing availability under its revolving credit facility, $791 million in liquidity.

Packaging segment income from operations was $1,424 million in 2022, compared to $1,306 million for 2021. Packaging segment EBITDA excluding special items was $1,849 million in 2022, compared to $1,688 million in 2021. The increase was driven primarily by higher containerboard and corrugated products prices and mix, partially offset by lower sales and production volumes, higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense. Packaging volumes remained strong at or above 2021 levels through the middle of the year. Volume then began to decline as general economic conditions deteriorated and our customers began to reduce their inventories and orders accordingly, which has resulted in lower demand for our products. Overall, our corrugated products shipments were down 3.4% for the year as those trends continued through the second half of the year. In order to achieve appropriate production levels for our demand and necessary inventory levels, we reduced our production of containerboard at our packaging mills during the second half of the year. 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 throughout 2021 and through the first three quarters of 2022, containerboard prices published by industry publications began to decline during the fourth quarter of 2022. We continued to experience cost inflation across our business, including in the areas of labor and benefits, chemicals, energy, repairs, materials, and supplies, as well as higher transportation costs. 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.

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Paper segment income from operations was $103 million in 2022, compared to $39 million in 2021. Paper segment EBITDA excluding special items was $132 million in 2022, compared to $72 million in 2021. The increase was due primarily to higher paper prices and mix and lower operating costs, partially offset by lower sales and production volumes, higher annual outage expense, and higher freight and logistic expenses. The Jackson mill produced only containerboard, and no paper products, during 2022, which drove lower sales and production volumes.

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 2022 and 2021 were as follows:

(a)
For 2022 and 2021, includes $14.1 million and $14.0 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.

(b)
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. For 2021, includes $3.6 million of income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of the San Lorenzo, California facility, a gain on sale of transportation assets and corrugated products facilities, and insurance proceeds received for a natural disaster at one of the corrugated products facilities, partially offset by closure costs related to corrugated products facilities.

(c)
For 2022, 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. For 2021, includes $0.9 million of charges for acquisition and integration costs related to the acquisition.

(d)
Includes $58.9 million of costs related to the Company's debt refinancing completed in October 2021, which included a redemption premium and the write-off of the remaining balance of unamortized debt issuance costs.

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 3.8% during 2022, compared to 2021. Reported industry containerboard production decreased 5.2% compared to 2021, and reported industry containerboard inventories at the end of 2022 were approximately 2.7 million tons, down 2.1% compared to 2021. Reported containerboard export shipments decreased 7.7% compared to 2021. Prices reported by trade publications increased by $60 per ton for linerboard and $70 per ton for corrugating medium in March 2022. Prices decreased $20 per ton for linerboard and $40 per ton for corrugating medium in November, followed by an additional decrease in December of $20 per ton each. In January 2023, prices decreased $10 per ton for linerboard and $30 per ton for corrugating medium.

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 were flat in 2022, compared to 2021. Average prices reported by a trade publication for cut size office papers increased $40 per ton in February and March 2022, $90 per ton in May 2022, and $65 per ton in September 2022. The average price was higher by $259, or 22%, in 2022 compared to 2021.

Outlook

For the first quarter of 2023, in our Packaging segment we expect corrugated products demand on a per day basis to be similar to fourth quarter levels, although we expect higher total volume as there are four additional shipping days compared to the fourth quarter of 2022. Prices for containerboard and corrugated products are expected to decrease as a result of the recent decreases in the published domestic containerboard prices, and prices for containerboard in export markets are expected to be lower as well. We expect slightly higher paper prices on flat sales volume. Labor costs and certain indirect costs will increase as some containerboard mill operations were temporarily idled during the fourth quarter and resumed operations during the first quarter. In addition, we anticipate higher labor and benefits costs and other timing-related expenses that occur at the beginning of a new year as well as higher prices for many chemicals, particularly starch and caustic soda. However, we expect lower wood and recycled fiber prices, lower energy prices, and lower scheduled maintenance outage expenses during the first quarter when compared to the fourth quarter of 2022. Lastly, we expect higher interest and non-operating pension expenses and a higher tax rate, but we expect to benefit on an earnings per share basis from recent share repurchases. Considering these items, we expect first quarter earnings to be lower than the fourth quarter of 2022.

Results of Operations

Year Ended December 31, 2022, Compared with Year Ended December 31, 2021

The historical results of operations of PCA for the years ended December 31, 2022 and 2021 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.

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Net Sales

Net sales increased $748 million, or 9.7%, to $8,478 million in 2022, compared to $7,730 million in 2021.

Packaging. Net sales increased $728 million, or 10.3%, to $7,781 million, compared to $7,053 million in 2021, due to higher prices and mix ($963 million), partially offset by lower volumes ($235 million). In 2022, our domestic containerboard prices increased 12.0% and export prices increased 16.0% compared to 2021. Our containerboard outside shipments decreased 12.2%, and total corrugated products shipments were down 3.4% in total and per workday, compared to 2021.

Paper. Net sales increased $22 million, or 3.7%, to $622 million, compared to $600 million in 2021. The increase was due to higher prices and mix ($96 million), partially offset by lower volume ($74 million).

Gross Profit

Gross profit increased $218 million in 2022, compared to 2021. The increase was driven primarily by higher prices and mix in our Packaging and Paper segments, partially offset by lower volumes in our Packaging and Paper segments, higher operating and converting costs, higher freight and logistic expense, and higher annual outage expense. In 2022, gross profit included $7 million of special items expense related to Jackson mill conversion-related activities, corrugated facility closure costs, and income related to acquisition and integration-related activities, compared to $7 million of special items expense related to Jackson mill conversion-related activities, corrugated facility closure costs, and corrugated facility acquisition costs in 2021.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (SG&A) increased $32 million in 2022 compared to 2021. The increase was primarily due to higher information technology expenses, outside services, travel, and employee salaries and fringe benefits.

Other Expense, Net

Other expense, net for the years ended December 31, 2022 and 2021 are set forth below (dollars in millions):

We discuss these items in more detail in Note 7, 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 increased $179 million, or 14.4%, for the year ended December 31, 2022, compared to 2021. Income from operations in 2022 included $14 million of expense for special items compared to $11 million in 2021. Special items in 2022 consisted of $14 million of expense for Jackson mill conversion-related activities, $1 million of corrugated facility closure costs, and $1 million of income related to acquisition and integration-related activities. 2021 special items included $14 million of expense for Jackson mill conversion-related costs and other paper-to-containerboard conversion-related activities, $1 million of expense related to the acquisition of Advance Packaging, and $4 million of income related to corrugated products facility closures.

Packaging. Segment income from operations increased $118 million to $1,424 million, compared to $1,306 million in 2021. The increase in 2022 related primarily to higher containerboard and corrugated products prices and mix ($842 million), partially offset by lower containerboard and corrugated products sales and production volumes ($166 million), higher operating and converting costs ($394 million), higher freight expense ($105 million), higher depreciation expense ($40 million), higher annual outage expense ($13 million), and other costs ($5 million). Special items in 2022 included $5 million of expense for Jackson mill conversion-related activities, corrugated facility closure costs, and income related to acquisition and integration-related activities. Special items in 2021 included $4 million of expense for Jackson mill conversion-related activities, $1 million of expense related to the acquisition of Advanced Packaging, and $3 million of income related to corrugated products facility closures.

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Paper. Segment income from operations increased $64 million to $103 million, compared to $39 million in 2021. The increase, excluding special items, primarily related to higher paper prices and mix ($98 million), lower operating costs ($4 million), and lower depreciation expense ($3 million), partially offset by lower sales and production volumes ($27 million), higher annual outage expense ($8 million), higher freight expense ($4 million), and other costs ($2 million). Special items in the Paper segment included $9 million of expense for Jackson mill conversion-related activities in 2022 and 2021.

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

During 2022, non-operating pension income decreased $5 million compared to 2021. The decrease in non-operating pension expense was primarily related to assumption changes, partially offset by favorable 2021 asset performance.

Interest expense, net, during 2022 decreased $82 million compared to 2021. The decrease in interest expense, net in 2022 was primarily due to higher charges ($59 million) in the prior year related to the Company's October 2021 debt refinancing, lower interest rates on the Company's fixed-rate debt ($8 million) as a result of the Company's debt refinancing, higher interest income ($8 million) due to higher rates on invested cash balances, and higher capitalized interest ($4 million) related to the Company's increased levels of capital expenditures in 2022.

During 2022, we recorded $335 million of income tax expense, compared to $268 million of income tax expense during 2021. The effective tax rate for 2022 and 2021 was 24.5% and 24.1%, respectively. The higher effective tax rate for 2022 was primarily due to higher nondeductible employee remuneration paid to covered employees.

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 $320 million of cash and cash equivalents, $150 million of marketable debt securities, and $321 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. 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.

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During 2022, net cash provided by operating activities was $1,495 million, compared to $1,094 million for 2021, an increase of $401 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $199 million, primarily due to higher income from operations as discussed above. Cash increased by $202 million due to changes in operating assets and liabilities, primarily due to the following:

a)
a favorable change in accounts receivable levels in 2022 compared to 2021 due to lower sales volumes in the Packaging segment during the latter portion of 2022, partially offset by higher pricing in the Packaging and Paper segments in 2022; and

b)
a net favorable change in inventories in 2022 due to a smaller increase in Packaging segment inventory levels in 2022 compared to 2021, primarily in raw materials and finished goods.

These favorable changes were partially offset by:

a)
an unfavorable change in accounts payable in 2022 compared to 2021 primarily due to lower Packaging production and sales volumes, which resulted in lower purchasing and manufacturing activities in 2022; and

b)
an unfavorable change in our income tax receivables due to higher tax payments in 2022.

Investing Activities

We used $834 million for investing activities in 2022, compared to $794 million in 2021. In 2022, we spent $824 million for internal capital investments, compared to $605 million in 2021. During 2021, we acquired Advance Packaging Corporation for $193 million, including a purchase price adjustment based upon net working capital.

The details of capital expenditures for property and equipment, excluding acquisitions, by segment for the years ended December 31, 2022 and 2021 are included in the table below (dollars in millions).

We expect capital investments in 2023 to be approximately $475 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 $20 million in 2023. 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 2022, net cash used for financing activities was $960 million, compared to $656 million of cash used for financing activities in 2021, an increase of $304 million. We paid $420 million in dividends on our common stock in 2022, compared to $380 million paid in 2021. We repurchased and retired 4.0 million shares of the Company's common stock for $523 million in 2022, compared to repurchases of 1.4 million shares for $193 million in 2021. In 2021, we issued $700 million of 3.05% Senior Notes due 2051 (the "New Notes"), the proceeds of which were used to redeem $700 million of 4.50% Senior Notes due 2023 in October 2021. We also paid $8 million of debt issuance costs associated with the 2021 debt refinancing and $1 million of debt issuance costs related to the New Revolving Credit Agreement that was entered into on June 8, 2021.

See Note 11, 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 the debt refinancing.

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Commitments

Contractual Obligations

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

•
Debt obligations and interest payments. See Note 11, 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 14, 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.

•
Capital additions. See Note 20, 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 approved capital projects with future spending in connection with the expansion and replacement of existing facilities and equipment.

•
Purchase commitments. Purchase commitments relate to various purchase agreements for items such as minimum amounts of energy and fiber purchases. See Note 20, 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 13, 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.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as of December 31, 2022.

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 2022, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $7.0 billion, and excluding non-cash costs (depreciation, depletion and amortization, pension and postretirement expense, and share-based compensation expense) was $6.5 billion. A 1% increase in COS and SG&A costs would increase costs by $70 million and cash costs by $65 million.

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

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Energy

Our mills represent about 90% of our total purchased fuel costs. In 2022, our Packaging and Paper mills consumed about 91 million MMBTUs of fuel, including internally generated and externally purchased, to produce both steam and electricity. The following table for 2022 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 22.00 million CkWh (hundred kilowatt-hours) of electricity in 2022. The purchases by quarter and the average cost per CkWh were as follows:

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 the year ended December 31, 2022, we spent $50 million, and for the years ended December 31, 2021 and 2020, we spent $44 million, to comply with the requirements of these and other environmental laws. Additionally, we had $11 million of environmental capital expenditures in 2022, $10 million in 2021, and $9 million in 2020.

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.

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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 2022, there were no significant environmental remediation costs at PCA's mills and corrugated plants. As of December 31, 2022, we maintained an environmental reserve of $25.2 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 $25.2 million accrued at December 31, 2022, will have a material impact on its financial condition, results of operations, and cash flows.

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 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 by setting 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.

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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 13, 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.

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, 2022, we had approximately $100.3 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 PCA plans (which is between six and nine years) and over the average remaining lifetime of inactive participants of Boise plans (which is between 22 and 25 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):

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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 2022 and 2023 pension expense (dollars in millions):

(a)
The sensitivities shown above are specific to 2022 and 2023. 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 13, 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.

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, 2022 and 2021 follow (dollars in millions):

(a)
For 2022 and 2021, 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.

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(b)
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. For 2021, includes income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of the San Lorenzo, California facility, a gain on sale of transportation assets and corrugated products facilities, and insurance proceeds received for a natural disaster at one of the corrugated products facilities, partially offset by closure costs related to corrugated products facilities.

(c)
For 2022, includes income from a favorable inventory adjustment related to the December 2021 Advance Packaging Corporation acquisition, partially offset by acquisition and integration related costs. For 2021, includes charges for acquisition and integration costs related to the acquisition.

(d)
Includes costs related to the Company's debt refinancing completed in October 2021, which included a redemption premium and the write-off of the remaining balance of unamortized debt issuance 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):