PACKAGING CORP OF AMERICA

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.

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.