International Paper - 10-K annual report 2014

The markets in the pulp, paper and packaging product lines are large and fragmented. The major markets, both U.S. and non-U.S., in which the Company sells its principal products are very competitive. Our products compete with similar products produced by other forest products companies. We also compete, in some instances, with companies in other industries and against substitutes for wood-fiber products.

The Company operates its primary research and development center in Loveland, Ohio, as well as several product laboratories. Additionally, the Company has an interest in ArborGen, Inc., a joint venture with certain other forest products companies.

Climate change refers to any significant change in the measure of the earth’s climatic conditions such as temperature, precipitation, or winds that persist for decades or longer. Climate change can be caused by natural factors, such as changes in the sun’s intensity and ocean circulation, and human activities can also affect the composition of the earth’s atmosphere, such as from the burning of fossil fuels. In an effort to mitigate the potential of climate change impacts from human activities, various international, national and sub-national (regional, state and local) governmental actions have been undertaken. Presently, these efforts have not materially impacted International Paper, but such efforts may have a material impact on the Company in the future.

The 1997 Kyoto Protocol established emission reduction obligations for certain countries where the Company had and continues to have operations. Though the Kyoto Protocol expired in 2012, several countries, and most notably the European Union (EU), extended their emissions commitments until 2020. A successor program to the Kyoto Protocol is the subject of on-going international negotiations including a

Conference of the Parties to the Kyoto Protocol scheduled for December 2015. It is not yet clear if these negotiations will result in a new International Climate Change Agreement and, if so, what form it may take. Due to this uncertainty, it is not possible at this time to estimate the potential impacts of future international agreements on the Company.

To assist member countries in meeting obligations under the Kyoto Protocol, the EU established and continues to operate an Emissions Trading System (EU ETS). Currently, we have two sites directly subject to regulation under Phase III of the EU ETS, one in Poland and one in France. Other sites that we operate in the EU experience indirect impacts of the EU ETS through purchased power pricing. Neither the direct nor indirect impacts of the EU ETS have been material to the Company, but they could be material to the Company in the future depending on how allocation of and market prices for greenhouse gas (GHG) credits evolve over the coming years.

In the U.S., the Kyoto Protocol was not ratified and Congress has not passed GHG legislation. The U.S. EPA has enacted (i) regulations to control GHGs from mobile sources (through transportation fuel efficiency standards), (ii) New Source Performance Standards (NSPS) for new Electrical Generating Units (EGUs) and (iii) regulations requiring reporting of GHGs from sources of GHGs greater than 25,000 tons per year. In 2014, the Company reported to EPA the GHG emissions from 23 of our U.S. manufacturing sites and 8 landfills.

In 2010, EPA issued GHG regulations for new and modified sources under the New Source Review and Title V Operating Permit programs and shortly thereafter deferred the applicability of these GHGs regulations to biomass carbon emissions until the summer of 2014. EPA subsequently issued guidance clarifying that GHGs cannot be the sole basis for designating a new or modified source as a major source subject to new source review or Title V air permitting requirements. EPA also established that BACT (Best Available Control Technology) would be required for any GHG emissions increase above 75,000 tons per year if a new source or Title V review was required for other regulated pollutants.

On November 19, 2014 EPA issued a revised draft carbon accounting framework addressing the circumstances under which biomass combustion can be considered carbon neutral. EPA has stated it intends to issue future rulemakings to address how states may use the revised framework in implementing state permit rules and in developing plans for regulating GHGs from utility electric generators. Given the uncertainties regarding the framework and scope of future GHG

rulemaking, it is unclear what impacts, if any, EPA’s actions in this area will have on the Company’s operations.

In 2013, EPA issued final regulations establishing New Source Performance Standards (NSPS) for new Electrical Generating Units (EGUs). This regulation is the first of several expected NSPSs that EPA will implement over the coming years. The EPA has not yet identified the pulp and paper industry in the first phase of sectors to be covered by the new standards. However, we anticipate that at some future time pulp and paper sources will be subject to new GHG NSPS rules. It is unclear what impacts, if any, future GHG NSPS rules will have on the Company’s operations.

In 2014, EPA proposed regulations for GHGs from new and existing utility electric generators. These regulations have the potential to increase purchased electricity prices across the United States. The proposed rules phase in the compliance obligations between about 2018 and 2030 and they remain subject to substantive revisions before final promulgation. EPA estimates purchased electricity prices will increase by less than seven percent, but some utilities are estimating significantly higher price increases. Given the uncertainties regarding the scope of the final regulations, it is unclear what impacts, if any, these regulations will have on the Company’s operations.

State, Regional and Local Measures

A few U.S. states have enacted or are considering legal measures to require the reduction of emissions of GHGs by companies and public utilities, primarily through the development of GHG emission inventories or regional GHG cap-and-trade programs. One such state is California. The Company does not have any sites currently subject to California's GHG regulatory plan. There may be indirect impacts from changing input costs (such as electricity) at some of our California converting operations but these have yet to manifest themselves in material impacts. Although we are monitoring proposed programs in other states, it is unclear what impacts, if any, state-level GHG rules will have on the Company’s operations.

Summary

Regulation of GHGs continues to evolve in various countries in which we do business. While it is likely that there will be increased governmental action regarding GHGs and climate change, at this time it is not reasonably possible to estimate either a timetable for the implementation of any new regulations or our costs of compliance. In addition to possible direct impacts, future legislation and regulation could have indirect impacts on International Paper, such as higher prices for transportation, energy and other inputs, as well as more protracted air permitting processes, causing

delays and higher costs to implement capital projects. International Paper has controls and procedures in place to stay informed about developments concerning possible climate change legislation and regulation in the U.S. and in other countries where we operate. We regularly assess whether such legislation or regulation may have a material effect on the Company, its operations or financial condition, and whether we have any related disclosure obligations.

International Paper, the USW, and several other unions have entered into two master agreements covering various mills and converting facilities. These master agreements cover several specific items, including wages, select benefit programs, successorship, employment security, and health and safety. Individual facilities continue to have local agreements for other subjects not covered by the master agreements. If local facility agreements are not successfully negotiated at the time of expiration, under the terms of the master agreements the local contracts will automatically renew with the same terms in effect. The mill master agreement covers 19 of our U.S. pulp, paper, and packaging mills; the converting agreement includes 61 of our converting facilities. In addition, International Paper is party to a master agreement with District Council 2, International Brotherhood of Teamsters, covering 13 additional converting facilities.

During 2014, local labor agreements were negotiated at four mills and 27 converting facilities. In 2015, local labor agreements are scheduled to be negotiated at 18 facilities, including five mills and 13 converting facilities. Fourteen of these agreements will automatically renew under the terms of the applicable master agreement if new agreements are not reached.

general counsel & corporate secretary from May 2011 until November 2011, vice president from March 2011 until May 2011, associate general counsel, chief ethics and compliance officer from 2009 until 2011, and associate general counsel from 2006 until 2009. Ms. Ryan joined International Paper in 1988.

Certain statements in this Annual Report on Form 10-K that are not historical in nature may be considered “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. These statements are not guarantees of future performance and reflect management’s current views with respect to future events, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) the level of our indebtedness and increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; and (vii) our ability to achieve the benefits we expect from strategic acquisitions, divestitures and restructurings. These and other factors that could cause or contribute to actual

results differing materially from such forward looking statements are discussed in greater detail below in “Item 1A. Risk Factors.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

All financial information and statistical measures regarding our 50/50 Ilim joint venture in Russia (“Ilim”), other than historical International Paper Equity Earnings and dividends received by International Paper, have been prepared by the management of Ilim. In providing this information in this filing, we are relying on the effectiveness of Ilim's internal control environment. Any projected financial information and statistical measures reflect the current views of Ilim management and are subject to the risks and uncertainties that cause actual results to differ materially from those expressed or implied by such projections.

RISKS RELATING TO INDUSTRY CONDITIONS

Our profitability has been, and will continue to be, affected by changes in the costs and availability of such

raw materials, energy sources and transportation sources.

RISKS RELATING TO MARKET AND ECONOMIC FACTORS

credit facilities as of December 31, 2014. The level of our indebtedness could have important consequences to our financial condition, operating results and business, including the following:

In addition, we are subject to agreements that require meeting and maintaining certain financial ratios and covenants. A significant or prolonged downturn in general business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests and could require us to take action to reduce our debt or to act in a manner contrary to our current business objectives.

dividend and reductions in capital expenditures and working capital.

contributions will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates.

RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS

restricting existing activities and products, subjecting them to escalating costs. For example, we have incurred, and expect that we will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations. There can be no assurance that future remediation requirements and compliance with existing and new laws and requirements, including with global climate change laws and regulations, Boiler MACT and NAAQSs, will not require significant expenditures, or that existing reserves for specific matters will be adequate to cover future costs. We could also incur substantial fines or sanctions, enforcement actions (including orders limiting our operations or requiring corrective measures), natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws, regulations, codes and common law. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, liability may be imposed without regard to contribution or to whether we knew of, or caused, the release of hazardous substances. As another example, we are subject to a number of labor and employment laws and regulations that could significantly increase our operating costs and reduce our operational flexibility.

RISKS RELATING TO OUR OPERATIONS

Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and having a negative effect on our business and financial results.

to and misuse of applications required by our customers to conduct business with International Paper. Access to internal applications required to plan our operations, source materials, manufacture and ship finished goods and account for orders could be denied or misused. Theft of intellectual property or trade secrets, and inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result in lost sales, business delays, negative publicity and could have a material effect on our business.

None.

Not applicable.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PERFORMANCE GRAPH

The following graph compares a $100 investment in Company stock on December 31, 2009 with a $100 investment in our Return on Invested Capital (ROIC) Peer Group and the S&P 500 also made at market close on December 31, 2009. The graph portrays total return, 2009–2014, assuming reinvestment of dividends.

FINANCIAL GLOSSARY

Current ratio—

current assets divided by current liabilities.

Total debt to capital ratio—

long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt and total shareholders’ equity.

Return on shareholders’ equity—

net earnings attributable to International Paper Company divided by average shareholders’ equity (computed monthly).

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

2014:

2013:

2012:

2011:

2010:

International Paper delivered strong results during 2014, driven by margin expansion in all our key businesses, most notably in our North American Industrial Packaging business. We generated record cash flow from operations which enabled the Company to return cash to our shareholders in the form of approximately $1 billion in share buy-backs and a 14% increase in the quarterly dividend beginning with the 2014 fourth quarter dividend payment. Finally, with respect to our balanced use of cash, we completed a bond issue and related tender offer which enabled us to address outstanding debt due in 2018 and 2019 as well as shift from higher cost to lower cost debt.

Our 2014 results reflect continued margin expansion driven by sustained price improvements in our North American Industrial Packaging business along with improved pricing in our North American Printing Papers and Consumer Packaging businesses. In aggregate, volumes were down, largely due to declines in our North American Printing Papers business following the completion of the Courtland mill closure. Input costs increased year over year largely due to higher wood costs and higher energy costs, which were impacted by the significant adverse weather events experienced in much of the U.S. during the 2014 first quarter. Our Ilim joint venture delivered continued solid operational performance in 2014 associated with the productivity ramp-up of the two joint venture funded capital projects and other efficiency improvements. Ilim’s 2014 results were significantly impacted by unfavorable non-cash foreign currency movements associated with Ilim’s U.S. dollar denominated debt, particularly in the 2014 fourth quarter. Finally, during 2014, we completed the spin-off of the xpedx distribution business which included our receipt of $411 million in special payments.

Overall, 2014 reflects our successful efforts to drive margin growth across all of our key businesses. We once again generated returns in excess of our cost of capital while returning cash to our shareholders in the form of increased dividends and share repurchases. We exited

2014 with significant momentum, entering 2015 with a particular focus on execution to drive continued earnings growth and strong free cash flow.

Looking ahead to the 2015 first quarter, we expect volume to be largely flat with the exception of seasonally lower volumes in our Brazilian and European Printing Papers businesses. The fourth quarter historically represents the strongest volume quarter for our Brazilian Printing Papers business. Pricing is expected to be relatively stable except for our European Printing Papers and European Industrial Packaging businesses where pricing pressure continues due to the challenging economic conditions. We expect improved operating performance as we move past the isolated issues that impacted the 2014 fourth quarter in our North American Industrial Packaging and Brazil Printing Papers businesses. Input costs should be relatively stable in the 2015 first quarter with some improvement in the North American Industrial Packaging business, primarily related to lower energy and fuel costs. Planned maintenance downtime costs should increase primarily driven by outages in our North American Industrial Packaging business. Equity earnings from our Ilim joint venture are expected to benefit from the absence of the significant negative impact from remeasurement of Ilim’s U.S. dollar denominated debt due to devaluation of the Russian ruble in the 2014 fourth quarter.

For the 2015 full year, we anticipate an overall challenging macroeconomic environment but expect to benefit from the strengthening U.S. economy. Even in those markets facing economic headwinds, namely Brazil and Russia, our low cost export position should enable us to effectively navigate these challenges. There continues to be significant optimization opportunities in our North American Industrial Packaging business which we expect to further realize during 2015. Additionally, we expect improvement in the results of our Brazilian Industrial Packaging business along with the benefits of continued margin expansion at the Ilim joint venture. We also expect to take further advantage of the growing demand for fiber-based food packaging. In addition, we expect to realize the benefits of the repositioned North American Printing Papers business following the completion of the Courtland mill closure. Finally, we expect to generate strong free cash flow results but we do expect some impact from higher cash taxes driven by changes in our geographic mix of earnings and other non-repeating events that benefitted 2014 cash taxes.

Results of Operations

Industry segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Industry segment operating profits are defined as earnings before taxes, equity earnings, noncontrolling interests, interest expense, corporate items and corporate special items. Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States.

International Paper operates in three segments: Industrial Packaging, Printing Papers and Consumer Packaging.

The following table presents a reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit:

The principal changes in operating profit by segment were as follows:

impairment of the goodwill and a trade name intangible asset of the Company's India Papers business.

Discontinued Operations

businesses through strategic acquisitions, as appropriate.

Legal

While the operating results for International Paper’s various business segments are driven by a number of business-specific factors, changes in International Paper’s operating results are closely tied to changes in general economic conditions in North America, Europe, Russia, Latin America, Asia, Africa and the Middle East. Factors that impact the demand for our products include industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels, and movements in currency exchange rates.

Product prices are affected by general economic trends, inventory levels, currency exchange rate movements and worldwide capacity utilization. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood, recycled fiber and chemical costs; energy costs; freight costs; salary and benefits costs, including pensions; and manufacturing conversion costs.

Discontinued Operations

2014:

In 2014, $24 million of net income adjustments were recorded relating to discontinued businesses, including $16 million of costs associated with the spin-off of the xpedx business and $9 million of costs associated with the divestiture of the Temple-Inland Building Products business. Also included are the operating earnings of the xpedx business prior to the spin-off on July 1, 2014.

2013:

In 2013, $418 million of net income adjustments were recorded relating to discontinued businesses, including goodwill impairment charges of $366 million associated with the xpedx business, $19 million for costs associated with the restructuring of the xpedx business, $14 million for costs associated with the spin-off of the xpedx business and $19 million for costs associated with the sale of the Temple-Inland Building Products business. Also included are the operating profits for the xpedx business for the full year and for the Temple-

Inland Building Products business through the date of sale of July 19, 2013.

2012:

In 2012, $43 million of net income adjustments were recorded relating to discontinued businesses, including $33 million of costs associated with the restructuring of the xpedx business and $9 million of costs associated with the announced agreement to sell the Temple-Inland Building Products business. Also included are the operating profits for the xpedx and Temple-Inland Building Products businesses.

Income Taxes

Equity Earnings, Net of Taxes

Corporate Items and Interest Expense

decrease in 2013 from 2012 reflects lower supply chain initiative expenses, partially offset by higher pension expense.

Restructuring and Other Charges

International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) rationalize and realign capacity to operate fewer facilities with the same revenue capability and close high cost facilities, and (c) reduce costs. Annually, strategic operating plans are developed by each of our businesses. If it subsequently becomes apparent that a facility’s plan will not be achieved, a decision is then made to (a) invest additional capital to upgrade the facility, (b) shut down the facility and record the corresponding charge, or (c) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. It is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur.

Also in the fourth quarter of 2013, the Company calculated the estimated fair value of its xpedx business using the discounted future cash flows and wrote off all of the goodwill of its xpedx business, totaling $400 million, which has been included in Discontinued operations in the accompanying consolidated statement of operations. The decline in the fair value of the xpedx reporting unit and resulting impairment charge was due to a significant decline in earnings and a change in the strategic outlook for the xpedx operations.

Also during 2013, the Company recorded a pre-tax charge of $15 million ($7 million after taxes and noncontrolling interest) for the impairment of a trade name intangible asset related to our India Papers business.

No goodwill impairment charges were recorded in 2012.

Market-related downtime in 2014 decreased to approximately 281,000 tons from approximately 412,000 tons in 2013.

International Paper’s industry segments discussed below are consistent with the internal structure used to manage these businesses. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the forest products industry.

International Paper is the largest manufacturer of containerboard in the United States. Our production capacity is about 13 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is converted domestically into corrugated boxes and other packaging by our 168 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 20 recycling plants. In EMEA, our operations include three recycled fiber containerboard mills in Morocco and Turkey and 27 container plants in France, Italy, Spain, Morocco and Turkey. In Brazil our operations include three containerboard mills and four box plants. In Asia, our operations include 17 container plants in China and additional container plants in Indonesia, Malaysia, Singapore, and Thailand. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives.

International Paper is one of the world’s leading producers of printing and writing papers. Products in this segment include uncoated papers and pulp.

Our Foodservice business produces cups, lids, food containers and plates through three domestic plants and four international facilities.

In October 2007, International Paper and Ilim Holding S.A. (Ilim) completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills located in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 3.2 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.1 million acres (5.7 million hectares).

Industrial Packaging

Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production, as well as with demand for processed foods,

poultry, meat and agricultural products. In addition to prices and volumes, major factors affecting the profitability of Industrial Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.

Sales volumes decreased in 2014 compared with 2013 reflecting slightly softer market demand for boxes. Average sales price realizations were higher mainly due to the realization of price increases for boxes and domestic containerboard that were implemented in 2013. Input costs were significantly higher for wood and energy. Freight costs also increased. Planned maintenance downtime costs were $20 million higher than in 2013. Manufacturing operating costs decreased, but were offset by inflation and higher overhead and distribution costs. The business took about 655,000 tons of total downtime in 2014 of which 240,000 were market-related and 415,000 were maintenance downtime. In 2013, the business took about 777,000 tons of total downtime of which about 377,000 were market-related and 400,000 were maintenance downtime. Operating profits in 2014 included $16 million of costs associated with the integration of Temple-Inland and a charge of $35 million associated with a multi-employer pension withdrawal liability. Operating profits in 2013 included $62 million of costs associated with the integration of Temple-Inland.

Looking ahead to 2015, compared with the fourth quarter of 2014, sales volumes for boxes in the first quarter are expected to be stable. Input costs are expected to be similar for wood and recycled fiber, but lower for mill energy. Planned maintenance downtime spending is expected to be about $18 million higher with outages scheduled at the Pine Hill, Savannah, Pensacola and Vicksburg mills. Manufacturing and other operating costs are expected to improve.

Sales volumes in 2014 were higher than in 2013 reflecting recovering economic conditions and improved demand for industrial packaging. Average sales margins were higher due to increased sales prices for boxes, partially offset by higher board costs. Other input costs, primarily for energy, were lower. Operating

profits included net gains of $2 million and $13 million in 2014 and 2013, respectively, for insurance settlements and Italian government grants, partially offset by additional operating costs in 2013, related to the earthquakes in Northern Italy in May 2012, which affected our San Felice box plant.

Entering the first quarter of 2015, sales volumes are expected to increase slightly reflecting continuing economic recovery. Average sales margins are expected to be favorably impacted by lower board costs, but box prices may decline due to competitive pressures. Other input costs should be about flat.

Sales volumes in 2014 decreased compared with 2013 due to overall weaker market demand and lower box consumption in the product segments of some of our key customers. Average sales price realizations were higher reflecting the impact of sales price increases implemented in the first half of 2014. Input costs were higher, primarily for recycled fiber and chemicals. Operating costs were higher.

Looking ahead to the first quarter of 2015, sales volumes are expected to be stable. Average sales margins should improve reflecting a more favorable product mix. Input costs are expected to be stable.

Printing Papers

Demand for Printing Papers products is closely correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated cut-size products, with changes in white-collar employment levels that affect the usage of copy and laser printer paper. Pulp is further affected by changes in currency rates that can enhance or disadvantage producers in different geographic

regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs.

Sales volumes in 2014 decreased compared with 2013 due to lower market demand for uncoated freesheet

paper and the closure our Courtland mill. Average sales price realizations were higher, reflecting sales price increases in both domestic and export markets. Higher input costs for wood were offset by lower costs for chemicals, however freight costs were higher. Planned maintenance downtime costs were $14 million lower in 2014. Operating profits in 2014 were negatively impacted by costs associated with the shutdown of our Courtland, Alabama mill but benefited from the absence of a provision for bad debt related to a large envelope customer that was recorded in 2013.

Entering the first quarter of 2015, sales volumes are expected to be stable compared with the fourth quarter of 2014. Average sales margins should improve reflecting a more favorable mix although average sales price realizations are expected to be flat. Input costs are expected to be stable. Planned maintenance downtime costs are expected to be about $16 million lower with an outage scheduled in the 2015 first quarter at our Georgetown mill compared with outages at our Eastover and Riverdale mills in the 2014 fourth quarter.

Sales volumes in 2014 were about flat compared with 2013. Average sales price realizations improved for domestic uncoated freesheet paper due to the realization of price increases implemented in the second half of 2013 and in 2014. Margins were favorably affected by an increased proportion of sales to the higher-margin domestic market. Raw material costs increased for wood and chemicals. Operating costs were higher than in 2013 and planned maintenance downtime costs were flat.

Looking ahead to 2015, sales volumes in the first quarter are expected to decrease due to seasonally weaker customer demand for uncoated freesheet paper. Average sales price improvements are expected to reflect the partial realization of announced sales price increases in the Brazilian domestic market for uncoated freesheet paper. Input costs are expected to be flat. Planned maintenance outage costs should be $5 million lower with an outage scheduled at the Luiz Antonio mill in the first quarter.

Compared with 2013, sales volumes for uncoated freesheet paper in 2014 were slightly higher in both

Russia and Europe. Average sales price realizations for uncoated freesheet paper decreased in both Europe and Russia, reflecting weak economic conditions and soft market demand. In Russia, sales prices in rubles increased, but this improvement is masked by the impact of the currency depreciation against the U.S. dollar. Input costs were significantly higher for wood in both Europe and Russia, partially offset by lower chemical costs. Planned maintenance downtime costs were $11 million lower in 2014 than in 2013. Manufacturing and other operating costs were favorable.

Entering 2015, sales volumes in the first quarter are expected to be seasonally weaker in Russia, and about flat in Europe. Average sales price realizations for uncoated freesheet paper are expected to remain steady in Europe, but increase in Russia. Input costs should be lower for oil and wood, partially offset by higher chemicals costs.

Average sales price realizations improved in 2014 compared with 2013 due to the impact of price increases implemented in 2013. Sales volumes were flat, reflecting weak economic conditions. Input costs were higher, primarily for wood. Operating costs and planned maintenance downtime costs were lower in 2014. Looking ahead to the first quarter of 2015, sales volumes are expected to be seasonally higher. Average sales price realizations are expected to decrease due to competitive pressures.

Sales volumes in 2014 increased from 2013 for both fluff pulp and market pulp reflecting improved market demand. Average sales price realizations increased significantly for fluff pulp, while prices for market pulp were also higher. Input costs for wood and energy were higher. Operating costs were lower, but planned maintenance downtime costs were $1 million higher.

Compared with the fourth quarter of 2014, sales volumes in the first quarter of 2015, are expected to decrease for market pulp, but be slightly higher for fluff pulp. Average sales price realizations are expected to to be stable for fluff pulp and softwood market pulp, while hardwood market pulp prices are expected to improve. Input costs should be flat. Planned maintenance downtime costs should be about $13 million higher than in the fourth quarter of 2014.

Consumer Packaging

Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of Consumer Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.

Coated Paperboard sales volumes in 2014 were lower than in 2013 reflecting weaker market demand. The business took about 41,000 tons of market-related downtime in 2014 compared with about 24,000 tons in 2013. Average sales price realizations increased year-

over-year due to the impact of sales price increases implemented in 2013 and 2014. Input costs increased, primarily for wood and energy. Planned maintenance downtime costs were $11 million higher in 2014. Operating costs were also higher.

Foodservice sales volumes increased in 2014 compared with 2013 reflecting strong market demand. Average sales margins were flat as higher average sales prices and a more favorable customer mix were offset by higher input costs for board and resins. Operating costs and distribution costs were both higher.

Looking ahead to the first quarter of 2015, Coated Paperboard sales volumes are expected to be seasonally weaker than in the fourth quarter of 2014. Average sales price realizations are expected to be slightly higher, and margins should also benefit from a more favorable product mix. Input costs are expected to be higher for wood and energy. Planned maintenance downtime costs should be $4 million higher with a planned maintenance outage scheduled at our Augusta mill in the first quarter. Foodservice sales volumes are expected to be seasonally lower. Average sales margins are expected to improve due to the realization of sales price increases effective with our January contract openers. Input costs, primarily for resin, are expected to improve and operating costs are expected to decrease.

Looking forward to the first quarter of 2015, sales volumes are expected to be lower than in the fourth quarter of 2014 reflecting weak economic conditions. Average sales price realizations are expected to be slightly higher in both Russia and Europe. Input costs are expected to be lower, primarily for fuel.

pressures. The currency depreciation of the Chinese renminbi against the U.S. dollar also negatively impacted year-over-year results. However, average sales margins benefited from a more favorable product mix. Input costs and freight costs were lower and operating costs also decreased.

In the first quarter of 2015, sales volumes are expected to be slightly lower. Average sales price realizations are expected to be flat reflecting continuing competitive pressures. The business will drive earnings improvement through operational excellence.

Equity Earnings, Net of Taxes – Ilim Holding S.A.

International Paper accounts for its investment in Ilim Holding S.A. (Ilim), a separate reportable industry segment, using the equity method of accounting.

Sales volumes for the joint venture increased year-over-year for shipments to China of hardwood pulp, softwood pulp and linerboard. Sales volumes in the domestic Russian market increased for linerboard, but decreased for softwood pulp and hardwood pulp. Average sales price realizations were higher in 2014 for sales to China of softwood pulp, but lower for hardwood pulp . In the domestic market, average sales price realizations were lower for pulp and linerboard. Input costs increased year-over-year for wood, chemicals and energy. The Company received cash dividends from the joint venture of $56 million in 2014. No dividends were paid in 2013 and 2012.

Entering the first quarter of 2015, sales volumes are expected to be seasonally lower than in the fourth quarter of 2014 due to the January holidays in Russia. Average sales price realizations are expected to remain strong for exported hardwood pulp and domestic linerboard and paper, partially offset by lower sales prices for exported softwood pulp. Input costs for wood and energy should be higher and distribution costs are also expected to increase.

Overview

A major factor in International Paper’s liquidity and capital resource planning is its generation of operating cash flow, which is highly sensitive to changes in the

pricing and demand for our major products. While changes in key cash operating costs, such as energy, raw material and transportation costs, do have an effect on operating cash generation, we believe that our focus on pricing and cost controls has improved our cash flow generation over an operating cycle.

Cash Provided by Operating Activities

Acquisitions and Joint Ventures

Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012.

Financing Activities