International Paper Company
Annual Report 2016

Plain-text annual report

P U R S U I N G O U R V I S I O N T O B E A M O N G T H E M O S T S U C C E S S F U L , S U S TA I N A B L E A N D R E S P O N S I B L E C O M P A N I E S I N T H E W O R L D To our shareowners, As one of the world’s leading producers of renewable fiber- based packaging, pulp and paper products, we know it’s our responsibility to create long-term value for all stakeholders in the most responsible and sustainable manner. I’m confident in the future of International Paper. By investing in attractive, fiber-based markets, controlling costs, managing capital spending and focusing on deliberate improvement efforts to increase productivity and efficiency, we have generated strong sustainable free cash flow despite challenging economic conditions. In 2016, we developed The IP Way Forward to drive the next wave of improvements and continue to meet our commitments to our shareowners, customers, employees and communities. The IP Way Forward consists of five Strategic Drivers critical to our success: sustaining forests, investing in people, improving our planet, creating innovative products and delivering inspired performance. Mark Sutton Chairman and CEO Sustaining FORESTS Our entire business depends on the sustainability of forests. By providing a dependable market for responsibly grown fiber, we provide an economic incentive for landowners to grow, harvest and regenerate forests for continuous, sustainable use. CE N A M R O F R E P d e r i p s n I v e s t i ng in PEOPLE I n Sustaining FORESTS In novative PR O D U C T S I m p r o v i n g o u r P L A N ET The IP Way Forward is our strategic framework for achieving our vision to be among the most successful, sustainable and responsible companies in the world. 2016 Annual Performance Summary 1 ADDITIONAL $10 MILLION TO NFWF FOR FOREST ECOSYSTEM PROTECTION ALMOST 50% REDUCTION IN SERIOUS SAFETY INCIDENTS SINCE 2012 “We protect and improve the lives of our employees.” We will continue to lead the world in responsible forest stewardship to ensure healthy and productive forest ecosystems for generations to come. Our investments in forest restoration and sustainable forest management help increase forest carbon stocks and mitigate climate change. Since 2013, we have invested more than $7.5 million in the Forestland Stewards Initiative, a partnership with the National Fish and Wildlife Foundation (NFWF) aimed at protecting and enhancing ecologically significant forestlands in the United States. Our investment generated more than $24.5 million in matching funds for a total conservation impact of $32 million. In 2016, we renewed our commitment to this partnership and pledged to increase our contribution to $10 million over the next five years. Investing in PEOPLE Our most important measure of success is ensuring all employees, contractors and visitors arrive home safely every day. In 2016, we expanded our focus on prevention with Safety Leading Indicators to identify hazards and unsafe actions before accidents occur. Engaged employees drive sustainable results, and good leaders engage, align and inspire colleagues. Building our capability means not only improving our assets, but also developing our employees, retaining our top talent and creating a culture of inclusion, where individuals feel respected, are treated fairly and have opportunities to do their best every day. We continue to be a force for good in our communities. By mobilizing our people, products and resources we can help address critical community needs where our employees live and work. In 2016, we increased our charitable contributions and focused our community engagement strategy on four signature people causes: education, hunger, health and wellness and disaster relief. SERIOUS SAFETY INCIDENTS 68 50 38 36 35 2012 2013 2014 2015 2016 2 International Paper *This data includes the 2016 acquisitions. $14 MILLION INVESTED TO ADDRESS CRITICAL COMMUNITY NEEDS AND TO IMPROVE THE PLANET Improving our PLANET Our sustainability story is embedded in the renewability and recyclability of our products, and in the way we operate. More than 70 percent of the energy used in our global mill system is generated from renewable, carbon-neutral biomass. We set our Vision 2020 Goals using a 2010 baseline; since then, we’ve reduced our energy use and greenhouse gas and other air emissions, resulting in a reduced environmental footprint and lower energy costs. “We are committed to reducing our environmental footprint.” 6.4% ENERGY EFFICIENCY IMPROVEMENT SINCE 2010 19% REDUCTION IN GHG EMISSIONS SINCE 2010 2016 Annual Performance Summary 3 Innovative PRODUCTS We transform renewable resources into recyclable products people depend on every day. Our packaging products protect and promote goods, enable worldwide commerce and keep consumers safe. Our pulp for diapers, tissue and other personal hygiene products promote health and wellness. Our papers facilitate education and communication, and our food service products provide convenience and portability for on-the-go consumers. In December 2016, we acquired Weyerhaeuser’s pulp business and integrated it with our existing business to create our Global Cellulose Fibers business, the world’s premier manufacturer of fluff and specialty pulp. This acquisition gave us best- in-class manufacturing assets and capabilities, a valuable patent portfolio and an expanded innovation team that will help us improve and grow our entire pulp business. We also gained additional mills in key coastal locations, which allows us to expand our exports of fluff pulp around the world. We continue to focus on creating innovative, sustainable and recyclable products that help our customers achieve their objectives and satisfy changing global consumer demand. M E E T I N G C O N S U M E R D E M A N D S $160 million Madrid mill acquisition and planned conversion Our acquisition and planned conversion of the Madrid mill represents a strategic opportunity to grow our corrugated packaging business in EMEA by further enhancing our value proposition and offering our customers even more choices in terms of innovative, tailored and high-performance packaging solutions. $2.2 billion Weyerhaeuser Pulp acquisition This 2016 acquisition positions International Paper as the premier global supplier of fluff pulp and enhances our ability to generate additional cash flow. In this transaction, International Paper acquired five pulp mills and two converting facilities that produce fluff pulp, softwood pulp and specialty pulp products for consumer applications including diapers, other hygiene products, tissue and textiles. $170 million strategic capital investments in our containerboard mills We invested in our containerboard mills in Prattville, Ala., and Springfield, Ore., in 2016 to expand capacity and improve efficiency. 4 International Paper RETURN ON INVESTED CAPITAL 2012 2013 2014 2015 2016 8.3% 9.3% 9.2% 11% 9.9% 7TH CONSECUTIVE YEAR ABOVE COST-OF- CAPITAL RETURNS Inspired PERFORMANCE We deliver long-term value for our stakeholders by establishing advantaged positions in attractive, fiber-based market segments with safe, efficient manufacturing operations near sustainable fiber sources. Challenging market conditions and increasing costs for fiber and energy caused us to fall short of our 2016 earnings goal. However, we remain focused on generating strong free cash flow, creating value with returns greater than our cost of capital, returning cash to shareowners, maintaining a strong balance sheet and making investments for future growth. FIVE-YEAR AVERAGE: 9.6% RETURN ON INVESTED CAPITAL FIVE-YEAR AVERAGE: $ 1.8B FREE CASH FLOW 5TH CONSECUTIVE YEAR OF DIVIDEND INCREASE FREE CASH FLOW ANNUALIZED DIVIDEND $2.1B $1.8B $1.9B $1.8B $1.6B $1.76 $1.85 $1.60 $1.40 $1.20 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2016 Annual Performance Summary 5 We value strong leadership and continue to work actively to maintain a strong bench of leaders. L E A D E R S H I P Farewell to Our Colleagues Bill Hoel, former Senior Vice President, Container the Americas, retired effective March 31, 2017. Bill joined Masonite Corporation, an International Paper subsidiary, in 1983. For 34 years he led several businesses including Decorative Products and Wood Products. In 2004, Bill was elected Senior Vice President, Corporate Sales and Marketing. For more than a decade, Bill led our corrugated packaging businesses in North America and Latin America; he directed the integrations of Box USA, Weyerhaeuser Packaging and Temple-Inland, helping to develop one of the world’s premier corrugated packaging businesses. Carol Roberts, former Senior Vice President and Chief Financial Officer, retired effective March 31, 2017. For more than 35 years, Carol was a key contributor to our company’s success. She joined International Paper in 1981 as an associate engineer at the Mobile mill and was named mill manager at Oswego in 1991. Carol became an officer in 1997, serving as Vice President, People Development. In 2005, Carol was elected Senior Vice President, Industrial Packaging, and in 2011 was appointed Senior Vice President and Chief Financial Officer. We will continue to benefit from the world-class financial organization that Carol helped build. Tom Kadien, Senior Vice President, Human Resources, Government Relations and Global Citizenship, has announced his retirement effective June 30, 2017. Tom joined International Paper in 1978 and was named an officer in 1999 while leading the Fine Papers business. In April 2003, he was appointed President of IP Europe and was elected as Senior Vice President in 2004. Tom led xpedx from 2006 to 2010 and then served as Senior Vice President, Consumer Packaging, IP Asia and IP India. In 2014, Tom was named Senior Vice President, Human Resources and Government Relations with continuing responsibility for IP India and Supply Chain Operations. In 2015, Tom added leadership of Global Citizenship to his responsibilities. We appreciate his many contributions over nearly four decades. 6 International Paper Congratulations to Our Newly Elected Senior Vice Presidents John Sims was elected Senior Vice President and President, Europe, the Middle East, Africa and IP Russia, effective July 1, 2016. John joined International Paper in 1994 and has served in marketing, supply chain, strategic planning, finance and general management roles. John leads the paper and packaging businesses in this region. Greg Wanta was elected Senior Vice President, North American Container, effective December 1, 2016. Greg joined International Paper in 1991 and has served in several manufacturing and general management roles. Greg leads our North American corrugated packaging business. Cathy Slater was elected Senior Vice President, Consumer Packaging, effective December 1, 2016. Cathy joined International Paper in 2016 from Weyerhaeuser, where she served in manufacturing and general management roles. Cathy leads our North American consumer packaging business, which includes our coated paperboard and foodservice businesses. Tom Plath was elected Senior Vice President, Human Resources and Global Citizenship, effective March 1, 2017. Tom joined International Paper in 1991 and has served in human resources, strategic planning and general management roles. Most recently, he served as Vice President, Human Resources, Global Businesses. New Assignments for Senior Vice Presidents Jean-Michel Ribieras was named Senior Vice President, Global Cellulose Fibers, effective July 1, 2016. Jean-Michel also assumed responsibility for IP Asia on March 1, 2017. Glenn Landau was named Senior Vice President, Finance, effective January 1, 2017, and Chief Financial Officer effective February 22, 2017. Mike Amick, Jr., was named Senior Vice President, Paper the Americas, effective January 1, 2017. Mike leads our North American and Latin American Papers businesses. Mike also assumed responsibility for International Paper India and APPM Ltd., on April 1, 2017. Tim Nicholls was named Senior Vice President, Industrial Packaging the Americas, effective January 1, 2017. Tim leads our North American and Latin American Industrial Packaging businesses. Board Member Transitions In December 2016, Joan Spero retired from the Board of Directors of International Paper Company, pursuant to the board’s mandatory retirement policy. Joan joined our board in 2011. Joan served in the U.S. Department of State as Undersecretary for Economic, Business and Agricultural Affairs and as Ambassador to the United Nations for Economic and Social Affairs. She held leadership positions in corporate strategy and corporate affairs over a span of 12 years at American Express, and from 1997 to 2008, she served as president of the Doris Duke Charitable Foundation. Joan is currently a senior research scholar at Columbia University’s School of International and Public Affairs. Joan also served on the board of directors of ING Group N.V., Delta Air Lines Inc., and First Data Corporation. She is a member of IBM’s and Citigroup’s boards of directors, a trustee of both the Council on Foreign Relations and the Wisconsin Alumni Research Foundation, and a trustee emeritus of Columbia University and Amherst College. She earned a master’s and a doctorate from Columbia University. We recognize and appreciate her contributions, especially her engagement with our Governance and Public Policy and Environment committees. Effective March 1, 2017, we welcomed a new board member, Dr. Kathryn Sullivan, the Charles A. Lindbergh Fellow of Aerospace History at the Smithsonian National Air and Space Museum. Kathy served in several roles in the U.S. Department of Commerce and the National Oceanic and Atmospheric Association Administration (NOAA), including Undersecretary of Commerce for Oceans & Atmosphere and NOAA Administrator. She was the inaugural director of the Battelle Center for Mathematics and Science Education Policy in the John Glenn School of Public Affairs at Ohio State University. A former mission specialist for NASA, Kathy is a veteran of three shuttle missions, with more than 500 hours in space and the first American woman to walk in space. Kathy earned a bachelor’s in earth sciences from the University of California, Santa Cruz and a doctorate in geology from Dalhousie University in Nova Scotia. Her extensive environmental and sustainability experience will bring a unique and valuable perspective to the International Paper Board of Directors and we are pleased to have Kathy join our board. O U T L O O K In 2017, we expect to continue our trend of strong cash generation and returns well above our cost of capital. We expect higher margins and earnings in our North American Industrial Packaging business through implementation of price increases, growing customer demand and internal improvement initiatives. We also expect to improve margins with continued strong operations and extensive cost reduction efforts across many of our other businesses. We expect to complete the conversion of the Madrid mill to recycled containerboard in the second half of the year, which will enable us to offer better products for our customers and to increase earnings in our European Industrial Packaging business. Our Ilim joint venture remains well-positioned for another strong year of performance. As we integrate Weyerhaeuser’s pulp business, we expect to achieve synergies and continue to evolve our ability to meet customer and global demands with innovative products. Through this integration, we will improve our overall product mix and, consequently, the earnings of our global cellulose fibers business. And with the strong free cash flow that comes from all of this, we will continue to create value with a near-term focus on debt reduction. We are confident in how International Paper is positioned and the value-creating opportunities we are pursuing. Our global team is committed to continuously strengthening our people and local communities, using resources responsibly and efficiently and ensuring our businesses are safe, successful and sustainable for generations to come. Mark Sutton | Chairman and CEO FORTUNE’S “WORLD’S MOST ADMIRED COMPANIES®” 14 OF THE LAST 15 YEARS ETHISPHERE INSTITUTE’S “WORLD’S MOST ETHICAL COMPANIES®” FOR 11 CONSECUTIVE YEARS INSTITUTIONAL INVESTOR’S “MOST HONORED COMPANY” 2017 MEMPHIS COMMERCIAL APPEAL “BEST PLACES TO WORK – LARGE COMPANY” 2016 March 2017 *FORWARD-LOOKING STATEMENTS Certain statements in this Annual Performance Summary may be considered forward-looking statements within the meaning of the federal securities laws. These statements reflect management’s current views and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include but are not limited to those listed and discussed in the Company's filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K portion of this Annual Performance Summary. 2016 Annual Performance Summary 7 Businesses International Paper is a leading global producer of renewable fiber-based packaging, pulp and paper products with 55,000 employees located in more than 24 countries. I N D U S T R I A L P A C K A G I N G International Paper is the world’s premier manufacturer of containerboard and corrugated packaging. Our containerboard mills, box plants and converting operations across the globe allow us to sustainably meet the most challenging customer sales, shipping, storage and display requirements. Industrial packaging also includes our North American recycling business, which recovers, processes and sells several million tons of corrugated packaging and paper annually. Customer segments: • Beverages • Fruit and vegetables • Protein and processed foods • eCommerce • Consumer and industrial goods • Shipping and distribution 85% NORTH AMERICA 67% of total revenue 4% ASIA 9% EMEA 2% BRAZIL C O N S U M E R P A C K A G I N G International Paper’s global coated paperboard business produces high-quality coated paperboard for a variety of packaging and foodservice applications. In addition to coated paperboard, consumer packaging includes our foodservice business, which produces paper cups, food containers and lids. Our consumer packaging businesses collaborate with customers across a wide range of market segments to meet consumer-driven demand for high-quality, sustainable and innovative products. Customer segments: • Pharmaceuticals • Health and beauty • Media • Packaged food • General consumer goods • Quick-service restaurants • Specialty coffee • Grocery and convenience stores • Hospitality 83% NORTH AMERICA 9% of total revenue 17% EMEA/ RUSSIA 8 International Paper G L O B A L C E L L U L O S E F I B E R S International Paper is a premier producer of fluff pulp for absorbent hygiene products like baby diapers, feminine care, adult incontinence, and other non-woven products, as well as pulp used for tissue and paper products. Our innovative, specialty pulps are used for non- absorbent end uses including textiles, filtration, construction material, paints and coatings, reinforced plastics and more. Our cellulose fibers products serve diverse, global customers who share a common need for confidence in the quality and convenience of personal hygiene and household products, and who value innovative solutions. Customer segments: • Absorbent hygiene products • Paper and tissue • Textiles • Reinforced plastics • Filtration • Paints and coatings 5% of total revenue *Global Cellulose Fibers numbers include Dec 1, 2016, acquisition of Weyerhaeuser’s pulp business P R I N T I N G P A P E R S International Paper’s global paper businesses manufacture a wide variety of uncoated papers for commercial printing, imaging and converting market segments. Customers rely on our signature brands including Accent®, Chamex®, Hammermill®, POL™, PRO-DESIGN® and Rey® to communicate, advertise, educate and inform. Customer segments: • Consumers • Schools • Businesses • Commercial printing • Book publishing • Advertising • Direct mail, bills, and statements • Office products • Retail packaging and labeling applications 47% NORTH AMERICA 19% of total revenue 27% EMEA/RUSSIA 4% INDIA 22% BRAZIL 2016 Annual Performance Summary 9 About International Paper S E N I O R L E A D E R S H I P T E A M As of March 31, 2017 (Seated left to right) Glenn R. Landau Senior Vice President Chief Financial Officer Mark S. Sutton Chairman of the Board and Chief Executive Officer (Standing left to right) Carol L. Roberts Senior Vice President Chief Financial Officer (Retired March 31, 2017) Gregory T. Wanta Senior Vice President North American Container Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary Jean-Michel Ribieras Senior Vice President Global Cellulose Fibers C. Cato Ealy Senior Vice President Corporate Development Catherine I. Slater Senior Vice President Consumer Packaging Thomas G. Kadien Senior Vice President Human Resources, Government Relations and Global Citizenship (Retiring June 30, 2017) John V. Sims Senior Vice President and President International Paper Europe, Middle East, Africa, and Russia Timothy S. Nicholls Senior Vice President Industrial Packaging The Americas W. Michael Amick, Jr. Senior Vice President Paper The Americas William P. Hoel Senior Vice President Container The Americas (Retired March 31, 2017) Tommy S. Joseph Senior Vice President Manufacturing, Technology, EH&S and Global Sourcing Thomas J. Plath (not pictured) Senior Vice President Human Resources and Global Citizenship (Effective March 1, 2017) Our mission is to improve people’s lives, the planet and our company’s performance by transforming renewable resources into products people depend on every day. 10 International Paper FORM 10-K K - 0 1 m r o F Our mission is to improve people’s lives, the planet and our company’s performance by transforming renewable resources into products people depend on every day. FINANCIAL HIGHLIGHTS In millions, except per share amounts, at December 31 2016 2015 FINANCIAL SUMMARY Net Sales Operating Profit Earnings from Continuing Operations Before Income Taxes and Equity Earnings Net Earnings Net Earnings Attributable to Noncontrolling Interests Net Earnings Attributable to International Paper Company Total Assets Total Shareholders’ Equity Attributable to International Paper Company PER SHARE OF COMMON STOCK Basic Earnings Per Share Attributable to International Paper Company Common Shareholders – Net Earnings Diluted Earnings Per Share Attributable to International Paper Company Common Shareholders – Net Earnings Cash Dividends Total Shareholders’ Equity SHAREHOLDER PROFILE Shareholders of Record at December 31 Shares Outstanding at December 31 Average Common Shares Outstanding Average Common Shares Outstanding – Assuming Dilution $21,079 $22,365 2,202 (a) 956 (b) 902 (b,c) (2) 904 (b,c) 33,345 4,341 $ $ 2.20 (b,c) 2.18 (b,c) 1.783 10.56 12,352 411.2 411.1 415.6 2,361 (a) 1,266 (d) 917 (d,e) (21) 938 (d,e) 30,531 3,884 $ $ 2.25 (d,e) 2.23 (d,e) 1.6400 9.43 12,730 412.1 417.4 420.6 (a) (b) (c) (d) (e) See the reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit on page 20 and the operating profit table on page 81 for details of operating profit by industry segment. Includes pre-tax restructuring and other charges of $54 million including charges of $29 million for early debt extinguishment costs, charges of $17 million for costs associated with the write-off of our India Packaging business evaluation, a gain of $8 million related to the sale of our investment in Arizona Chemical, charges of $9 million for costs associated with the Riegelwood, North Carolina mill conversion to 100% pulp production and a charge of $7 million for costs associated with the closure of a mill in Turkey. Also included a $439 million settlement accounting charge associated with term-vested lump sum pension payments, charges of $70 million for the impairment of the assets of our Asia corrugated packaging business and costs associated with the sale of that business, charges of $31 million of costs associated with the newly acquired pulp business, a charge of $19 million to amortize the newly acquired pulp business inventory fair value step-up and a charge of $8 million for the write-off of certain regulatory pre-engineering costs. Includes a tax benefit of $57 million related to the legal restructuring of our Brazil Packaging business, a tax expense of $31 million associated with a Luxembourg tax rate change, a tax expense of $23 million associated with 2016 cash pension contributions, a tax benefit of $14 million related to the closure of a U.S. federal tax audit and a tax benefit of $6 million related to an international legal entity restructuring. Also included is an after-tax charge of $5 million for a legal settlement associated with the xpedx business which was spun-off in 2014. Includes pre-tax restructuring and other charges of $252 million including charges of $207 million for early debt extinguishment costs, charges of $16 million for costs associated with the Timber Monetization restructuring, a charge of $15 million for a legal liability reserve adjustment, a charge of $8 million for costs associated with our Riegelwood, North Carolina mill conversion to 100% pulp production, net of proceeds from the sale of the Carolina Coated Bristols brand and charges of $6 million for other items. Also included are a pre-tax charge of $137 million related to the impairment of goodwill and a trade name intangible for our Brazil Packaging business, a pre-tax charge of $174 million related to the impairment of our 55% equity share in the IP-Sun JV and gain of $4 million related to the refund of state tax credits. Includes a tax benefit of $67 million related to the impairment of the IP-Sun JV, a tax expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a tax expense of $7 million for other items. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES For reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders, see page 18. In millions, at December 31 Calculation of Free Cash Flow Cash provided by operations (Less)/Add: Cash invested in capital projects Cash contribution to pension plan Cash received from unwinding a timber monetization Change in control payments related to Temple-Inland acquisition Insurance reimbursement for Guaranty Bank settlement Free Cash Flow 2016 2015 2014 2013 2012 $ 2,478 $ 2,580 $ 3,077 $ 3,028 $ 2,967 (1,348) 750 — — — $ 1,880 (1,487) 750 — — — $ 1,843 (1,366) 353 — — — $ 2,064 (1,198) 31 — — (30) $ 1,831 (1,383) 44 (251) 120 80 $ 1,577 Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, service debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company’s ongoing performance, free cash flow also enables investors to perform meaningful comparisons between past and present periods. In millions, at December 31 2016 2015 2014 Reconciliation of Operating Earnings Before Net Interest Expense to Net Earnings Before Taxes and Equity Earnings Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings (Losses) Add back: Net Interest Expense Add back: Special Items Before Taxes Add back: Non-Operating Pension Expense Before Taxes Operating Earnings Before Interest, Taxes and Equity Earnings (Losses) Tax Rate Operating Earnings Before Interest and Equity Earnings Equity Earnings (Loss), Net of Tax Operating Earnings Before Interest $ 956 520 182 610 2,268 31.8% 1,547 198 $ 1,745 $ 1,266 555 559 258 2,638 33.0% 1,767 117 $ 1,884 $ 872 607 1,052 212 2,743 30.7% 1,901 (200) $ 1,701 The Company considers adjusted return on invested capital (“adjusted ROIC”) to be a meaningful indicator of our operating performance, and we evaluate this metric because it measures how effectively and efficiently we use the capital invested in our business. Adjusted ROIC is not a measure of financial performance under U.S. generally accepted accounting principles (“GAAP”) and may not be defined and calculated by other companies in the same manner. The Company defines and calculates adjusted ROIC using in the numerator Operating Earnings Before Interest, the most directly comparable GAAP measure to which is Earnings Before Income Taxes and Equity Earnings. The Company calculates Operating Earnings Before Interest by excluding net interest expense, the after-tax effect on non-operating pension expense and items considered by management to be unusual from the earnings reported under GAAP. Management uses this measure to focus on on- going operations and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. Adjusted ROIC = Operating Earnings Before Interest / Average Invested Capital Average Invested Capital = Equity adjusted to remove pension-related amounts in OCI, net of taxes + interest-bearing debt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________________________________________ FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2016 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-3157 INTERNATIONAL PAPER COMPANY (Exact name of registrant as specified in its charter) New York (State or other jurisdiction of incorporation or organization) 13-0872805 (I.R.S. Employer Identification No.) 6400 Poplar Avenue Memphis, Tennessee (Address of principal executive offices) 38197 (Zip Code) Registrant’s telephone number, including area code: (901) 419-9000 _____________________________________________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $1 per share par value Name of each exchange on which registered New York Stock Exchange _____________________________________________________ Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the Company’s outstanding common stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2016) was approximately $17,330,052,160. The number of shares outstanding of the Company’s common stock as of February 17, 2017 was 411,255,197. Documents incorporated by reference: Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection with registrant’s 2017 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016 INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016 PART I. ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. PART II. ITEM 5. ITEM 6. ITEM 7. BUSINESS. General Financial Information Concerning Industry Segments Financial Information About International and U.S. Operations Competition and Costs Marketing and Distribution Description of Principal Products Sales Volumes by Product Research and Development Environmental Protection Climate Change Employees Executive Officers of the Registrant Raw Materials Forward-looking Statements RISK FACTORS. UNRESOLVED STAFF COMMENTS. PROPERTIES. Forestlands Mills and Plants Capital Investments and Dispositions LEGAL PROCEEDINGS. MINE SAFETY DISCLOSURES. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. SELECTED FINANCIAL DATA. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Executive Summary Results of Operations Description of Industry Segments Industry Segment Results Liquidity and Capital Resources Critical Accounting Policies and Significant Accounting Estimates Recent Accounting Developments Legal Proceedings Effect of Inflation Foreign Currency Effects Market Risk 1 1 1 1 1 1 2 2 2 3 3 3 5 5 6 7 7 11 11 11 11 11 12 12 12 12 14 18 18 21 24 25 30 34 37 37 37 38 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Management on Financial Statements, Internal Control over Financial Reporting and Internal Control Environment and Board of Directors Oversight Accounting Firm Reports of Deloitte & Touche LLP, Independent Registered Public Consolidated Statement of Operations Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to Consolidated Financial Statements Interim Financial Results (Unaudited) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CONTROLS AND PROCEDURES. OTHER INFORMATION. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. EXECUTIVE COMPENSATION. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEM 9A. ITEM 9B. PART III. ITEM 10. ITEM 11. ITEM 12. PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Additional Financial Data Schedule II – Valuation and Qualifying Accounts SIGNATURES APPENDIX I 2016 LISTING OF FACILITIES APPENDIX II 2016 CAPACITY INFORMATION 38 39 39 41 43 44 45 46 47 48 83 85 85 86 86 86 87 87 87 87 87 87 87 90 91 A-1 A-4 Financial Information Concerning Industry Segments Financial Information About International and U.S. Operations INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016 PART I. ITEM 1. BUSINESS. General Competition and Costs Marketing and Distribution Description of Principal Products Sales Volumes by Product Research and Development Environmental Protection Climate Change Employees Executive Officers of the Registrant Raw Materials Forward-looking Statements ITEM 1A. RISK FACTORS. ITEM 1B. UNRESOLVED STAFF COMMENTS. ITEM 2. PROPERTIES. Forestlands Mills and Plants Capital Investments and Dispositions LEGAL PROCEEDINGS. MINE SAFETY DISCLOSURES. ITEM 3. ITEM 4. PART II. ITEM 5. ITEM 6. ITEM 7. SECURITIES. SELECTED FINANCIAL DATA. AND RESULTS OF OPERATIONS. Executive Summary Results of Operations Description of Industry Segments Industry Segment Results Liquidity and Capital Resources Legal Proceedings Effect of Inflation Foreign Currency Effects Market Risk MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Critical Accounting Policies and Significant Accounting Estimates Recent Accounting Developments 1 1 1 1 1 1 2 2 2 3 3 3 5 5 6 7 7 11 11 11 11 11 12 12 12 12 14 18 18 21 24 25 30 34 37 37 37 38 38 INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016 ITEM 7A. ITEM 8. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Management on Financial Statements, Internal Control over Financial Reporting and Internal Control Environment and Board of Directors Oversight Reports of Deloitte & Touche LLP, Independent Registered Public Accounting Firm Consolidated Statement of Operations Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to Consolidated Financial Statements Interim Financial Results (Unaudited) CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CONTROLS AND PROCEDURES. OTHER INFORMATION. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. EXECUTIVE COMPENSATION. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEM 9. ITEM 9A. ITEM 9B. PART III. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Additional Financial Data Schedule II – Valuation and Qualifying Accounts APPENDIX I SIGNATURES 2016 LISTING OF FACILITIES APPENDIX II 2016 CAPACITY INFORMATION 38 39 39 41 43 44 45 46 47 48 83 85 85 86 86 86 87 87 87 87 87 87 87 90 91 A-1 A-4 PART I. ITEM 1. BUSINESS GENERAL International Paper Company (the “Company” or “International Paper,” which may also be referred to as “we” or “us”) is a global producer of renewable fiber- based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, Asia and Russia. We are a New York corporation, incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site. In the United States, at December 31, 2016, the Company operated 29 pulp, paper and packaging mills, 170 converting and packaging plants, 16 recycling plants and three bag facilities. Production facilities at December 31, 2016 in Canada, Europe, Asia, Africa, India, Latin America included 17 pulp, paper and packaging mills, 68 converting and packaging plants, and two recycling plants. We operate a printing and packaging products distribution business principally through 12 branches in Asia. At December 31, 2016, we owned or managed approximately 329,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. to For management and financial reporting purposes, our businesses are separated into four segments: Industrial Packaging; Global Cellulose Fibers; Printing Papers; and Consumer Packaging. Subsequent the acquisition of the Weyerhaeuser pulp business in December 2016, the Company began reporting the Global Cellulose Fibers business as a separate busines segment due to the increased materiality of the results of this business. This segment includes the Company's legacy pulp business and the newly acquired pulp business. As such, amounts related to the legacy pulp business have been reclassified out of the Printing Papers business segment and into the new Global Cellulose Fibers business segment for all prior periods. A description of these business segments can be found on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s 50% equity interest in Ilim Holding S.A. ("Ilim") is also a separate reportable industry segment. From 2012 through 2016, International Paper’s capital expenditures approximated $6.8 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs and maintain reliability of operations. Capital spending in 2016 was approximately $1.3 billion and is expected to be approximately $1.5 billion in 2017. You can find more information about capital expenditures on pages 30 and 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Discussions of acquisitions can be found on page 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find discussions of restructuring charges and other special items on pages 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our Internet Web site at www.internationalpaper.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our Web site is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS The financial information concerning segments is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on pages 79 through 81 of Item 8. Financial Statements and Supplementary Data. FINANCIAL INFORMATION ABOUT INTERNATIONAL AND U.S. OPERATIONS The financial information concerning international and U.S. operations and export sales is set forth in Note 19 Financial Industry Segment and Geographic Area on page 81 of Item 8. Financial Statements and Supplementary Data. Information by COMPETITION AND COSTS 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. Many factors influence the Company’s competitive position, including price, cost, product quality and services. You can find more information about the impact of these factors on operating profits on pages 18 through 30 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II. MARKETING AND DISTRIBUTION The Company sells products directly to end users and converters, as well as through agents, resellers and paper distributors. DESCRIPTION OF PRINCIPAL PRODUCTS The Company’s principal products are described on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. SALES VOLUMES BY PRODUCT Sales volumes of major products for 2016, 2015 and 2014 were as follows: Sales Volumes by Product (1) In thousands of short tons (except as noted) Industrial Packaging North American Corrugated Packaging (3) North American Containerboard North American Recycling North American Saturated Kraft North American Gypsum/Release Kraft North American Bleached Kraft EMEA Industrial Packaging (3) (4) Cellulose Fibers (in thousands of metric tons) (2) European and Russian Uncoated Papers Asian Box (3) (5) Brazilian Packaging Industrial Packaging Printing Papers U.S. Uncoated Papers Brazilian Uncoated Papers Indian Uncoated Papers Uncoated Papers Consumer Packaging North American Consumer Packaging European and Russian Coated Paperboard Asian Coated Paperboard (6) Consumer Packaging 2016 2015 2014 10,392 3,091 2,402 182 200 24 208 371 1,477 18,347 1,870 1,872 1,536 1,114 241 4,763 1,189 393 — 1,582 10,284 3,110 2,379 156 171 23 426 348 1,417 18,314 1,575 1,879 1,493 1,125 241 4,738 1,425 381 958 2,764 10,355 3,035 2,459 186 168 26 407 362 1,379 18,377 1,612 1,968 1,531 1,141 231 4,871 1,486 354 1,358 3,198 (1) (2) (5) (6) Includes third-party and inter-segment sales and excludes sales of equity investees. Includes North American, European and Brazilian volumes and internal sales to mills. Includes sales volumes from the newly acquired pulp business beginning December 1, 2016. (3) Volumes for corrugated box sales reflect consumed tons sold (CTS). Board sales by these businesses reflect invoiced tons. (4) Excludes newsprint sales volumes at Madrid, Spain mill. Includes sales volumes through the date of sale on June 30, 2016. Includes sales volumes through the date of sale in October 2015. 1 2 PART I. ITEM 1. BUSINESS GENERAL International Paper Company (the “Company” or “International Paper,” which may also be referred to as “we” or “us”) is a global producer of renewable fiber- based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, Asia and Russia. We are a New York corporation, incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site. In the United States, at December 31, 2016, the Company operated 29 pulp, paper and packaging mills, 170 converting and packaging plants, 16 recycling plants and three bag facilities. Production facilities at December 31, 2016 in Canada, Europe, Asia, Africa, India, Latin America included 17 pulp, paper and packaging mills, 68 converting and packaging plants, and two recycling plants. We operate a printing and packaging products distribution business principally through 12 branches in Asia. At December 31, 2016, we owned or managed approximately 329,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. For management and financial reporting purposes, our businesses are separated into four segments: Industrial Packaging; Global Cellulose Fibers; Printing Papers; and Consumer Packaging. Subsequent to the acquisition of the Weyerhaeuser pulp business in December 2016, the Company began reporting the Global Cellulose Fibers business as a separate busines segment due to the increased materiality of the results of this business. This segment includes the Company's legacy pulp business and the newly acquired pulp business. As such, amounts related to the legacy pulp business have been reclassified out of the Printing Papers business segment and into the new Global Cellulose Fibers business segment for all prior periods. A description of these business segments can be found on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s 50% equity interest in Ilim Holding S.A. ("Ilim") is also a separate reportable industry segment. From 2012 through 2016, International Paper’s capital expenditures approximated $6.8 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs and maintain reliability of operations. Capital spending in 2016 was approximately $1.3 billion and is expected to be approximately $1.5 billion in 2017. You can find more information about capital expenditures on pages 30 and 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Discussions of acquisitions can be found on page 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find discussions of restructuring charges and other special items on pages 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our Internet Web site at www.internationalpaper.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our Web site is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS The financial information concerning segments is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on pages 79 through 81 of Item 8. Financial Statements and Supplementary Data. FINANCIAL INFORMATION ABOUT INTERNATIONAL AND U.S. OPERATIONS The financial information concerning international and U.S. operations and export sales is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on page 81 of Item 8. Financial Statements and Supplementary Data. COMPETITION AND COSTS 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. Many factors influence the Company’s competitive position, including price, cost, product quality and services. You can find more information about the impact of these factors on operating profits on pages 18 through 30 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II. MARKETING AND DISTRIBUTION The Company sells products directly to end users and converters, as well as through agents, resellers and paper distributors. DESCRIPTION OF PRINCIPAL PRODUCTS The Company’s principal products are described on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. SALES VOLUMES BY PRODUCT Sales volumes of major products for 2016, 2015 and 2014 were as follows: Sales Volumes by Product (1) In thousands of short tons (except as noted) Industrial Packaging North American Corrugated Packaging (3) North American Containerboard North American Recycling North American Saturated Kraft North American Gypsum/Release Kraft North American Bleached Kraft EMEA Industrial Packaging (3) (4) Asian Box (3) (5) Brazilian Packaging Industrial Packaging Cellulose Fibers (in thousands of metric tons) (2) Printing Papers U.S. Uncoated Papers European and Russian Uncoated Papers Brazilian Uncoated Papers Indian Uncoated Papers Uncoated Papers Consumer Packaging North American Consumer Packaging European and Russian Coated Paperboard Asian Coated Paperboard (6) Consumer Packaging 2016 2015 2014 10,392 3,091 2,402 182 200 24 1,477 208 371 18,347 1,870 1,872 1,536 1,114 241 4,763 1,189 393 — 1,582 10,284 3,110 2,379 156 171 23 1,417 426 348 18,314 1,575 1,879 1,493 1,125 241 4,738 1,425 381 958 2,764 10,355 3,035 2,459 186 168 26 1,379 407 362 18,377 1,612 1,968 1,531 1,141 231 4,871 1,486 354 1,358 3,198 (1) (2) Includes third-party and inter-segment sales and excludes sales of equity investees. Includes North American, European and Brazilian volumes and internal sales to mills. Includes sales volumes from the newly acquired pulp business beginning December 1, 2016. (3) Volumes for corrugated box sales reflect consumed tons sold (CTS). Board sales by these businesses reflect invoiced tons. (4) Excludes newsprint sales volumes at Madrid, Spain mill. (5) (6) Includes sales volumes through the date of sale on June 30, 2016. Includes sales volumes through the date of sale in October 2015. 1 2 RESEARCH AND DEVELOPMENT The Company operates its primary research and development center in Loveland, Ohio, as well as several other product development facilities, including the Global Cellulose Fibers technology center in Federal Way, Washington that was acquired in 2016. Additionally, the Company has an interest in ArborGen, Inc., a joint venture with certain other forest products companies. packaging We direct research and development activities to short- term, long-term and technical assistance needs of customers and operating divisions, and to process, equipment and product innovations. Activities include product development within the operating divisions; studies on innovation and improvement of pulping, bleaching, chemical recovery, papermaking, converting and coating processes; packaging design and materials development; mechanical systems, environmentally sensitive printing inks and reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $20 million in 2016, $27 million in 2015, and $16 million in 2014. We own numerous patents, copyrights, trademarks, trade secrets and other intellectual property rights relating to our products and to the processes for their production. We also license intellectual property rights to and from others where advantageous or necessary. Many of the manufacturing processes are among our trade secrets. Some of our products are covered by U.S. and non-U.S. patents and are sold under well known trademarks. We derive a competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses. ENVIRONMENTAL PROTECTION International Paper is subject to extensive federal and state environmental regulation as well as similar regulations internationally. Our continuing objectives include: (1) controlling emissions and discharges from our facilities into the air, water and groundwater to avoid adverse the environment, and (2) maintaining compliance with applicable laws and regulations. The Company spent $83 million in 2016 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. The 2016 spend impacts on included costs associated with the U.S. Environmental Protection Agency’s (EPA) Boiler MACT (maximum achievable control technology) regulations. We expect to spend $111 million in 2017 for environmental capital projects. Capital expenditures for 2018 environmental projects are anticipated to be approximately $54 million. Capital expenditures for 2019 environmental projects are estimated to be $51 million. On January 31, 2013, EPA issued the final suite of Boiler MACT regulations. These regulations require owners of specified boilers to meet revised air emissions standards for certain substances. Several lawsuits have been filed to challenge all or portions of the Boiler MACT regulations. On December 23, 2016, the U.S. Court of Appeals for the D.C. Circuit remanded the Boiler MACT regulations to EPA requiring the agency to revise emission standards for boiler subcategories that had been affected by flawed calculations. The Court determined that the existing MACT standards should remain in place while the revised standards are being developed, but did not establish a deadline for EPA to complete the rulemaking. As such, the projected capital expenditures for environmental projects represent our current best estimate of future expenditures with the recognition that the Boiler MACT regulations could change as a result of new, revised standards. Amendments lowering National Ambient Air Quality Standards (NAAQS) for sulfur dioxide (SO2), nitrogen dioxide (NO2), fine particulate (PM2.5), and ozone have been finalized in recent years but to date have not had a material impact on the Company. CLIMATE CHANGE 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. International Efforts A successor program to the 1997 Kyoto Protocol, the Paris Agreement went into effect in November 2016 which continued international efforts and voluntary commitments toward reducing Greenhouse gasses (GHGs). Consistent with this objective, participating countries aim to balance GHG emissions generation states are to develop and begin implementing programs and removal in the second half of this century, or in to reduce GHGs from EGUs by about 32 percent by the effect achieve a net-zero global GHG emissions. As 2022 to 2033 timeframe as compared to 2005 baseline part of the Paris agreement, many countries, including levels. These plans, if implemented could pose the U.S. and EU member states, established non- potential cost increases for electricity purchased by the binding emissions reduction targets. The U.S non- Company. The magnitude of cost increases to the binding commitment is for GHG emissions to be 7% Company, if any, are not possible to estimate reliably below 2005 GHG emissions levels by 2020 and 26% at this time. Adding to the uncertainty, states and some to 28% below by 2025. Other countries in which we do industry parties have filed lawsuits challenging the rule, business made similar non-binding commitments. The and on February 9, 2016, the U.S. Supreme Court Company’s voluntary GHG reductions, which are set granted a stay of the Clean Power Plan. The stay will out in the annual Global Reporting Initiative (GRI) remain in effect until final disposition of the case, and report, are roughly in line with the percentages of the as such, the rule’s potential impact on the Company U.S. target reductions. It is not clear at this time what, remains unclear. if any, further reductions by the Company might be required by the countries in which we operate. Due to this uncertainty, it is not possible at this time to estimate the potential impacts of 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 the Paris Agreement non-binding commitments or allocation of and market prices for GHG credits under existing rules evolve over the coming years. National Efforts In the U.S., the 1997 Kyoto Protocol was not ratified and Congress has not passed GHG legislation. EPA however has enacted regulations to: (i) control GHGs from mobile sources by adopting transportation fuel efficiency standards; (ii) control GHG emissions from new Electric Generating Units (EGUs), (iii) require reporting of GHGs from sources of GHGs greater than 25,000 tons per year, (iv) in 2015, require states to develop plans to reduce GHGs from utility electric generating units (EGUs) and (v) in 2016 EPA took the first steps in the process of developing emissions standards for existing sources in the oil and gas sector. The EPA has not yet identified the pulp and paper industry in the sectors to be covered by new standards. However, we anticipate that at some future time pulp and paper sources may 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 2015, EPA promulgated the Clean Power Plan (CPP) rule to address climate change by reducing carbon dioxide (CO2) and other designated greenhouse gas pollutant emissions from utility EGUs. In response, 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. California has already enacted such a program and similar actions are being considered by Oregon. The Company does not have any sites currently subject to California's GHG regulatory plan and since the Oregon program is still being developed, it is too early to know how or if Company owned sites in Oregon may be affected. 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. Further state measures are under substantive review as they respond to EPA’s 2015 Clean Power Plan and develop an implementation plan over the next 1 to 3 years. The CPP allows significant flexibility in how states develop their plans, so the uncertainty regarding potential impacts will remain high until more specificity is reached and individual power companies develop their compliance strategies. 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, any material impact to the company is not likely to occur before 2020 and at this time it is not reasonably possible to estimate Company costs of compliance with rules that have not yet been adopted or implemented and may not be adopted or implemented in the future. 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, 3 4 RESEARCH AND DEVELOPMENT The Company operates its primary research and development center in Loveland, Ohio, as well as several other product development facilities, including the Global Cellulose Fibers technology center in Federal Way, Washington that was acquired in 2016. Additionally, the Company has an interest in ArborGen, Inc., a joint venture with certain other forest products companies. We direct research and development activities to short- term, long-term and technical assistance needs of customers and operating divisions, and to process, equipment and product innovations. Activities include product development within the operating divisions; studies on innovation and improvement of pulping, bleaching, chemical recovery, papermaking, converting and coating processes; packaging design and materials development; mechanical packaging systems, environmentally sensitive printing inks and reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $20 million in 2016, $27 million in 2015, and $16 million in 2014. We own numerous patents, copyrights, trademarks, trade secrets and other intellectual property rights relating to our products and to the processes for their production. We also license intellectual property rights to and from others where advantageous or necessary. Many of the manufacturing processes are among our trade secrets. Some of our products are covered by U.S. and non-U.S. patents and are sold under well known trademarks. We derive a competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses. ENVIRONMENTAL PROTECTION International Paper is subject to extensive federal and state environmental regulation as well as similar regulations internationally. Our continuing objectives include: (1) controlling emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, and (2) maintaining compliance with applicable laws and regulations. The Company spent $83 million in 2016 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. The 2016 spend included costs associated with the U.S. Environmental Protection Agency’s (EPA) Boiler MACT (maximum achievable control technology) regulations. We expect to spend $111 million in 2017 for environmental capital projects. Capital expenditures for 2018 environmental projects are anticipated to be approximately $54 million. Capital expenditures for 2019 environmental projects are estimated to be $51 million. On January 31, 2013, EPA issued the final suite of Boiler MACT regulations. These regulations require owners of specified boilers to meet revised air emissions standards for certain substances. Several lawsuits have been filed to challenge all or portions of the Boiler MACT regulations. On December 23, 2016, the U.S. Court of Appeals for the D.C. Circuit remanded the Boiler MACT regulations to EPA requiring the agency to revise emission standards for boiler subcategories that had been affected by flawed calculations. The Court determined that the existing MACT standards should remain in place while the revised standards are being developed, but did not establish a deadline for EPA to complete the rulemaking. As such, the projected capital expenditures for environmental projects represent our current best estimate of future expenditures with the recognition that the Boiler MACT regulations could change as a result of new, revised standards. Amendments lowering National Ambient Air Quality Standards (NAAQS) for sulfur dioxide (SO2), nitrogen dioxide (NO2), fine particulate (PM2.5), and ozone have been finalized in recent years but to date have not had a material impact on the Company. CLIMATE CHANGE 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. International Efforts A successor program to the 1997 Kyoto Protocol, the Paris Agreement went into effect in November 2016 which continued international efforts and voluntary commitments toward reducing Greenhouse gasses (GHGs). Consistent with this objective, participating countries aim to balance GHG emissions generation and removal in the second half of this century, or in effect achieve a net-zero global GHG emissions. As part of the Paris agreement, many countries, including the U.S. and EU member states, established non- binding emissions reduction targets. The U.S non- binding commitment is for GHG emissions to be 7% below 2005 GHG emissions levels by 2020 and 26% to 28% below by 2025. Other countries in which we do business made similar non-binding commitments. The Company’s voluntary GHG reductions, which are set out in the annual Global Reporting Initiative (GRI) report, are roughly in line with the percentages of the U.S. target reductions. It is not clear at this time what, if any, further reductions by the Company might be required by the countries in which we operate. Due to this uncertainty, it is not possible at this time to estimate the potential impacts of 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 the Paris Agreement non-binding commitments or allocation of and market prices for GHG credits under existing rules evolve over the coming years. National Efforts In the U.S., the 1997 Kyoto Protocol was not ratified and Congress has not passed GHG legislation. EPA however has enacted regulations to: (i) control GHGs from mobile sources by adopting transportation fuel efficiency standards; (ii) control GHG emissions from new Electric Generating Units (EGUs), (iii) require reporting of GHGs from sources of GHGs greater than 25,000 tons per year, (iv) in 2015, require states to develop plans to reduce GHGs from utility electric generating units (EGUs) and (v) in 2016 EPA took the first steps in the process of developing emissions standards for existing sources in the oil and gas sector. The EPA has not yet identified the pulp and paper industry in the sectors to be covered by new standards. However, we anticipate that at some future time pulp and paper sources may 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 2015, EPA promulgated the Clean Power Plan (CPP) rule to address climate change by reducing carbon dioxide (CO2) and other designated greenhouse gas pollutant emissions from utility EGUs. In response, states are to develop and begin implementing programs to reduce GHGs from EGUs by about 32 percent by the 2022 to 2033 timeframe as compared to 2005 baseline levels. These plans, if implemented could pose potential cost increases for electricity purchased by the Company. The magnitude of cost increases to the Company, if any, are not possible to estimate reliably at this time. Adding to the uncertainty, states and some industry parties have filed lawsuits challenging the rule, and on February 9, 2016, the U.S. Supreme Court granted a stay of the Clean Power Plan. The stay will remain in effect until final disposition of the case, and as such, the rule’s potential impact on the Company remains unclear. 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. California has already enacted such a program and similar actions are being considered by Oregon. The Company does not have any sites currently subject to California's GHG regulatory plan and since the Oregon program is still being developed, it is too early to know how or if Company owned sites in Oregon may be affected. 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. Further state measures are under substantive review as they respond to EPA’s 2015 Clean Power Plan and develop an implementation plan over the next 1 to 3 years. The CPP allows significant flexibility in how states develop their plans, so the uncertainty regarding potential impacts will remain high until more specificity is reached and their individual power companies develop compliance strategies. 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, any material impact to the company is not likely to occur before 2020 and at this time it is not reasonably possible to estimate Company costs of compliance with rules that have not yet been adopted or implemented and may not be adopted or implemented in the future. 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, 3 4 to stay in place causing delays and higher costs to implement capital International Paper has controls and projects. procedures 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. Additional information regarding climate change and International Paper is available in our 2015 Global Reporting Initiative (GRI) report found at http:// .com/docs/default-source/ www.internationalpaper english/sustainability/2015-gri-report.pdf?sfvrsn=26 though this information is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC. EMPLOYEES the United States. Of As of December 31, 2016, we have approximately 55,000 employees, nearly 36,000 of whom are located in the U.S. employees, approximately 25,000 are hourly, with unions representing approximately 15,000 employees. Approximately 11,500 of this number are represented by the United Steelworkers union (USW). 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 2016, local labor agreements were negotiated at four mills and 13 converting facilities. Two of these were locations not covered by a master agreement. In 2017, local labor agreements are scheduled to be negotiated at 24 facilities, including seven mills and 17 converting facilities. 23 of these agreements will automatically renew under the terms of the applicable master agreement if new agreements are not reached. EXECUTIVE OFFICERS OF THE REGISTRANT Mark S. Sutton, 55, chairman (since January 1, 2015) & chief executive officer (since November 1, 2014). Mr. Sutton previously served as president & chief operating officer from June 1, 2014 to October 31, 2014, senior vice president - industrial packaging from November 2011 to May 31, 2014, senior vice president - printing and communications papers of the Americas from 2010 until 2011, senior vice president - supply chain from 2008 to 2009, vice president - supply chain from 2007 until 2008, and vice president - strategic planning from 2005 until 2007. Mr. Sutton joined International Paper in 1984. Mr. Sutton serves on the board of directors of The Kroger Company. He is a member of The Business Council and the Business Roundtable and serves on the American Forest & Paper Association board of directors and the international advisory board of the Moscow School of Management - Skolkovo. He was appointed chairman of the U.S. Russian Business Council and was also appointed to the U.S. Section of the U.S.-Brazil CEO Forum. He also serves on the board of directors of Memphis Tomorrow and board of governors for New Memphis Institute. Mr. Sutton has been a director since June 1, 2014. W. Michael Amick, Jr., 53, senior vice president - paper the Americas since January 1, 2017. Mr. Amick previously served as senior vice president - North American papers & consumer packaging from July 2016 until December 2016, senior vice president - North American papers, pulp & consumer packaging from November 2014 until June 2016, vice president - president, IP India, from August 2012 to October 2014, and vice president and general manager for the coated paperboard business from 2010 to 2012. Mr. Amick joined International Paper in 1990. C. Cato Ealy, 60, senior vice president - corporate development since 2003. Mr. Ealy is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ealy joined International Paper in 1992. William P. Hoel, 60, senior vice president since January 2017. Mr. Hoel previously served as senior vice president - Container The Americas from February 2012 until December 2016, vice president, Container The Americas, from 2005 until 2012, senior vice president, corporate sales and marketing, from 2004 until 2005, and vice president, Wood Products, from 2000 until 2004. Mr. Hoel joined International Paper in 1983. Tommy S. Joseph, 57, senior vice president - manufacturing, technology, EH&S and global sourcing since January 2010. Mr. Joseph previously served as senior vice president - manufacturing, Alcoa Corp., VF Corporation, the Yale University technology, EH&S from February 2009 until Presidents Advisory Council, and the local governing December 2009, and vice president - technology from board of the University of Memphis. Ms. Roberts 2005 until February 2009. Mr. Joseph is a director of joined International Paper in 1981. Ilim Holding S.A., a Swiss Holding Company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Joseph joined International Paper in 1983. Thomas G. Kadien, 60, senior vice president - human resources, government relations & global citizenship Sharon R. Ryan, 57, senior vice president, general counsel & corporate secretary since November 2011. Ms. Ryan previously served as vice president, acting general counsel & corporate secretary from May 2011 until November 2011, vice president from March 2011 until May 2011, associate general counsel, chief since November 1, 2014. Mr. Kadien previously ethics and compliance officer from 2009 until 2011, served as senior vice president - consumer packaging and associate general counsel from 2006 until 2009. and IP Asia from January 2010 to October 31, 2014, Ms. Ryan joined International Paper in 1988. and senior vice president and president - xpedx from 2005 until 2009. Mr. Kadien serves on the board of directors of The Sherwin-Williams Company. Mr. Kadien joined International Paper in 1978. Glenn R. Landau, 48, senior vice president - finance since January 1, 2017. Mr. Landau previously served John V. Sims, 54, senior vice president - president, IP Europe, Middle East, Africa & Russia since July 2016. Mr. Sims previously served as vice president and general manager, European papers from March 2016 until June 2016, vice president & general manager, North American papers from 2013 until as senior vice president - president, IP Latin America February 2016, and vice president, finance and from November 2014 through December 2016, vice strategy, industrial packaging, from 2009 until 2013. president - president IP Latin America from 2013 to Mr. Sims is a director of Ilim Holding S.A., a Swiss October 2014, vice president - investor relations from Holding Company in which International Paper holds 2011 to 2013, and vice president and general a 50% interest, and of its subsidiary, Ilim Group. Mr. manager, containerboard and recycling from 2007 to Sims joined International Paper in 1994. 2011. Mr. Landau joined International Paper in 1991. Timothy S. Nicholls, 55, senior vice president - industrial packaging the Americas since January 1, Catherine I. Slater, 53, senior vice president - consumer packaging since December 2016. Ms. Slater joined International Paper from Weyerhaeuser 2017. Mr. Nicholls previously served as senior vice Company in December 2016, effective with the president - industrial packaging from November 2014 completion of the acquisition of Weyerhaeuser’s through December 2016, senior vice president - cellulose fibers business, which she previously led. printing and communications papers of the Americas Ms. Slater’s 24-year career with Weyerhaeuser from November 2011 through October 2014, senior included leadership roles in manufacturing, printing vice president and chief financial officer from 2007 papers, consumer products, wood products, until 2011, vice president and executive project leader distribution and the cellulose fibers business. of IP Europe during 2007, and vice president and chief financial officer - IP Europe from 2005 until 2007. Mr. Nicholls joined International Paper in 1991. Jean-Michel Ribieras, 54, senior vice president - global cellulose fibers since July 2016. Mr. Ribieras Gregory T. Wanta, 51, senior vice president - North American container since December 2016. Mr. Wanta has served in a variety of roles of increasing responsibility in manufacturing and commercial leadership roles in specialty papers, coated previously served as senior vice president - president, paperboard, printing papers, foodservice and industrial IP Europe, Middle East, Africa & Russia from 2013 packaging, including vice president, central region, until June 2016, and president - IP Latin America from Container the Americas, from January 2012 through 2009 until 2013. Mr. Ribieras is a director of Ilim November 2016. Mr. Wanta joined International Paper Holding S.A., a Swiss holding company in which in 1991. International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ribieras joined International Paper in 1993. Carol L. Roberts, 57, senior vice president & chief financial officer since November 2011. Ms. Roberts previously served as senior vice president - industrial packaging from 2008 until 2011 and senior vice president - IP packaging solutions from 2005 until 2008. Ms. Roberts serves on the board of directors of RAW MATERIALS Raw materials essential to our businesses include wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch. Information concerning fiber supply purchase agreements that were entered into in connection with the Company’s 2006 Transformation Plan, the 2008 5 6 causing delays and higher costs to implement capital projects. International Paper has controls and EXECUTIVE OFFICERS OF THE REGISTRANT procedures in place to stay informed about Mark S. Sutton, 55, chairman (since January 1, 2015) developments concerning possible climate change & chief executive officer (since November 1, 2014). legislation and regulation in the U.S. and in other Mr. Sutton previously served as president & chief countries where we operate. We regularly assess operating officer from June 1, 2014 to October 31, whether such legislation or regulation may have a 2014, senior vice president - industrial packaging from material effect on the Company, its operations or November 2011 to May 31, 2014, senior vice financial condition, and whether we have any related president - printing and communications papers of the disclosure obligations. Americas from 2010 until 2011, senior vice president - supply chain from 2008 to 2009, vice president - Additional information regarding climate change and supply chain from 2007 until 2008, and vice president International Paper is available in our 2015 Global - strategic planning from 2005 until 2007. Mr. Sutton Reporting Initiative (GRI) report found at http:// joined International Paper in 1984. Mr. Sutton serves www.internationalpaper .com/docs/default-source/ on the board of directors of The Kroger Company. He english/sustainability/2015-gri-report.pdf?sfvrsn=26 is a member of The Business Council and the though this information is not incorporated by reference Business Roundtable and serves on the American into this Form 10-K and should not be considered part Forest & Paper Association board of directors and the of this or any other report that we file with or furnish to international advisory board of the Moscow School of the SEC. EMPLOYEES As of December 31, 2016, we have approximately 55,000 employees, nearly 36,000 of whom are located in the United States. Of the U.S. employees, approximately 25,000 are hourly, with unions representing approximately 15,000 employees. Approximately 11,500 of this number are represented by the United Steelworkers union (USW). 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 2016, local labor agreements were negotiated at four mills and 13 converting facilities. Two of these were locations not covered by a master agreement. In 2017, local labor agreements are scheduled to be negotiated at 24 facilities, including seven mills and 17 converting facilities. 23 of these agreements will automatically renew under the terms of the applicable master agreement if new agreements are not reached. Management - Skolkovo. He was appointed chairman of the U.S. Russian Business Council and was also appointed to the U.S. Section of the U.S.-Brazil CEO Forum. He also serves on the board of directors of Memphis Tomorrow and board of governors for New Memphis Institute. Mr. Sutton has been a director since June 1, 2014. W. Michael Amick, Jr., 53, senior vice president - paper the Americas since January 1, 2017. Mr. Amick previously served as senior vice president - North American papers & consumer packaging from July 2016 until December 2016, senior vice president - North American papers, pulp & consumer packaging from November 2014 until June 2016, vice president - president, IP India, from August 2012 to October 2014, and vice president and general manager for the coated paperboard business from 2010 to 2012. Mr. Amick joined International Paper in 1990. C. Cato Ealy, 60, senior vice president - corporate development since 2003. Mr. Ealy is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ealy joined International Paper in 1992. William P. Hoel, 60, senior vice president since January 2017. Mr. Hoel previously served as senior vice president - Container The Americas from February 2012 until December 2016, vice president, Container The Americas, from 2005 until 2012, senior vice president, corporate sales and marketing, from 2004 until 2005, and vice president, Wood Products, from 2000 until 2004. Mr. Hoel joined International Paper in 1983. Tommy S. Joseph, 57, senior vice president - manufacturing, technology, EH&S and global sourcing since January 2010. Mr. Joseph previously served as senior vice president - manufacturing, from February 2009 until technology, EH&S December 2009, and vice president - technology from 2005 until February 2009. Mr. Joseph is a director of Ilim Holding S.A., a Swiss Holding Company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Joseph joined International Paper in 1983. Thomas G. Kadien, 60, senior vice president - human resources, government relations & global citizenship since November 1, 2014. Mr. Kadien previously served as senior vice president - consumer packaging and IP Asia from January 2010 to October 31, 2014, and senior vice president and president - xpedx from 2005 until 2009. Mr. Kadien serves on the board of directors of The Sherwin-Williams Company. Mr. Kadien joined International Paper in 1978. Glenn R. Landau, 48, senior vice president - finance since January 1, 2017. Mr. Landau previously served as senior vice president - president, IP Latin America from November 2014 through December 2016, vice president - president IP Latin America from 2013 to October 2014, vice president - investor relations from 2011 to 2013, and vice president and general manager, containerboard and recycling from 2007 to 2011. Mr. Landau joined International Paper in 1991. Timothy S. Nicholls, 55, senior vice president - industrial packaging the Americas since January 1, 2017. Mr. Nicholls previously served as senior vice president - industrial packaging from November 2014 through December 2016, senior vice president - printing and communications papers of the Americas from November 2011 through October 2014, senior vice president and chief financial officer from 2007 until 2011, vice president and executive project leader of IP Europe during 2007, and vice president and chief financial officer - IP Europe from 2005 until 2007. Mr. Nicholls joined International Paper in 1991. Jean-Michel Ribieras, 54, senior vice president - global cellulose fibers since July 2016. Mr. Ribieras previously served as senior vice president - president, IP Europe, Middle East, Africa & Russia from 2013 until June 2016, and president - IP Latin America from 2009 until 2013. Mr. Ribieras is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, joined International Paper in 1993. Ilim Group. Mr. Ribieras Carol L. Roberts, 57, senior vice president & chief financial officer since November 2011. Ms. Roberts previously served as senior vice president - industrial packaging from 2008 until 2011 and senior vice president - IP packaging solutions from 2005 until 2008. Ms. Roberts serves on the board of directors of Alcoa Corp., VF Corporation, the Yale University Presidents Advisory Council, and the local governing board of the University of Memphis. Ms. Roberts joined International Paper in 1981. Sharon R. Ryan, 57, senior vice president, general counsel & corporate secretary since November 2011. Ms. Ryan previously served as vice president, acting 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. John V. Sims, 54, senior vice president - president, IP Europe, Middle East, Africa & Russia since July 2016. Mr. Sims previously served as vice president and general manager, European papers from March 2016 until June 2016, vice president & general manager, North American papers from 2013 until February 2016, and vice president, finance and strategy, industrial packaging, from 2009 until 2013. Mr. Sims is a director of Ilim Holding S.A., a Swiss Holding Company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Sims joined International Paper in 1994. Catherine I. Slater, 53, senior vice president - consumer packaging since December 2016. Ms. Slater joined International Paper from Weyerhaeuser Company in December 2016, effective with the completion of the acquisition of Weyerhaeuser’s cellulose fibers business, which she previously led. Ms. Slater’s 24-year career with Weyerhaeuser included leadership roles in manufacturing, printing papers, consumer products, wood products, distribution and the cellulose fibers business. Gregory T. Wanta, 51, senior vice president - North American container since December 2016. Mr. Wanta has served in a variety of roles of increasing responsibility in manufacturing and commercial in specialty papers, coated leadership paperboard, printing papers, foodservice and industrial packaging, including vice president, central region, Container the Americas, from January 2012 through November 2016. Mr. Wanta joined International Paper in 1991. roles RAW MATERIALS Raw materials essential to our businesses include wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch. fiber supply purchase Information concerning agreements that were entered into in connection with the Company’s 2006 Transformation Plan, the 2008 5 6 of Weyerhaeuser acquisition Company’s Containerboard, Packaging and Recycling business and the 2016 acquisition of Weyerhaeuser's pulp business is presented in Note 11 Commitments and Contingent Liabilities on page 61 of Item 8. Financial Statements and Supplementary Data. FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10- K (including the exhibits hereto) 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 changes 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) changes in our estimates for the costs and insurance coverage associated with the recent incident at our Pensacola, Florida mill and for the time required to resume full operations at the mill; (vi) whether we experience a material disruption at one of our other manufacturing in conducting business through a joint venture; (viii) the failure to realize the expected synergies and cost- savings from our purchase of the cellulose fibers business of Weyerhaeuser Company; and (ix) our ability to achieve the benefits we expect from all other 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. facilities; inherent risks (vii) ITEM 1A. RISK FACTORS pursued or achieved by competitors could negatively In addition, we are subject to agreements that require In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), or in the Company’s other filings with the Securities and Exchange Commission, the following are some important factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement. RISKS RELATING TO INDUSTRY CONDITIONS CHANGES IN THE COST OR AVAILABILITY OF RAW MATERIALS, ENERGY AND TRANSPORTATION COULD AFFECT OUR PROFITABILITY. We rely heavily on the use of certain raw materials (principally virgin wood fiber, recycled fiber, caustic soda and starch), energy sources (principally natural gas, coal and fuel oil) and third-party companies that transport our goods. The market price of virgin wood fiber varies based upon availability and source. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause an occasional tightening in the supply of recycled fiber. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future. 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. impact our financial results. RISKS RELATING TO MARKET AND ECONOMIC FACTORS ADVERSE DEVELOPMENTS IN GENERAL BUSINESS AND ECONOMIC CONDITIONS COULD HAVE AN ADVERSE EFFECT ON THE DEMAND FOR OUR PRODUCTS AND OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels and consumer confidence, all of which impact demand for our products. In addition, volatility in the capital and credit markets, which impacts interest rates, currency exchange rates and the availability of credit, could have a material adverse effect on our business, financial condition and our results of operations. THE LEVEL OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS. As of December 31, 2016, International Paper had approximately $11.3 billion of outstanding indebtedness. The level of our indebtedness could have important consequences to our financial condition, operating results and business, including the following: • it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, dividends, share repurchases, debt service requirements, acquisitions and general corporate or other purposes; • a portion of our cash flows from operations will be dedicated to payments on indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities; 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. CHANGES IN CREDIT RATINGS ISSUED BY NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS COULD ADVERSELY AFFECT OUR COST OF FINANCING AND HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SECURITIES. Maintaining an investment-grade credit rating is an important element of our financial strategy, and a downgrade of the Company’s ratings below investment grade may limit our access to the capital markets, have an adverse effect on the market price of our securities, increase our cost of borrowing and require us to post collateral for derivatives in a net liability position. The Company’s desire to maintain its investment grade rating may cause the Company to take certain actions designed to improve its cash flow, including sale of assets, suspension or reduction of our dividend and reductions in capital expenditures and working capital. Under the terms of the agreements governing approximately $2.3 billion of our debt as of December 31, 2016, the applicable interest rate on such debt may increase upon each downgrade in our credit rating below investment grade. As a result, a downgrade in our credit rating below investment grade may lead to an increase in our interest expense. There can be no assurance that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Any such downgrade of our credit ratings could adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in • the debt service requirements of our indebtedness agreements governing the terms of any future could make it more difficult for us to satisfy other indebtedness that we may incur. obligations; • our indebtedness that is subject to variable rates of interest exposes us to increased debt service obligations in the event of increased interest rates; • it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt; and • it may increase our vulnerability to a downturn in general economic conditions or in our business, and may make us unable to carry out capital spending that is important to our growth. DOWNGRADES IN THE CREDIT RATINGS OF BANKS ISSUING CERTAIN LETTERS OF CREDIT WILL INCREASE OUR COST OF MAINTAINING CERTAIN INDEBTEDNESS AND MAY RESULT IN THE ACCELERATION OF DEFERRED TAXES. We are subject to the risk that a bank with currently issued irrevocable letters of credit supporting installment notes delivered to Temple-Inland in connection with Temple- Inland's 2007 sales of forestlands may be downgraded below a required rating. Since 2007, certain banks have fallen below the required ratings threshold and were successfully replaced, or waivers were obtained regarding their replacement. As a result of continuing uncertainty in the banking environment, a number of THE IN WHICH WE OPERATE EXPERIENCE BOTH ECONOMIC CYCLICALITY AND CHANGES IN CONSUMER PREFERENCES. FLUCTUATIONS IN THE PRICES OF, AND THE DEMAND FOR, OUR PRODUCTS COULD MATERIALLY FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. in consumer In addition, changes preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. These consumer preferences affect the prices of our products. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products. COMPETITION IN THE UNITED STATES AND INTERNATIONALLY COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate in a competitive environment, both in the United States and internationally, in all of our operating segments. Product innovations, manufacturing and operating efficiencies, and marketing, distribution and pricing strategies 7 8 INDUSTRIES AFFECT OUR acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business and the 2016 acquisition of Weyerhaeuser's pulp business is presented in Note 11 Commitments and Contingent Liabilities on page 61 of Item 8. Financial Statements and Supplementary Data. FORWARD-LOOKING STATEMENTS ITEM 1A. RISK FACTORS In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), or in the Company’s other filings with the Securities and Exchange Commission, the following are some important factors that could cause the Certain statements in this Annual Report on Form 10- Company’s actual results to differ materially from those K (including the exhibits hereto) that are not historical projected in any forward-looking statement. 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 changes 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) changes in our estimates for the costs and insurance coverage associated with the recent incident at our Pensacola, Florida mill and for the time required to resume full operations at the mill; (vi) whether we experience a material disruption at one of our other manufacturing facilities; (vii) risks inherent in conducting business through a joint venture; (viii) the failure to realize the expected synergies and cost- savings from our purchase of the cellulose fibers business of Weyerhaeuser Company; and (ix) our ability to achieve the benefits we expect from all other 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 RISKS RELATING TO INDUSTRY CONDITIONS CHANGES IN THE COST OR AVAILABILITY OF RAW MATERIALS, ENERGY AND TRANSPORTATION COULD AFFECT OUR PROFITABILITY. We rely heavily on the use of certain raw materials (principally virgin wood fiber, recycled fiber, caustic soda and starch), energy sources (principally natural gas, coal and fuel oil) and third-party companies that transport our goods. The market price of virgin wood fiber varies based upon availability and source. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause an occasional tightening in the supply of recycled fiber. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future. 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. THE INDUSTRIES IN WHICH WE OPERATE EXPERIENCE BOTH ECONOMIC CYCLICALITY AND CHANGES IN CONSUMER PREFERENCES. FLUCTUATIONS IN THE PRICES OF, AND THE DEMAND FOR, OUR PRODUCTS COULD MATERIALLY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. In addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. These consumer preferences affect the prices of our products. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products. COMPETITION IN THE UNITED STATES AND INTERNATIONALLY COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate in a publicly update any forward-looking statements, competitive environment, both in the United States and whether as a result of new information, future events or internationally, in all of our operating segments. Product otherwise. innovations, manufacturing and operating efficiencies, and marketing, distribution and pricing strategies 7 pursued or achieved by competitors could negatively impact our financial results. RISKS RELATING TO MARKET AND ECONOMIC FACTORS IN GENERAL ADVERSE DEVELOPMENTS BUSINESS AND ECONOMIC CONDITIONS COULD HAVE AN ADVERSE EFFECT ON THE DEMAND FOR OUR PRODUCTS AND OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, levels and consumer white-collar employment confidence, all of which impact demand for our products. In addition, volatility in the capital and credit markets, which interest rates, currency exchange rates and the availability of credit, could have a material adverse effect on our business, financial condition and our results of operations. impacts THE LEVEL OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS. As of December 31, 2016, International Paper had approximately $11.3 billion of outstanding indebtedness. The level of our indebtedness could have important consequences to our financial condition, operating results and business, including the following: • • • • • • financing it may limit our ability to obtain additional debt or equity for working capital, capital expenditures, product development, dividends, share repurchases, debt service requirements, acquisitions and general corporate or other purposes; a portion of our cash flows from operations will be dedicated to payments on indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities; the debt service requirements of our indebtedness could make it more difficult for us to satisfy other obligations; our indebtedness that is subject to variable rates of interest exposes us to increased debt service obligations in the event of increased interest rates; it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt; and it may increase our vulnerability to a downturn in general economic conditions or in our business, and may make us unable to carry out capital spending that is important to our growth. 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. IN CREDIT RATINGS CHANGES ISSUED BY NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS COULD ADVERSELY AFFECT OUR COST OF FINANCING AND HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SECURITIES. Maintaining an investment-grade credit rating is an important element of our financial strategy, and a downgrade of the Company’s ratings below investment grade may limit our access to the capital markets, have an adverse effect on the market price of our securities, increase our cost of borrowing and require us to post collateral for derivatives in a net liability position. The Company’s desire to maintain its investment grade rating may cause the Company to take certain actions designed to improve its cash flow, including sale of assets, suspension or reduction of our dividend and reductions in capital expenditures and working capital. the terms of Under the agreements governing approximately $2.3 billion of our debt as of December 31, 2016, the applicable interest rate on such debt may increase upon each downgrade in our credit rating below investment grade. As a result, a downgrade in our credit rating below investment grade may lead to an increase in our interest expense. There can be no assurance that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Any such downgrade of our credit ratings could adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in future the agreements governing indebtedness that we may incur. terms of any DOWNGRADES IN THE CREDIT RATINGS OF BANKS ISSUING CERTAIN LETTERS OF CREDIT WILL INCREASE OUR COST OF MAINTAINING CERTAIN INDEBTEDNESS AND MAY RESULT IN THE ACCELERATION OF DEFERRED TAXES. We are subject to the risk that a bank with currently issued irrevocable letters of credit supporting installment notes delivered to Temple-Inland in connection with Temple- Inland's 2007 sales of forestlands may be downgraded below a required rating. Since 2007, certain banks have fallen below the required ratings threshold and were successfully replaced, or waivers were obtained regarding their replacement. As a result of continuing uncertainty in the banking environment, a number of 8 the letter-of-credit banks currently in place remain subject to risk of downgrade and the number of qualified replacement banks remains limited. The downgrade of one or more of these banks may subject the Company to additional costs of securing a replacement letter-of- credit bank or could result in an acceleration of payments of up to $831 million in deferred income taxes if replacement banks cannot be obtained. The deferred taxes are currently recorded the Company's consolidated financial statements. See Note 12, Variable Interest Entities, on pages 64 through 66, and Note 10, Income Taxes, on pages 59 through 61, in Item 8. Financial Statements and Supplementary Data for further information. in OUR PENSION AND HEALTH CARE COSTS ARE SUBJECT TO NUMEROUS FACTORS WHICH COULD CAUSE THESE COSTS TO CHANGE. We have defined benefit pension plans covering substantially all U.S. salaried employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. We provide retiree health care benefits to certain former U.S. hourly employees, as well as financial assistance towards the cost of individual retiree medical coverage for certain former U.S. salaried employees. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could increase pension costs. Health care reform under the Patient Protection and Affordable Care Act of 2010, and modifications thereto, could also increase costs with respect to medical coverage of the Company’s full-time employees. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations. OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE MAY BE REQUIRED TO MAKE CASH PAYMENTS TO THE PLANS, REDUCING THE CASH AVAILABLE FOR OUR BUSINESS. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation – Retirement Benefits,” at December 31, 2016 was $3.4 billion. The amount and timing of future contributions will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. IN CHANGES INTERNATIONAL CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operating results and business prospects could be substantially affected by risks related to the countries outside the United States in which we have manufacturing facilities or sell our products. Specifically, Russia, Brazil, Poland, India, and Turkey, where we have substantial manufacturing facilities, are countries that are exposed to economic and political instability in their respective regions of the world. Fluctuations in the value of local currency versus the U.S. dollar, downturns in economic activity, adverse tax consequences, nationalization or any change in social, political or labor conditions in any of these countries or regions could negatively affect our financial results. Trade protection measures in favor of local producers including governmental subsidies, tax benefits and other local producers a competitive measures giving advantage over International Paper, may also adversely impact our operating results and business prospects In addition, our international operations are subject to regulation under U.S. law and other laws related to operations in foreign jurisdictions. For example, the Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. Failure to comply with domestic or foreign laws could result in the various adverse consequences, imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations. these countries. competing products, including of in RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS Our operations are subject WE ARE SUBJECT TO A WIDE VARIETY OF LAWS, REGULATIONS AND OTHER GOVERNMENT REQUIREMENTS THAT MAY CHANGE IN SIGNIFICANT WAYS, AND THE COST OF COMPLIANCE WITH SUCH REQUIREMENTS COULD IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and other government requirements -- including, among others, those relating to the environment, health and safety, labor and employment, data privacy, and health care. There can be no assurance that laws, regulations and government requirements will not be changed, applied or interpreted in ways that will require us to modify our operations and objectives or affect our returns on investments by 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 9 10 regulations. There can be no assurance that future • domestic and international laws and regulations 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. RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS. The costs and other effects of pending litigation against us cannot be determined with certainty. Although we do not believe that the outcome of any pending or threatened lawsuits or claims will have a material effect on our business or consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claim will be as expected. RISKS RELATING TO OUR OPERATIONS MATERIAL DISRUPTIONS AT ONE OF OUR MANUFACTURING FACILITIES COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at our corporate headquarters or one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial condition. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including: • fires, floods, earthquakes, hurricanes or other catastrophes; water supply; • the effect of a drought or reduced rainfall on its • the effect of other severe weather conditions on equipment and facilities; • terrorism or threats of terrorism; • • • • • • • • applicable to our Company and our business partners, including joint venture partners, around the world; unscheduled maintenance outages; prolonged power failures; an equipment failure; a chemical spill or release; explosion of a boiler or other equipment; damage or disruptions caused by third parties operating on or adjacent to one of our manufacturing facilities; • disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and • widespread outbreak of an illness or any other communicable disease, or any other public health tunnels; crisis; labor difficulties; and other operational problems. 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. For example, on January 22, 2017, we experienced significant structural damage to the largest pulp digester as well as the power house at our Pensacola pulp and paper mill in Cantonment, Florida. We restarted the power house and resumed partial operations producing fluff pulp at the mill using a series of small batch digesters within a couple weeks. Repairing the damaged digester will take more time, however, and we know that we will not be able to resume full operations producing containerboard at the mill during the first quarter of 2017. WE ARE SUBJECT TO INFORMATION TECHNOLOGY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY USED TO MANAGE OPERATIONS AND OTHER BUSINESS PROCESSES. Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, the letter-of-credit banks currently in place remain subject to risk of downgrade and the number of qualified replacement banks remains limited. The downgrade of CHANGES IN INTERNATIONAL CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operating results one or more of these banks may subject the Company and business prospects could be substantially affected to additional costs of securing a replacement letter-of- by risks related to the countries outside the United credit bank or could result in an acceleration of States in which we have manufacturing facilities or sell payments of up to $831 million in deferred income taxes our products. Specifically, Russia, Brazil, Poland, India, if replacement banks cannot be obtained. The deferred and Turkey, where we have substantial manufacturing taxes are currently recorded in the Company's facilities, are countries that are exposed to economic consolidated financial statements. See Note 12, and political instability in their respective regions of the Variable Interest Entities, on pages 64 through 66, and world. Fluctuations in the value of local currency versus Note 10, Income Taxes, on pages 59 through 61, in Item the U.S. dollar, downturns in economic activity, adverse 8. Financial Statements and Supplementary Data for tax consequences, nationalization or any change in further information. OUR PENSION AND HEALTH CARE COSTS ARE SUBJECT TO NUMEROUS FACTORS WHICH COULD CAUSE THESE COSTS TO CHANGE. We have defined benefit pension plans covering substantially all U.S. salaried employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. We provide retiree health care benefits to certain former U.S. hourly employees, as well as financial assistance towards the cost of individual retiree medical coverage for certain former U.S. salaried employees. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could increase pension costs. Health care reform under the modifications thereto, could also increase costs with respect to medical coverage of the Company’s full-time employees. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations. OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE MAY BE REQUIRED TO MAKE CASH PAYMENTS TO THE PLANS, REDUCING THE CASH AVAILABLE FOR OUR BUSINESS. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation – Retirement Benefits,” at December 31, 2016 was $3.4 billion. The amount and timing of future contributions will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. social, political or labor conditions in any of these countries or regions could negatively affect our financial results. Trade protection measures in favor of local producers of competing products, including governmental subsidies, tax benefits and other measures giving local producers a competitive advantage over International Paper, may also adversely impact our operating results and business prospects in these countries. In addition, our international operations are subject to regulation under U.S. law and other laws related to operations in foreign jurisdictions. For example, the Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. Failure to comply with domestic or foreign laws could result in various adverse consequences, including the imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations. RISKS RELATING TO LEGAL PROCEEDINGS AND WE ARE SUBJECT TO A WIDE VARIETY OF LAWS, REGULATIONS AND OTHER GOVERNMENT REQUIREMENTS THAT MAY CHANGE IN SIGNIFICANT WAYS, AND THE COST OF COMPLIANCE WITH SUCH REQUIREMENTS COULD IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operations are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and other government requirements -- including, among others, those relating to the environment, health and safety, labor and employment, data privacy, and health care. There can be no assurance that laws, regulations and government requirements will not be changed, applied or interpreted in ways that will require us to modify our operations and objectives or affect our returns on investments by 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 Patient Protection and Affordable Care Act of 2010, and COMPLIANCE COSTS 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. RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS. The costs and other effects of pending litigation against us cannot be determined with certainty. Although we do not believe that the outcome of any pending or threatened lawsuits or claims will have a material effect on our business or consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claim will be as expected. RISKS RELATING TO OUR OPERATIONS FACILITIES MATERIAL DISRUPTIONS AT ONE OF OUR MANUFACTURING COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at our corporate headquarters or one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial condition. Any of our manufacturing facilities, or any of our machines within an otherwise operations could operational unexpectedly due to a number of events, including: facility, cease • • • fires, floods, earthquakes, hurricanes or other catastrophes; the effect of a drought or reduced rainfall on its water supply; the effect of other severe weather conditions on equipment and facilities; • terrorism or threats of terrorism; 9 10 • • • • • • • • domestic and international laws and regulations applicable to our Company and our business partners, including joint venture partners, around the world; unscheduled maintenance outages; prolonged power failures; an equipment failure; a chemical spill or release; explosion of a boiler or other equipment; damage or disruptions caused by third parties operating on or adjacent to one of our manufacturing facilities; disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels; • widespread outbreak of an illness or any other communicable disease, or any other public health crisis; • • labor difficulties; and other operational problems. 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. For example, on January 22, 2017, we experienced significant structural damage to the largest pulp digester as well as the power house at our Pensacola pulp and paper mill in Cantonment, Florida. We restarted the power house and resumed partial operations producing fluff pulp at the mill using a series of small batch digesters within a couple weeks. Repairing the damaged digester will take more time, however, and we know that we will not be able to resume full operations producing containerboard at the mill during the first quarter of 2017. TO SUBJECT WE ARE INFORMATION TECHNOLOGY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY USED TO MANAGE OPERATIONS AND OTHER BUSINESS PROCESSES. Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, Condition and Results of Operations, and on page 54 and pages 56 and 57 of Item 8. Financial Statements PART II. and Supplementary Data. ITEM 3. LEGAL PROCEEDINGS Information concerning the Company’s legal proceedings is set forth in Note 11 Commitments and Dividend per share data on the Company’s common Contingencies on pages 61 through 63 of Item 8. stock and the high and low sales prices for the Financial Statements and Supplementary Data. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Company’s common stock for each of the four quarters in 2016 and 2015 are set forth on page 83 of Item 8. Financial Statements and Supplementary Data. As of the filing of this Annual Report on Form 10-K, the Company’s common shares are traded on the New York Stock Exchange. As of February 17, 2017, there were approximately 12,311 record holders of common stock of the Company. The table below presents information regarding the Company’s purchase of its equity securities for the time periods presented. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. October 1, 2016 - October 31, 2016 November 1, 2016 - November 30, 2016 December 1, 2016 - December 31, 2016 Period Total Total Number of Shares Average Price Paid per Purchased (a) Share — 9,096 2,642 11,738 Total Number of Shares (or Units) Purchased as Part of Publicly Announced Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in billions) $— 45.03 52.29 — — — $0.933 0.933 0.933 (a) 11,738 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. During these periods, no shares were purchased under our share repurchase program, which was was approved by our Board of Directors and announced on July 8, 2014. Through this program, which does not have an expiration date, we were authorized to purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $1.5 billion of shares of our common stock. As of February 17, 2017, approximately $933 million of shares of our common stock remained authorized for purchase under this program. implementation, updating and independent third party verification, our information technology systems, and those of our third party providers, could become subject to employee error or malfeasance, cyber attacks, or natural disasters. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to, interruption to systems availability, denial of access 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 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. incidents. Any of CERTAIN OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT. Certain operations in Russia are carried on by a joint venture, Ilim. In joint ventures, we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co- owners, so we receive only our portion of those benefits. JOINT WE MAY NOT ACHIEVE THE EXPECTED BENEFITS VENTURES, FROM ACQUISITIONS, DIVESTITURES AND OTHER CORPORATE TRANSACTIONS. Our strategy for long-term growth, productivity and profitability depends, in part, on our joint to accomplish prudent acquisitions, ability ventures, divestitures and other corporate transactions and to realize the benefits we expect from such transactions, and we are subject to the risk that we may not achieve the expected benefits. Among the benefits we expect from potential as well as completed acquisitions and joint ventures are synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers who place higher strategic value on such businesses and assets than does International Paper. On December 1, 2016, for example, we completed our acquisition of Weyerhaeuser's pulp business. The success of the acquisition will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating the acquired business with our existing businesses. The integration process may be complex, costly and time-consuming, and we may not accomplish the integration of the business smoothly, successfully or within the anticipated costs or timeframe. Potential integration risks include, among other things, our ability to successfully implement our business plan for the combined business and retain key customers, suppliers and employees. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES FORESTLANDS As of December 31, 2016, the Company owned or managed approximately 329,000 acres of forestlands in Brazil, and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. All owned lands in Brazil are independently third-party certified for sustainable forestry under the Brazilian National Forest Certification Program (CERFLOR) and the Forest Stewardship Council (FSC). MILLS AND PLANTS A listing of our production facilities by segment, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference. The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities. CAPITAL INVESTMENTS AND DISPOSITIONS Given the size, scope and complexity of our business interests, we continually examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about level of planned capital investments for 2017 on page 31 and 32, and restructuring activities as of dispositions and December 31, 2016, on pages 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial the 11 12 implementation, updating and independent third party than does International Paper. verification, our information technology systems, and those of our third party providers, could become subject to employee error or malfeasance, cyber attacks, or natural disasters. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to, interruption to systems availability, denial of access 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. CERTAIN OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT. Certain operations in Russia are carried on by a joint venture, Ilim. In joint ventures, we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co- owners, so we receive only our portion of those benefits. WE MAY NOT ACHIEVE THE EXPECTED BENEFITS FROM ACQUISITIONS, JOINT VENTURES, DIVESTITURES AND OTHER CORPORATE TRANSACTIONS. Our strategy for long-term growth, productivity and profitability depends, in part, on our ability to accomplish prudent acquisitions, joint ventures, divestitures and other corporate transactions and to realize the benefits we expect from such transactions, and we are subject to the risk that we may not achieve the expected benefits. Among the benefits we expect from potential as well as completed acquisitions and joint ventures are synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers who place higher strategic value on such businesses and assets On December 1, 2016, for example, we completed our acquisition of Weyerhaeuser's pulp business. The success of the acquisition will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating the acquired business with our existing businesses. The integration process may be complex, costly and time-consuming, and we may not accomplish the integration of the business smoothly, successfully or within the anticipated costs or timeframe. Potential integration risks include, among other things, our ability to successfully implement our business plan for the combined business and retain key customers, suppliers and employees. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES FORESTLANDS As of December 31, 2016, the Company owned or managed approximately 329,000 acres of forestlands in Brazil, and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. All owned lands in Brazil are independently third-party certified for sustainable forestry under the Brazilian National Forest Certification Program (CERFLOR) and the Forest Stewardship Council (FSC). MILLS AND PLANTS A listing of our production facilities by segment, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference. The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities. CAPITAL INVESTMENTS AND DISPOSITIONS Given the size, scope and complexity of our business interests, we continually examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about the level of planned capital investments for 2017 on page 31 and 32, and dispositions and restructuring activities as of December 31, 2016, on pages 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on page 54 and pages 56 and 57 of Item 8. Financial Statements and Supplementary Data. ITEM 3. LEGAL PROCEEDINGS concerning legal Information proceedings is set forth in Note 11 Commitments and Contingencies on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data. the Company’s ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Dividend per share data on the Company’s common stock and the high and low sales prices for the Company’s common stock for each of the four quarters in 2016 and 2015 are set forth on page 83 of Item 8. Financial Statements and Supplementary Data. As of the filing of this Annual Report on Form 10-K, the Company’s common shares are traded on the New York Stock Exchange. As of February 17, 2017, there were approximately 12,311 record holders of common stock of the Company. The table below presents information regarding the Company’s purchase of its equity securities for the time periods presented. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Period October 1, 2016 - October 31, 2016 November 1, 2016 - November 30, 2016 December 1, 2016 - December 31, 2016 Total Total Number of Shares Purchased (a) Average Price Paid per Share Total Number of Shares (or Units) Purchased as Part of Publicly Announced Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in billions) — 9,096 2,642 11,738 $— 45.03 52.29 — — — $0.933 0.933 0.933 (a) 11,738 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. During these periods, no shares were purchased under our share repurchase program, which was was approved by our Board of Directors and announced on July 8, 2014. Through this program, which does not have an expiration date, we were authorized to purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $1.5 billion of shares of our common stock. As of February 17, 2017, approximately $933 million of shares of our common stock remained authorized for purchase under this program. 11 12 PERFORMANCE GRAPH The performance graph shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended. The following graph compares a $100 investment in Company stock on December 31, 2011 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, 2011. The graph portrays total return, 2011–2016, assuming reinvestment of dividends. ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL SUMMARY (a) Note 1: The companies included in the ROIC Peer Group are Domtar Inc., Fibria Celulose S.A., Graphic Packaging Holding Company, Klabin S.A., Metsa Board Corporation, Mondi Group, Packaging Corporation of America, Smurfit Kappa Group, Stora Enso Group, and UPM- Kymmene Corp. MeadWestvaco Corp. and Rock-Tenn Company are included in the ROIC Peer Group results through 2014 and subsequently, after the merger of those companies, WestRock was added to the Peer group beginning in 2015. Note 2: Returns are calculated in $USD. 13 Current assets less current liabilities $ 2,897 $ 2,553 $ 3,050 $ 3,898 $ 3,907 Dollar amounts in millions, except per share amounts and stock prices RESULTS OF OPERATIONS Net sales Costs and expenses, excluding interest Earnings (loss) from continuing operations before income taxes and equity earnings Equity earnings (loss), net of taxes Discontinued operations, net of taxes Net earnings (loss) Noncontrolling interests, net of taxes Net earnings (loss) attributable to International Paper Company FINANCIAL POSITION Plants, properties and equipment, net Forestlands Total assets long-term debt Long-term debt Notes payable and current maturities of Total shareholders’ equity BASIC EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations Net earnings (loss) DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations Net earnings (loss) Cash dividends Total shareholders’ equity COMMON STOCK PRICES High Low Year-end FINANCIAL RATIOS Current ratio Total debt to capital ratio Return on shareholders’ equity CAPITAL EXPENDITURES NUMBER OF EMPLOYEES 2016 2015 2014 2013 2012 $ 21,079 19,603 $ 22,365 20,544 $ 23,617 22,138 $ 23,483 21,643 $ 21,852 20,214 (b) (c) (b-d) 956 198 (5) 902 (2) 1,266 (e) 117 — 917 (21) (e-f) (g) (h) (g-i) 872 (200) (13) 536 (19) 1,228 (j) 967 (m) (39) (309) 1,378 (17) (k) (j-l) 61 77 799 5 (n) (m-o) 904 (b-d) 938 (e-f) 555 (g-i) 1,395 (j-l) 794 (m-o) 13,990 456 33,345 239 11,075 4,341 11,980 366 30,531 426 8,844 3,884 12,728 507 28,637 742 8,584 5,115 13,672 557 31,488 661 8,787 8,105 $ 57.90 $ 55.73 $ 50.33 $ 39.88 $ 2.21 $ 2.25 $ 1.33 $ 3.85 $ (0.01) 2.20 — 2.25 (0.03) 1.30 (0.70) 3.15 $ 2.19 $ 2.23 $ 1.31 $ 3.80 $ (0.01) 2.18 1.783 10.56 $ 54.68 32.50 53.06 1.7 0.72 (0.02) 1.29 1.450 12.18 44.24 53.58 1.6 0.65 (0.69) 3.11 1.250 18.57 39.47 49.03 1.8 0.54 $1,198 64,000 — 2.23 1.640 9.43 36.76 37.70 1.7 0.70 14 22.1% (b-d) 20.0% (e-f) 7.7% (g-i) 20.2% (j-l) 11.6% (m-o) $ 1,348 55,000 $ 1,487 56,000 $ 1,366 58,000 13,949 622 32,106 444 9,649 6,304 1.65 0.17 1.82 1.63 0.17 1.80 1.088 14.33 27.29 39.84 1.8 0.62 $1,383 65,000 PERFORMANCE GRAPH The performance graph shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended. The following graph compares a $100 investment in Company stock on December 31, 2011 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, 2011. The graph portrays total return, 2011–2016, assuming reinvestment of dividends. ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL SUMMARY (a) Dollar amounts in millions, except per share amounts and stock prices RESULTS OF OPERATIONS Net sales Costs and expenses, excluding interest Earnings (loss) from continuing operations before income taxes and equity earnings Equity earnings (loss), net of taxes Discontinued operations, net of taxes Net earnings (loss) Noncontrolling interests, net of taxes Net earnings (loss) attributable to International Paper Company FINANCIAL POSITION 2016 2015 2014 2013 2012 $ 21,079 19,603 $ 22,365 20,544 $ 23,617 22,138 $ 23,483 21,643 $ 21,852 20,214 (b) (c) (b-d) 956 198 (5) 902 (2) 1,266 (e) 117 — 917 (21) (e-f) (g) (h) (g-i) 872 (200) (13) 536 (19) 1,228 (j) 967 (m) (39) (309) 1,378 (17) (k) (j-l) 61 77 799 5 (n) (m-o) 904 (b-d) 938 (e-f) 555 (g-i) 1,395 (j-l) 794 (m-o) Current assets less current liabilities $ 2,897 $ 2,553 $ 3,050 $ 3,898 $ 3,907 Note 1: The companies included in the ROIC Peer Group are Domtar Inc., Fibria Celulose S.A., Graphic Packaging Holding Company, Klabin S.A., Metsa Board Corporation, Mondi Group, Packaging Corporation of America, Smurfit Kappa Group, Stora Enso Group, and UPM- Kymmene Corp. MeadWestvaco Corp. and Rock-Tenn Company are included in the ROIC Peer Group results through 2014 and subsequently, after the merger of those companies, WestRock was added to the Peer group beginning in 2015. Note 2: Returns are calculated in $USD. Plants, properties and equipment, net Forestlands Total assets Notes payable and current maturities of long-term debt Long-term debt Total shareholders’ equity BASIC EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations Net earnings (loss) DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations Net earnings (loss) Cash dividends Total shareholders’ equity COMMON STOCK PRICES High Low Year-end FINANCIAL RATIOS Current ratio Total debt to capital ratio Return on shareholders’ equity CAPITAL EXPENDITURES NUMBER OF EMPLOYEES 13,990 456 33,345 239 11,075 4,341 11,980 366 30,531 426 8,844 3,884 12,728 507 28,637 742 8,584 5,115 13,672 557 31,488 661 8,787 8,105 $ 2.21 $ 2.25 $ 1.33 $ 3.85 $ (0.01) 2.20 — 2.25 (0.03) 1.30 (0.70) 3.15 $ 2.19 $ 2.23 $ 1.31 $ 3.80 $ — 2.23 1.640 9.43 (0.02) 1.29 1.450 12.18 (0.69) 3.11 1.250 18.57 13,949 622 32,106 444 9,649 6,304 1.65 0.17 1.82 1.63 0.17 1.80 1.088 14.33 $ 57.90 $ 55.73 $ 50.33 $ 39.88 36.76 37.70 44.24 53.58 39.47 49.03 27.29 39.84 (0.01) 2.18 1.783 10.56 $ 54.68 32.50 53.06 1.7 0.72 22.1% (b-d) 1.7 0.70 20.0% (e-f) 1.6 0.65 7.7% (g-i) $ 1,348 55,000 $ 1,487 56,000 $ 1,366 58,000 1.8 0.54 20.2% (j-l) $1,198 64,000 1.8 0.62 11.6% (m-o) $1,383 65,000 13 14 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 (a) All periods presented have been restated to reflect the xpedx business and the Temple-Inland Building Products business as discontinued operations and prior period amounts have been adjusted to conform with current year presentation, if applicable. 2016: (b) Includes the following charges (gains): In millions 2016 Before Tax After Tax Riegelwood mill conversion costs $ 9 $ India Packaging evaluation write-off Write-off of certain regulatory pre- engineering costs Early debt extinguishment costs Costs associated with the newly acquired pulp business Asia Box impairment / restructuring Gain on sale of investment in Arizona Chemical Turkey mill closure Amortization of Weyerhaeuser inventory fair value step-up Total special items Non-operating pension expense Total 17 8 29 31 70 (8) 7 6 11 5 18 21 58 (5) 6 19 182 610 792 $ $ 11 131 375 506 $ $ (c) Includes a pre-tax charge of $8 million ($5 million after taxes) for a legal settlement associated with the xpedx business. (d) Includes the following tax expenses (benefits): 2014: 2013: In millions Cash pension contribution U.S. Federal audit Brazil goodwill International legal entity restructuring Luxembourg tax rate change Total 2015: 2016 23 (14) (57) (6) 31 (23) $ $ (e) Includes the following charges (gains): In millions 2015 Before Tax After Tax Riegelwood mill conversion costs, net of proceeds from sale of the Carolina Coated Bristols brand $ 8 $ Timber monetization restructuring Early debt extinguishment costs IP-Sun JV impairment Legal reserve adjustment Refund and state tax credits Impairment of Orsa goodwill and trade name intangible Other items Total special items Non-operating pension expense Total 16 207 174 15 (4) 137 6 559 258 817 $ $ $ $ 4 10 133 180 9 (2) 137 5 476 157 633 (f) Includes the following tax expenses (benefits): In millions IP-Sun JV impairment Cash pension contribution Other items Total 2015 $ $ (67) 23 7 (37) (g) Includes the following charges (gains): (j) Includes the following charges (gains): In millions In millions Temple-Inland integration $ 16 $ Temple-Inland integration $ 62 $ Courtland mill shutdown Early debt extinguishment costs India legal contingency resolution Multi-employer pension plan withdrawal liability Foreign tax amnesty program Asia Industrial Packaging goodwill impairment Loss on sale by investee and impairment of investment Other items Total special items $ 1,052 $ Non-operating pension expense Total $ 1,264 $ (h) Includes the operating earnings of the xpedx business prior to the spin-off and the following charges (gains): (i) Includes the following tax expenses (benefits): In millions xpedx spinoff Building Products divestiture xpedx restructuring Total In millions State legislative tax change Internal restructuring Other items Total 2014 Before Tax After Tax 554 276 (20) 35 32 100 47 12 212 10 338 169 (20) 21 17 100 36 9 680 129 809 2014 Before Tax After Tax $ $ 24 16 1 $ 41 $ 16 9 (1) 24 2014 $ $ 10 (90) (1) (81) 2013 Before Tax After Tax (30) (19) Courtland mill shutdown Early debt extinguishment costs Insurance reimbursement related to legal settlement Shut down of paper machine at Augusta mill India Papers tradename and goodwill Fair value adjustment of company Cass Lake environmental reserve Bargain purchase adjustment - impairment airplanes Turkey Other items Total Total Non-operating pension expense 118 25 45 127 9 6 (13) (5) 344 323 667 $ $ $ $ 38 72 16 28 122 5 4 2 (13) 255 197 452 (k) Includes the operating earnings of the xpedx business for the full year and the Temple-Inland Building Products business through the date of sale in July 2013. Also includes the following charges (gains): In millions xpedx spinoff xpedx goodwill impairment Building Products divestiture xpedx restructuring Total 2013 Before Tax After Tax $ 22 $ 400 23 32 14 366 19 19 $ 477 $ 418 (l) Includes the following tax expenses (benefits): Settlement of U.S. federal tax audits Income tax reserve release In millions Other items Total 2013 $ (744) (31) 1 $ (774) 15 16 (d) Includes the following tax expenses (benefits): 2014: 2013: (g) Includes the following charges (gains): (j) Includes the following charges (gains): In millions 2014 Before Tax After Tax In millions 2013 Before Tax After Tax 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. In millions Cash pension contribution U.S. Federal audit Brazil goodwill International legal entity restructuring Luxembourg tax rate change Total 2016 23 (14) (57) (6) 31 (23) $ $ Return on shareholders’ equity— net earnings attributable to International Paper Company divided by average shareholders’ equity 2015: (computed monthly). (e) Includes the following charges (gains): Temple-Inland integration $ 16 $ Courtland mill shutdown Early debt extinguishment costs India legal contingency resolution Multi-employer pension plan withdrawal liability Foreign tax amnesty program Asia Industrial Packaging goodwill impairment Loss on sale by investee and impairment of investment Other items 554 276 (20) 35 32 100 47 12 Total special items $ 1,052 $ Non-operating pension expense 212 Total $ 1,264 $ 10 338 169 (20) 21 17 100 36 9 680 129 809 (h) Includes the operating earnings of the xpedx business prior to the spin-off and the following charges (gains): In millions xpedx spinoff Building Products divestiture xpedx restructuring Total 2014 Before Tax After Tax $ $ 24 16 1 $ 41 $ 16 9 (1) 24 2015 (i) Includes the following tax expenses (benefits): In millions State legislative tax change Internal restructuring Other items Total 2014 $ $ 10 (90) (1) (81) 2015 Before Tax After Tax In millions Riegelwood mill conversion costs, net of proceeds from sale of the Carolina Coated Bristols brand $ 8 $ Timber monetization restructuring Early debt extinguishment costs IP-Sun JV impairment Legal reserve adjustment Refund and state tax credits Impairment of Orsa goodwill and trade name intangible Other items Total special items Non-operating pension expense Total 16 207 174 15 (4) 137 6 559 258 817 $ $ (f) Includes the following tax expenses (benefits): 4 10 133 180 9 (2) 137 5 476 157 633 (67) 23 7 (37) $ $ $ $ In millions IP-Sun JV impairment Cash pension contribution Other items Total FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY (a) All periods presented have been restated to reflect the xpedx business and the Temple-Inland Building Products business as discontinued operations and prior period amounts have been adjusted to conform with current year presentation, if applicable. 2016: (b) Includes the following charges (gains): In millions Riegelwood mill conversion costs $ 9 $ 2016 Before Tax After Tax India Packaging evaluation write-off Write-off of certain regulatory pre- engineering costs Early debt extinguishment costs Costs associated with the newly acquired pulp business Asia Box impairment / restructuring Gain on sale of investment in Arizona Chemical Turkey mill closure Amortization of Weyerhaeuser inventory fair value step-up Total special items Non-operating pension expense Total 17 8 29 31 70 (8) 7 6 11 5 18 21 58 (5) 6 19 182 610 792 $ $ 11 131 375 506 $ $ (c) Includes a pre-tax charge of $8 million ($5 million after taxes) for a legal settlement associated with the xpedx business. 15 16 Temple-Inland integration $ 62 $ Courtland mill shutdown Early debt extinguishment costs Insurance reimbursement related to legal settlement Shut down of paper machine at Augusta mill India Papers tradename and goodwill impairment Fair value adjustment of company airplanes Cass Lake environmental reserve Bargain purchase adjustment - Turkey Other items Total Non-operating pension expense Total $ $ 118 25 38 72 16 (30) (19) 45 127 9 6 (13) (5) 344 323 667 $ $ 28 122 5 4 (13) 2 255 197 452 (k) Includes the operating earnings of the xpedx business for the full year and the Temple-Inland Building Products business through the date of sale in July 2013. Also includes the following charges (gains): In millions xpedx spinoff xpedx goodwill impairment Building Products divestiture xpedx restructuring Total 2013 Before Tax After Tax $ 22 $ 400 23 32 14 366 19 19 $ 477 $ 418 (l) Includes the following tax expenses (benefits): In millions Settlement of U.S. federal tax audits Income tax reserve release Other items Total 2013 $ (744) (31) 1 $ (774) 2012: (m) Includes the following charges (gains): (n) Includes the operating earnings of the xpedx business and the Temple-Inland Building Products business for the full year. Also includes the following charges (gains): In millions 2012 Before Tax After Tax Temple-Inland integration $ 164 $ 105 In millions 2012 Before Tax After Tax Early debt extinguishment costs EMEA packaging business restructuring Temple-Inland inventory fair value adjustment Hueneme mill long-lived asset fair value adjustment Containerboard mill divestitures Other Total Non-operating pension expense Total 48 17 20 62 29 30 12 12 38 55 (5) 335 159 494 $ $ (5) 247 113 360 $ $ Building Products divestiture xpedx restructuring Total $ $ 15 44 59 $ $ (o) Includes the following tax expenses (benefits): In millions Internal restructuring Deferred tax asset adjustment related to Medicare Part D reimbursement Other Total 2012 $ $ 9 28 37 14 5 6 25 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY Diluted earnings (loss) attributable to common shareholders were $904 million ($2.18 per share) in 2016, compared with $938 million ($2.23 per share) in 2015 and $555 million ($1.29 per share) in 2014. Adjusted Operating Earnings is a non-GAAP measure and is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non- operating pension expense. International Paper generated Adjusted Operating Earnings Attributable to Common Shareholders of $1.4 billion ($3.35 per share) in 2016, compared with $1.5 billion ($3.65 per share) in 2015, and $1.3 billion ($3.00 per share) in 2014 (see reconciliation on page 19). Despite a tough global environment, International Paper delivered another year of solid performance, with continued strong cash flow generation and a return on invested capital in excess of our cost of capital. During 2016, we took steps to further strengthen our portfolio. We completed the acquisition of Weyerhaeuser’s pulp business, which we have combined with IP’s legacy pulp business to form our new Global Cellulose Fibers business. We also completed the conversion of a machine at the Riegelwood, North Carolina mill to produce fluff pulp, which coupled with the newly acquired pulp business, gives the Company the capacity to grow both fluff and high-value specialty pulp products. In addition, we also acquired a top-quartile mill asset in Madrid, which we will convert in the second half of 2017 to produce recycled containerboard to support our EMEA Industrial Packaging business. Finally, we were able to return cash to our shareholders in the form of a 5% increase in the annual dividend, making it the fifth consecutive year of a dividend increase. Our 2016 results reflect margin pressure across most of our businesses throughout the year along with escalating input costs, primarily natural gas and OCC, in the later portion of the year. Full-year 2016 earnings were impacted by price erosion and weaker mix across many of our businesses, in particular, our North American Industrial Packaging business which experienced lower export pricing and the impact of early 2016 pricing index changes to boxes. Volume was positive compared to 2015, primarily driven by increased North American box demand. Manufacturing operations, despite solid performance across our mill systems, were negatively impacted by the Riegelwood conversion and ramp up, Hurricane Matthew, and inventory valuation charges associated with the October containerboard price increase. We did see signs of strengthening in some of our key markets in the second half of the year, which enabled us to announce and implement price increases across various businesses that will benefit us in 2017. Our Ilim joint venture had another solid year in 2016, experiencing strong demand which led to record full-year production. Looking ahead to the 2017 first quarter, we expect sales volumes for North American Industrial Packaging to be slightly higher despite seasonally lower daily shipments due to four more shipping days. Sales volumes for Global Cellulose Fibers will be higher due to the full-quarter impact of the newly acquired pulp business. In addition, sales volumes for EMEA Industrial Packaging, North American Printing Papers and North American Consumer Packaging are also expected to be seasonally higher. Pricing is expected to increase for both North American Industrial Packaging and Brazilian Industrial Packaging, reflecting the continuing implementation of box price increases announced in 2016. Pricing for both North American Printing Papers and North American Consumer Packaging is expected to be lower due to market pressures. Planned maintenance outages are expected to increase due to a heavy outage quarter, including a significant outage currently underway at the Global Cellulose Fibers Port Wentworth mill. Input costs are expected to increase primarily for our North American operations, largely driven by natural gas, wood and OCC. Additionally, we expect the results of Ilim to be sequentially lower, primarily due to seasonally lower volumes and seasonally higher input costs. Looking to full year 2017, we are encouraged by an improving economic climate and are eager to begin the integration of our newly acquired pulp business, driving the anticipated synergies to the bottom line. We expect higher earnings in our North American Industrial Packaging business through benefits from the previously announced price increase, growing demand from our customers and improvement initiatives. We also expect to improve margins with continued strong operations and extensive cost reduction efforts across many of our other businesses. Additionally, we are on track for our planned conversion of the Madrid mill in the second half of the year, which will enable a better offering for our customers and earnings improvement for our EMEA Industrial Packaging business. Finally, with the strong cash flow that we expect from all of these initiatives, we will continue to allocate capital to create value with a near-term focus on debt reduction and returning value to our shareholders. Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures. Diluted earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most direct comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of items considered by management to be unusual, from the earnings reported under GAAP, non-operating pension expense (includes all U.S. pension costs, excluding service costs and prior service costs), and 17 18 2012: (m) Includes the following charges (gains): (n) Includes the operating earnings of the xpedx business and the Temple-Inland Building Products business for the full year. Also includes the following charges (gains): Temple-Inland integration $ 164 $ 105 In millions In millions Early debt extinguishment costs EMEA packaging business restructuring Temple-Inland inventory fair value adjustment Hueneme mill long-lived asset fair value adjustment Containerboard mill divestitures Other Total Total Non-operating pension expense 2012 Before Tax After Tax 48 17 20 62 29 30 12 12 38 55 (5) 335 159 494 $ $ (5) 247 113 360 $ $ Building Products divestiture xpedx restructuring Total (o) Includes the following tax expenses (benefits): In millions Internal restructuring Deferred tax asset adjustment related to Medicare Part D reimbursement Other Total 2012 Before Tax After Tax $ $ 15 44 59 $ $ 9 28 37 14 5 6 25 2012 $ $ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY (loss) attributable to common Diluted earnings shareholders were $904 million ($2.18 per share) in 2016, compared with $938 million ($2.23 per share) in 2015 and $555 million ($1.29 per share) in 2014. Adjusted Operating Earnings is a non-GAAP measure and is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non- operating pension expense. International Paper generated Adjusted Operating Earnings Attributable to Common Shareholders of $1.4 billion ($3.35 per share) in 2016, compared with $1.5 billion ($3.65 per share) in 2015, and $1.3 billion ($3.00 per share) in 2014 (see reconciliation on page 19). Despite a tough global environment, International Paper delivered another year of solid performance, with continued strong cash flow generation and a return on invested capital in excess of our cost of capital. During 2016, we took steps to further strengthen our portfolio. We completed the acquisition of Weyerhaeuser’s pulp business, which we have combined with IP’s legacy pulp business to form our new Global Cellulose Fibers business. We also completed the conversion of a machine at the Riegelwood, North Carolina mill to produce fluff pulp, which coupled with the newly acquired pulp business, gives the Company the capacity to grow both fluff and high-value specialty pulp products. In addition, we also acquired a top-quartile mill asset in Madrid, which we will convert in the second half of 2017 to produce recycled containerboard to support our EMEA Industrial Packaging business. Finally, we were able to return cash to our shareholders in the form of a 5% increase in the annual dividend, making it the fifth consecutive year of a dividend increase. Our 2016 results reflect margin pressure across most of our businesses throughout the year along with escalating input costs, primarily natural gas and OCC, in the later portion of the year. Full-year 2016 earnings were impacted by price erosion and weaker mix across many of our businesses, in particular, our North American Industrial Packaging business which experienced lower export pricing and the impact of early 2016 pricing index changes to boxes. Volume was positive compared to 2015, primarily driven by increased North American box demand. Manufacturing operations, despite solid performance across our mill systems, were negatively impacted by the Riegelwood conversion and ramp up, Hurricane Matthew, and inventory valuation charges associated with the October containerboard price increase. We did see signs of strengthening in some of our key markets in the second half of the year, which enabled us to announce and implement price increases across various businesses that will benefit us in 2017. Our Ilim joint venture had another solid year in 2016, experiencing strong demand which led to record full-year production. Looking ahead to the 2017 first quarter, we expect sales volumes for North American Industrial Packaging to be slightly higher despite seasonally lower daily shipments due to four more shipping days. Sales volumes for Global Cellulose Fibers will be higher due to the full-quarter impact of the newly acquired pulp business. In addition, sales volumes for EMEA Industrial Packaging, North American Printing Papers and North American Consumer Packaging are also expected to be seasonally higher. Pricing is expected to increase for both North American Industrial Packaging and Brazilian Industrial Packaging, reflecting the continuing implementation of box price increases announced in 2016. Pricing for both North American Printing Papers and North American Consumer Packaging is expected to be lower due to market pressures. Planned maintenance outages are expected to increase due to a heavy outage quarter, including a significant outage currently underway at the Global Cellulose Fibers Port Wentworth mill. Input costs are expected to increase primarily for our North American operations, largely driven by natural gas, wood and OCC. Additionally, we expect the results of Ilim to be sequentially lower, primarily due to seasonally lower volumes and seasonally higher input costs. in our North American Looking to full year 2017, we are encouraged by an improving economic climate and are eager to begin the integration of our newly acquired pulp business, driving the anticipated synergies to the bottom line. We expect higher earnings Industrial Packaging business through benefits from the previously announced price increase, growing demand from our customers and improvement initiatives. We also expect to improve margins with continued strong operations and extensive cost reduction efforts across many of our other businesses. Additionally, we are on track for our planned conversion of the Madrid mill in the second half of the year, which will enable a better offering for our customers and earnings improvement for our EMEA Industrial Packaging business. Finally, with the strong cash flow that we expect from all of these initiatives, we will continue to allocate capital to create value with a near-term focus on debt reduction and returning value to our shareholders. Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures. Diluted earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most direct comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of items considered by management to be unusual, from the earnings reported under GAAP, non-operating pension expense (includes all U.S. pension costs, excluding service costs and prior service costs), and 17 18 discontinued operations. Adjusted Operating Earnings Per Share is calculated by dividing Adjusted Operating Earnings by diluted average shares of common stock outstanding. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. (loss) attributable Diluted earnings to common shareholders were $0.53 in the 2016 fourth quarter, compared with $0.75 in the 2016 third quarter and $0.43 in the 2015 fourth quarter. Adjusted Operating Earnings attributable to common shareholders of $303 million ($0.73 per share) in the 2016 fourth quarter were lower than both the $380 million ($0.91 per share) in the 2016 third quarter and the $361 million ($0.87 per share) in the 2015 fourth quarter. The following are reconciliations of Diluted earnings (loss) to Adjusted to common shareholders attributable operating earnings attributable to common shareholders. Diluted Earnings (Loss) Attributable to Shareholders Add back - Discontinued operations (gain) loss Diluted Earnings (Loss) from Continuing Operations Add back - Non-operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Attributable to Shareholders Diluted Earnings (Loss) Per Share Attributable to Shareholders Add back - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non-operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders 2016 2015 2014 $ 904 $ 938 $ 555 5 — 13 909 610 182 938 568 258 212 559 1,052 (309) (221) (536) $ 1,392 $ 1,534 $ 1,296 2016 2015 2014 $ 2.18 $ 2.23 $ 1.29 0.01 — 0.02 2.19 2.23 1.31 1.47 0.61 0.49 0.44 1.33 2.44 (0.75) (0.52) (1.24) $ 3.35 $ 3.65 $ 3.00 Three Months Ended December 31, 2016 Three Months Ended September 30, 2016 Three Months Ended December 31, 2015 $ 218 $ 312 $ 178 — 218 37 45 3 — 312 42 66 — 178 60 158 (40) (35) $ 303 $ 380 $ 361 the impact of equity earnings and noncontrolling interests, Corporate items Three Months Ended December 31, 2016 Three Months Ended September 30, 2016 Three Months Ended December 31, 2015 $ 0.53 $ 0.75 $ 0.43 States. — — — 0.53 0.09 0.11 0.75 0.43 0.10 0.14 0.16 0.38 — (0.10) (0.08) $ 0.73 $ 0.91 $ 0.87 past and present periods. Free Cash Flow of $1.9 billion The following table presents a reconciliation of net generated in 2016 was higher than the $1.8 billion earnings (loss) from continuing operations attributable to generated in 2015, but lower than the $2.1 billion International Paper Company to its total Business generated in 2014 (see reconciliation on page 30). Segment Operating Profit: Free Cash Flow of $467 million generated in the 2016 fourth quarter was lower than the $575 million generated in the 2016 third quarter and the $501 million generated in the 2015 fourth quarter (see reconciliation on page 30). Results of Operations Business 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. Business Segment Operating Profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including excluding corporate items and corporate special items. Business 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 International Paper operates in four segments: Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging. In millions 2016 2015 2014 Earnings (Loss) From Continuing Operations Attributable to International Paper Company Add back (deduct) Income tax provision (benefit) Equity (earnings) loss, net of taxes Noncontrolling interests, net of taxes Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Interest expense, net Noncontrolling interests/equity earnings included in operations Corporate special items (income) expense Non-operating pension expense Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Business Segment Operating Profit Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging $ 909 $ 938 $ 568 247 466 (198) (117) 123 200 (2) (21) (19) 956 520 1 69 46 610 1,266 555 8 36 238 258 872 601 2 51 320 212 $ 2,202 $ 2,361 $ 2,058 $ 1,651 $ 1,853 $ 1,896 (180) 540 191 68 465 61 (77) (25) 178 Total Business Segment Operating Profit $ 2,202 $ 2,361 $ 2,058 Business Segment Operating Profits in 2016 included a net loss from special items of $136 million compared with $321 million in 2015 and $732 million in 2014. Operationally, compared with 2015, the benefits from higher sales volumes ($62 million), lower maintenance outage costs ($14 million), lower input costs ($82 million) and the incremental operating earnings from the newly acquired pulp business ($17 million) were offset by lower average sales price realizations and mix ($443 million), higher operating costs ($62 million) and higher other costs ($14 million). Diluted Earnings (Loss) Attributable to Shareholders Add back - Discontinued operations (gain) loss Diluted Earnings (Loss) from Continuing Operations Add back - Non- operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Attributable to Shareholders Diluted Earnings (Loss) Per Share Attributable to Shareholders Add back - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non- operating pension (income) expense per share Add back - Net special items expense (income) per share Income tax effect per share - Non- operating pension and special items expense Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders Free Cash Flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management believes that Free Cash Flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, repay debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing performance, free cash flow also enables investors to perform meaningful comparisons between 19 20 discontinued operations. Adjusted Operating Earnings Per Share is calculated by dividing Adjusted Operating Earnings by diluted average shares of common stock outstanding. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. Diluted earnings (loss) attributable to common shareholders were $0.53 in the 2016 fourth quarter, compared with $0.75 in the 2016 third quarter and $0.43 in the 2015 fourth quarter. Adjusted Operating Earnings attributable to common shareholders of $303 million ($0.73 per share) in the 2016 fourth quarter were lower than both the $380 million ($0.91 per share) in the 2016 third quarter and the $361 million ($0.87 per share) in the 2015 fourth quarter. The following are reconciliations of Diluted earnings (loss) attributable to common shareholders to Adjusted operating earnings attributable to common shareholders. Diluted Earnings (Loss) Attributable to Shareholders Add back - Discontinued operations (gain) loss Diluted Earnings (Loss) from Continuing Operations Add back - Non-operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Attributable to Shareholders Diluted Earnings (Loss) Per Share Attributable to Shareholders Add back - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non-operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders 2016 2015 2014 $ 904 $ 938 $ 555 5 — 13 909 610 182 938 568 258 212 559 1,052 (309) (221) (536) $ 1,392 $ 1,534 $ 1,296 2016 2015 2014 $ 2.18 $ 2.23 $ 1.29 0.01 — 0.02 2.19 2.23 1.31 1.47 0.61 0.49 0.44 1.33 2.44 (0.75) (0.52) (1.24) $ 3.35 $ 3.65 $ 3.00 Diluted Earnings (Loss) Attributable to Shareholders Add back - Discontinued operations (gain) loss Diluted Earnings (Loss) from Continuing Operations Add back - Non- operating pension (income) expense Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Attributable to Shareholders Diluted Earnings (Loss) Per Share Attributable to Shareholders Add back - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non- operating pension (income) expense per share Add back - Net special items expense (income) per share Income tax effect per share - Non- operating pension and special items expense Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders Three Months Three Months Three Months December 31, September 30, December 31, Ended 2016 Ended 2016 Ended 2015 $ 218 $ 312 $ 178 — 218 37 45 3 — 312 42 66 — 178 60 158 (40) (35) $ 303 $ 380 $ 361 Three Months Three Months Three Months December 31, September 30, December 31, Ended 2016 Ended 2016 Ended 2015 $ 0.53 $ 0.75 $ 0.43 — — — 0.53 0.09 0.75 0.43 0.10 0.14 0.11 0.16 0.38 — (0.10) (0.08) $ 0.73 $ 0.91 $ 0.87 Free Cash Flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management believes that Free Cash Flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, repay debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing performance, free cash flow also enables investors to perform meaningful comparisons between past and present periods. Free Cash Flow of $1.9 billion generated in 2016 was higher than the $1.8 billion generated in 2015, but lower than the $2.1 billion generated in 2014 (see reconciliation on page 30). The following table presents a reconciliation of net earnings (loss) from continuing operations attributable to International Paper Company to its total Business Segment Operating Profit: Free Cash Flow of $467 million generated in the 2016 fourth quarter was lower than the $575 million generated in the 2016 third quarter and the $501 million generated in the 2015 fourth quarter (see reconciliation on page 30). Results of Operations Business 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. Business Segment Operating Profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of equity earnings and noncontrolling interests, excluding corporate items and corporate special items. Business 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 four segments: Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging. In millions 2016 2015 2014 Earnings (Loss) From Continuing Operations Attributable to International Paper Company Add back (deduct) $ 909 $ 938 $ 568 Income tax provision (benefit) Equity (earnings) loss, net of taxes 247 466 (198) (117) 123 200 Noncontrolling interests, net of taxes Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Interest expense, net Noncontrolling interests/equity earnings included in operations Corporate items Corporate special items (income) expense Non-operating pension expense Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Business Segment Operating Profit Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging (2) (21) (19) 956 520 1 69 46 610 1,266 555 8 36 238 258 872 601 2 51 320 212 $ 2,202 $ 2,361 $ 2,058 $ 1,651 $ 1,853 $ 1,896 (180) 540 191 68 465 61 (77) (25) 178 Total Business Segment Operating Profit $ 2,202 $ 2,361 $ 2,058 Business Segment Operating Profits in 2016 included a net loss from special items of $136 million compared with $321 million in 2015 and $732 million in 2014. Operationally, compared with 2015, the benefits from higher sales volumes ($62 million), lower maintenance outage costs ($14 million), lower input costs ($82 million) and the incremental operating earnings from the newly acquired pulp business ($17 million) were offset by lower average sales price realizations and mix ($443 million), higher operating costs ($62 million) and higher other costs ($14 million). 19 20 and lower input costs were partially offset by lower lower average sales price sales volumes, realizations and mix and higher other costs. In addition, operating profits in 2016 included a charge of $9 million related to the conversion of our Riegelwood mill to 100% pulp production. In 2015, operating losses included an asset impairment charge of $174 million related to the sale of our 55% equity share of the IP-Sun JV in Asia, a net cost of $8 million related to costs for our Riegelwood mill conversion, net of proceeds from the sale of the Carolina Coated Bristols brand, and $2 million of sheet plant closure costs. Liquidity and Capital Resources For the year ended December 31, 2016, International Paper generated $2.5 billion of cash flow from operations compared with $2.6 billion in 2015 and $3.1 billion in 2014. Cash flow from operations included $750 million, $750 million and $353 million of cash pension contributions in 2016, 2015 and 2014, respectively. Capital spending for 2016 totaled $1.3 billion, or 110% of depreciation and amortization expense. Net increases in debt totaled $1.9 billion, the proceeds from which were primarily used to fund the acquisition of the Weyerhaeuser pulp business. Our liquidity position remains strong, supported by approximately $2.1 billion of credit facilities that we believe are adequate liquidity requirements. Maintaining an investment-grade credit rating for our long-term debt continues to be an important element in our overall financial strategy. to meet future We expect strong cash generation again in 2017 and will continue our balanced use of cash through the payment of dividends, reducing total debt and making investments for future growth. Capital spending for 2017 is targeted at $1.5 billion, or about 107% of depreciation and amortization. Legal See Note 11 Commitments and Contingent Liabilities on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data for a discussion of legal matters. RESULTS OF OPERATIONS 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. 21 22 Product prices are affected by general economic relating to the Company’s investment in Ilim Holding, trends, inventory levels, currency exchange rate SA. 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. The following is a discussion of International Paper’s results of operations for the year ended December 31, 2016, and the major factors affecting these results compared to 2015 and 2014. For the year ended December 31, 2016, International Paper reported net sales of $21.1 billion, compared with $22.4 billion in 2015 and $23.6 billion in 2014. International net sales (including U.S. exports) totaled $7.2 billion or 34% of total sales in 2016. This compares with international net sales of $7.8 billion in 2015 and $9.3 billion in 2014. Full year 2016 net earnings attributable to International Paper Company totaled $904 million ($2.18 per share), compared with net earnings of $938 million ($2.23 per share) in 2015 and $555 million ($1.29 per share) in 2014. Amounts in 2016 and 2014 include the results of discontinued operations. Earnings from continuing operations attributable to International Paper Company after taxes in 2016, 2015 and 2014 were as follows: In millions 2016 2015 2014 Earnings from continuing operations attributable to International Paper Company $ 909 (a) $ 938 (b) $ 568 (c) (a) Includes $108 million of net special items charges and $375 million of non-operating pension expense which included a pre- tax charge of $439 million ($270 million after taxes) for a settlement accounting charge associated with payments under a term-vested lump sum buyout. (b) Includes $439 million of net special items charges and $157 million of non-operating pension expense. (c) Includes $599 million of net special items gains and $129 million of non-operating pension expense in 2014. Compared with 2015, the benefits from higher sales volumes, lower maintenance outage costs, lower input costs, incremental earnings from the acquisition of Weyerhaeuser's pulp business, lower interest expense and lower tax expense were offset by lower average sales price realizations and mix, higher operating costs and higher corporate and other costs. In addition, 2016 results included higher equity earnings, net of taxes, See Business Segment Results on pages 25 through 30 for a discussion of the impact of these factors by segment. 2016: Discontinued Operations In 2016, there was $5 million of discontinued operations expense associated with a legal settlement related to the xpedx business. There were no discontinued operations in 2015. 2015: 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. Income Taxes A net income tax provision of $247 million was recorded for 2016 including tax benefits of $63 million related to legal entity restructurings, a tax expense of $31 million associated with a tax rate change in Luxembourg, a tax expense of $23 million associated with the $750 million of 2016 cash pension contributions, and a tax benefit of $14 million related to the closure of a federal tax audit. Excluding these items, a $51 million tax benefit for other special items and a $235 million tax benefit related to non-operating pension expense, the tax provision was $556 million, or 32% of pre-tax earnings before equity earnings. A net income tax provision of $466 million was recorded for 2015 including a tax benefit of $62 million related to internal restructurings, a tax expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a $2 million tax expense for other The principal changes in operating profit by segment were as follows: • Industrial Packaging’s profits of $1.7 billion were $202 million lower than in 2015 as the benefits of higher sales volumes, lower maintenance outage costs and lower input costs were more than offset by lower average sales price realizations and mix, higher operating costs and higher other costs. In addition, operating profits in 2016 included a charge of $70 million for impairment and other costs associated with the sale of our corrugated packaging business in Asia and a charge of $7 million related to the closure of a mill in Turkey. In 2015, operating trade name profits impairment charge of $137 million related to our Brazil Packaging business. included a goodwill and • Global Cellulose Fibers' operating loss of $180 million was $248 million unfavorable versus 2015 as the benefits of higher sales volumes, lower input costs, lower other costs and the earnings from the newly acquired business were more than offset by lower average sales price realizations and mix, higher operating costs and higher maintenance outage costs. The operating loss in 2016 included $31 million of costs associated with the acquisition of the pulp business and a charge of $19 million to amortize the newly acquired pulp business inventory fair value adjustment. • Printing Papers’ profits of $540 million represented a $75 million increase in operating profits from 2015. The benefits from higher sales volumes, higher average sales price realizations and mix, lower operating costs, lower maintenance outage costs and lower input costs were partially offset by higher other costs. • Consumer Packaging’s operating profit of $191 million represented a $216 million increase in operating profits from 2015. The benefits from lower operating costs, lower maintenance outage costs, sales volumes, and lower input costs were partially offset by lower lower average sales price realizations and mix and higher other costs. In addition, operating profits in 2016 included a charge of $9 million related to the conversion of our Riegelwood mill to 100% pulp production. In 2015, operating losses included an asset impairment charge of $174 million related to the sale of our 55% equity share of the IP-Sun JV in Asia, a net cost of $8 million related to costs for our Riegelwood mill conversion, net of proceeds from the sale of the Carolina Coated Bristols brand, and $2 million of sheet plant closure costs. Liquidity and Capital Resources For the year ended December 31, 2016, International Paper generated $2.5 billion of cash flow from operations compared with $2.6 billion in 2015 and $3.1 billion in 2014. Cash flow from operations included $750 million, $750 million and $353 million of cash pension contributions in 2016, 2015 and 2014, respectively. Capital spending for 2016 totaled $1.3 billion, or 110% of depreciation and amortization expense. Net increases in debt totaled $1.9 billion, the proceeds from which were primarily used to fund the acquisition of the Weyerhaeuser pulp business. Our liquidity position remains strong, supported by approximately $2.1 billion of credit facilities that we liquidity requirements. Maintaining an investment-grade credit rating for our long-term debt continues to be an important believe are adequate to meet future element in our overall financial strategy. We expect strong cash generation again in 2017 and will continue our balanced use of cash through the payment of dividends, reducing total debt and making investments for future growth. Capital spending for 2017 is targeted at $1.5 billion, or about 107% of depreciation and amortization. Legal See Note 11 Commitments and Contingent Liabilities on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data for a discussion of legal matters. RESULTS OF OPERATIONS 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. The following is a discussion of International Paper’s results of operations for the year ended December 31, 2016, and the major factors affecting these results compared to 2015 and 2014. For the year ended December 31, 2016, International Paper reported net sales of $21.1 billion, compared with $22.4 billion in 2015 and $23.6 billion in 2014. International net sales (including U.S. exports) totaled $7.2 billion or 34% of total sales in 2016. This compares with international net sales of $7.8 billion in 2015 and $9.3 billion in 2014. Full year 2016 net earnings attributable to International Paper Company totaled $904 million ($2.18 per share), compared with net earnings of $938 million ($2.23 per share) in 2015 and $555 million ($1.29 per share) in 2014. Amounts in 2016 and 2014 include the results of discontinued operations. Earnings from continuing operations attributable to International Paper Company after taxes in 2016, 2015 and 2014 were as follows: In millions 2016 2015 2014 Earnings from continuing operations attributable to International Paper Company $ 909 (a) $ 938 (b) $ 568 (c) (a) Includes $108 million of net special items charges and $375 million of non-operating pension expense which included a pre- tax charge of $439 million ($270 million after taxes) for a settlement accounting charge associated with payments under a term-vested lump sum buyout. (b) Includes $439 million of net special items charges and $157 million of non-operating pension expense. (c) Includes $599 million of net special items gains and $129 million of non-operating pension expense in 2014. Compared with 2015, the benefits from higher sales volumes, lower maintenance outage costs, lower input costs, incremental earnings from the acquisition of Weyerhaeuser's pulp business, lower interest expense and lower tax expense were offset by lower average sales price realizations and mix, higher operating costs and higher corporate and other costs. In addition, 2016 results included higher equity earnings, net of taxes, relating to the Company’s investment in Ilim Holding, SA. See Business Segment Results on pages 25 through 30 for a discussion of the impact of these factors by segment. Discontinued Operations 2016: In 2016, there was $5 million of discontinued operations expense associated with a legal settlement related to the xpedx business. 2015: There were no discontinued operations in 2015. 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. Income Taxes A net income tax provision of $247 million was recorded for 2016 including tax benefits of $63 million related to legal entity restructurings, a tax expense of $31 million associated with a tax rate change in Luxembourg, a tax expense of $23 million associated with the $750 million of 2016 cash pension contributions, and a tax benefit of $14 million related to the closure of a federal tax audit. Excluding these items, a $51 million tax benefit for other special items and a $235 million tax benefit related to non-operating pension expense, the tax provision was $556 million, or 32% of pre-tax earnings before equity earnings. A net income tax provision of $466 million was recorded for 2015 including a tax benefit of $62 million related to internal restructurings, a tax expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a $2 million tax expense for other 21 22 The principal changes in operating profit by segment were as follows: • Industrial Packaging’s profits of $1.7 billion were $202 million lower than in 2015 as the benefits of higher sales volumes, lower maintenance outage costs and lower input costs were more than offset by lower average sales price realizations and mix, higher operating costs and higher other costs. In addition, operating profits in 2016 included a charge of $70 million for impairment and other costs associated with the sale of our corrugated packaging business in Asia and a charge of $7 million related to the closure of a mill in Turkey. In 2015, operating profits included a goodwill and trade name impairment charge of $137 million related to our Brazil Packaging business. • Global Cellulose Fibers' operating loss of $180 million was $248 million unfavorable versus 2015 as the benefits of higher sales volumes, lower input costs, lower other costs and the earnings from the newly acquired business were more than offset by lower average sales price realizations and mix, higher operating costs and higher maintenance outage costs. The operating loss in 2016 included $31 million of costs associated with the acquisition of the pulp business and a charge of $19 million to amortize the newly acquired pulp business inventory fair value adjustment. • Printing Papers’ profits of $540 million represented a $75 million increase in operating profits from 2015. The benefits from higher sales volumes, higher average sales price realizations and mix, lower operating costs, lower maintenance outage costs and lower input costs were partially offset by higher other costs. • Consumer Packaging’s operating profit of $191 million represented a $216 million increase in operating profits from 2015. The benefits from lower operating costs, lower maintenance outage costs, items. Excluding these items, an $83 million net tax benefit for other special items and a $101 million tax benefit related to non-operating pension expense, the tax provision was $687 million, or 33% of pre-tax earnings before equity earnings. A net income tax provision of $123 million was recorded for 2014 including a tax benefit of $90 million related to internal restructurings and a net $9 million tax expense for other items. Excluding these items, a $372 million net tax benefit for other special items and a $83 million tax benefit related to non-operating pension expense, the tax provision was $659 million, or 31% of pre-tax earnings before equity earnings. Equity Earnings, Net of Taxes Equity earnings, net of taxes in 2016, 2015 and 2014 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see page 29 and 30). that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur. During 2016, 2015 and 2014, pre-tax restructuring and other charges totaling $54 million, $252 million and $846 million were recorded in the business segments. Details of these charges are as follows: Restructuring and Other In millions Business Segments Riegelwood mill conversion costs net of proceeds from the sale of Carolina Coated Bristols brand 2016 2015 2014 $ 9 (a) $ 8 (a) $ — Turkey mill closure 7 (b) Courtland mill shutdown Other items — — 16 — — 2 (a) 10 — 554 (c) 15 (d) 569 Interest Expense and Noncontrolling Interest Corporate Net corporate interest expense totaled $520 million in 2016, $555 million in 2015 and $601 million in 2014. The decrease in 2016 compared with 2015 is due to lower average interest rates. The decrease in 2015 compared with 2014 also reflects lower average interest rates. Net earnings attributable to noncontrolling interests totaled a loss of $2 million in 2016 compared with a loss of $21 million in 2015 and a loss of $19 million in 2014. The decrease in 2016 reflects the sale of our equity share of the IP-Sun JV in 2015. The decrease in 2015 compared with 2014 also reflects the sale of our interest in the IP-Sun JV and lower earnings for the joint venture in China prior to its divestiture. Special Items Restructuring and Other Charges International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) 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, among other outcomes, (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 assets have 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 Early debt extinguishment costs (see Note 13) India Packaging business evaluation write-off Gain on sale of investment in Arizona Chemical Timber monetization restructuring Legal liability reserve adjustment Other Items Total $ $ 29 207 276 17 (8) — — — 38 54 — — 16 15 4 — — — — 1 242 277 $ 252 $ 846 (a) Recorded in the Consumer Packaging business segment. (b) Recorded in the Industrial Packaging business segment. (c) Recorded in the Printing Papers business segment. (d) Recorded in the Industrial Packaging business segment ($7 million) and Consumer Packaging business segment ($8 million). 23 24 Other Corporate Special Items In addition, other corporate special items totaling $8 million, $4 million and $43 million were recorded in 2016, 2015 and 2014, respectively. Details of these charges were as follows: Other Corporate Items In millions Write-off of certain regulatory pre- engineering costs Sale of investment by ASG and impairment of that investment Other Total Impairments of Goodwill 2016 2015 2014 $ 8 $ — $ — — — — (4) $ 8 $ (4) $ 47 (4) 43 No goodwill impairment charges were recorded in 2016. In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy. In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business. earnings from the newly acquired pulp business ($17 million) were more than offset by lower average sales price realizations and mix ($443 million), higher operating costs ($62 million) and higher other costs ($14 million). Special items were a $136 million net loss in 2016 compared with a net loss of $321 million in 2015. Market-related downtime in 2016 increased to approximately 448,000 tons from approximately 440,000 tons in 2015. DESCRIPTION OF BUSINESS SEGMENTS International Paper’s business 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. Industrial Packaging International Paper is the largest manufacturer of containerboard in the United States. Our U.S. production capacity is over 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 166 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 18 recycling plants. In EMEA, our operations include two recycled fiber containerboard mills in Morocco and Turkey and 26 container plants in France, Italy, Spain, Morocco and Turkey. During 2016 we acquired a newsprint mill in Spain which we intend to convert to a recycled containerboard mill during 2017. In Brazil our operations include three containerboard mills and four box plants. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. Net Losses on Sales and Impairments of Businesses Global Cellulose Fibers Net losses on sales and impairments of businesses included in special items totaled a pre-tax loss of $70 million in 2016, a pre-tax loss of $174 million in 2015 and a pre-tax loss of $38 million in 2014. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data) for further discussion. Business Segment Operating Profits Business segment operating profits of $2.2 billion in 2016 decreased from $2.4 billion in 2015. The benefits from higher sales volumes ($62 million), higher maintenance outage costs ($14 million), lower input costs ($82 million) and the incremental operating Our cellulose fibers product portfolio includes fluff, market and specialty pulps. Our fluff pulp is used to make absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products, and our market pulp is used for tissue and paper products. We continue to invest in exploring new innovative uses for our products, such as our specialty pulps, which are used for non-absorbent end uses including textiles, filtration, construction material, paints and coatings, reinforced plastics and more. Our products are made in the United States, Canada, France, Poland, and Russia and are sold around the world. International Paper facilities have annual dried pulp capacity of about 4 million metric tonnes. items. Excluding these items, an $83 million net tax that additional charges and costs will be incurred in Other Corporate Special Items benefit for other special items and a $101 million tax future periods in our core businesses should such benefit related to non-operating pension expense, the triggering events occur. tax provision was $687 million, or 33% of pre-tax earnings before equity earnings. During 2016, 2015 and 2014, pre-tax restructuring and other charges totaling $54 million, $252 million and A net income tax provision of $123 million was recorded $846 million were recorded in the business segments. for 2014 including a tax benefit of $90 million related to Details of these charges are as follows: 2016 2015 2014 Restructuring and Other In millions Business Segments Riegelwood mill conversion costs net of proceeds from the sale of Carolina Coated Bristols brand Courtland mill shutdown Other items Corporate Early debt extinguishment costs (see Note 13) India Packaging business evaluation write-off Gain on sale of investment in Arizona Chemical Timber monetization restructuring Legal liability reserve adjustment Other Items Turkey mill closure 7 (b) $ 9 (a) $ 8 (a) $ — — 554 (c) 15 (d) 569 2 (a) $ 29 207 276 — — 10 — — 16 15 4 — — 16 17 (8) — — — 38 54 — — — — 1 Total $ $ 252 $ 846 242 277 (a) Recorded in the Consumer Packaging business segment. (b) Recorded in the Industrial Packaging business segment. (c) Recorded in the Printing Papers business segment. (d) Recorded in the Industrial Packaging business segment ($7 million) and Consumer Packaging business segment ($8 million). In addition, other corporate special items totaling $8 million, $4 million and $43 million were recorded in 2016, 2015 and 2014, respectively. Details of these charges were as follows: Other Corporate Items In millions Write-off of certain regulatory pre- engineering costs Sale of investment by ASG and impairment of that investment Other Total Impairments of Goodwill 2016 2015 2014 $ 8 $ — $ — — — — (4) $ 8 $ (4) $ 47 (4) 43 No goodwill impairment charges were recorded in 2016. In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy. In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business. earnings from the newly acquired pulp business ($17 million) were more than offset by lower average sales price realizations and mix ($443 million), higher operating costs ($62 million) and higher other costs ($14 million). Special items were a $136 million net loss in 2016 compared with a net loss of $321 million in 2015. Market-related downtime approximately 448,000 440,000 tons in 2015. in 2016 increased to from approximately tons DESCRIPTION OF BUSINESS SEGMENTS International Paper’s business 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. Industrial Packaging in include International Paper is the largest manufacturer of containerboard the United States. Our U.S. production capacity is over 13 million tons annually. Our products 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 166 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 18 recycling plants. In EMEA, our operations include two recycled fiber containerboard mills in Morocco and Turkey and 26 container plants in France, Italy, Spain, Morocco and Turkey. During 2016 we acquired a newsprint mill in Spain which we intend to convert to a recycled containerboard mill during 2017. In Brazil our operations include three containerboard mills and four box plants. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. Net Losses on Sales and Impairments of Businesses Global Cellulose Fibers Net losses on sales and impairments of businesses included in special items totaled a pre-tax loss of $70 million in 2016, a pre-tax loss of $174 million in 2015 and a pre-tax loss of $38 million in 2014. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data) for further discussion. Business Segment Operating Profits Business segment operating profits of $2.2 billion in 2016 decreased from $2.4 billion in 2015. The benefits from higher sales volumes ($62 million), higher maintenance outage costs ($14 million), lower input costs ($82 million) and the incremental operating Our cellulose fibers product portfolio includes fluff, market and specialty pulps. Our fluff pulp is used to make absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products, and our market pulp is used for tissue and paper products. We continue to invest in exploring new innovative uses for our products, such as our specialty pulps, which are used for non-absorbent end uses including textiles, filtration, construction material, paints and coatings, reinforced plastics and more. Our products are made in the United States, Canada, France, Poland, and Russia and are sold around the world. International Paper facilities have annual dried pulp capacity of about 4 million metric tonnes. 23 24 internal restructurings and a net $9 million tax expense for other items. Excluding these items, a $372 million net tax benefit for other special items and a $83 million tax benefit related to non-operating pension expense, the tax provision was $659 million, or 31% of pre-tax earnings before equity earnings. Equity Earnings, Net of Taxes Equity earnings, net of taxes in 2016, 2015 and 2014 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see page 29 and 30). Interest Expense and Noncontrolling Interest Net corporate interest expense totaled $520 million in 2016, $555 million in 2015 and $601 million in 2014. The decrease in 2016 compared with 2015 is due to lower average interest rates. The decrease in 2015 compared with 2014 also reflects lower average interest rates. Net earnings attributable to noncontrolling interests totaled a loss of $2 million in 2016 compared with a loss of $21 million in 2015 and a loss of $19 million in 2014. The decrease in 2016 reflects the sale of our equity share of the IP-Sun JV in 2015. The decrease in 2015 compared with 2014 also reflects the sale of our interest in the IP-Sun JV and lower earnings for the joint venture in China prior to its divestiture. Special Items Restructuring and Other Charges International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) 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, among other outcomes, (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 assets have 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 Printing Papers BUSINESS SEGMENT RESULTS International Paper is one of the world’s largest producers of printing and writing papers. The primary product in this segment is uncoated papers. This business produces papers for use in copiers, desktop and laser printers and digital imaging. End use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. Uncoated papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms and file folders. Uncoated papers are sold under private label and International Paper brand include Hammermill, Springhill, names Williamsburg, Postmark, Accent, Great White, Chamex, Ballet, Rey, Pol, and Svetocopy. The mills producing uncoated papers are located in the United States, France, Poland, Russia, Brazil and India. The mills have uncoated paper production capacity of approximately 4 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 329,000 acres of forestlands in Brazil. that Consumer Packaging International Paper is one of the world’s largest producers of solid bleached sulfate board with annual U.S. production capacity of about 1.2 million tons . Our coated paperboard business produces high quality coated paperboard for a variety of packaging and foodservice end uses. Our Everest®, Fortress®, and Starcote® brands are used in packaging applications for everyday products such as food, cosmetics, pharmaceuticals and tobacco products. Our U.S. capacity is supplemented by about 395,000 tons of capacity at our mills producing coated board in Poland and Russia. Our Foodservice business produces cups, lids, food containers and plates through three domestic plants and four international facilities. Ilim Holding S.A. 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 3.4 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.9 million acres (6.0 million hectares). Products and brand designations appearing in italics are trademarks of International Paper or a related company. The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability. The tables include a detail of special items in each year, where applicable, in order to show operating profit before special items. 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. Industrial Packaging In millions Net Sales Operating Profit (Loss) Turkey mill closure Asia Packaging restructuring and impairment Brazil Packaging goodwill and trade name impairment Temple-Inland acquisition Multi-employer pension withdrawal liability Box plant closures EMEA Packaging restructuring Turkey acquisition Brazil Packaging integration costs Asia Packaging goodwill impairment Operating Profit Before Special Items 2016 2014 2015 $ 14,191 $ 14,484 $ 14,944 1,651 $ 1,853 $ 1,896 $ — — 7 70 — — — — — — — — — 137 — — — — — — — 7 — 16 35 (5) 5 1 (1) 100 $ 1,728 $ 1,990 $ 2,054 Industrial Packaging net sales for 2016 decreased 2% to $14.2 billion compared with $14.5 billion in 2015, and 5% compared with $14.9 billion in 2014. Operating profits in 2016 were 11% lower than in 2015 and 13% lower than in 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($61 million), lower maintenance outage costs ($15 million) and lower input costs ($42 million) were offset by lower average sales price realizations and mix ($278 million), higher operating costs ($101 million) and higher other costs ($1 million). In addition, special items were an expense of $77 million in 2016 compared with $137 million in 2015. 25 26 North American Industrial EMEA Industrial Packaging Packaging In millions Net Sales 2016 2015 2014 $ 12,227 $ 12,541 $ 12,663 In millions Net Sales Operating Profit (Loss) $ 1,757 $ 2,009 $ 1,986 Temple-Inland acquisition Multi-employer pension withdrawal liability Box plant closures Operating Profit Before Special Items — — — — — — 16 35 (5) $ 1,757 $ 2,009 $ 2,032 Turkey Mill Closure EMEA Packaging restructuring Turkey acquisition Operating Profit Before Special Items 2016 2015 2014 1,227 $ 1,114 $ 1,307 $ $ 7 — — — — — 25 — 5 1 $ 22 $ 13 $ 31 Operating Profit (Loss) 15 $ 13 $ North American Industrial Packaging's sales volumes increased in 2016 compared with 2015 reflecting higher box shipments and higher shipments of containerboard to export markets. In 2016, the business took about 914,000 tons of total downtime of which about 445,000 were economic downtime and 469,000 were maintenance downtime. The business took about 814,000 tons of total downtime in 2015 of which 363,000 were economic downtime and 451,000 were maintenance downtime. Average sales price realizations were significantly lower for containerboard due to pricing pressures in export markets. Average sales prices for boxes were lower primarily due to contract de-escalators that were triggered in the first quarter by a decrease in a key containerboard price index. Input costs for wood, energy and freight fuel surcharges were lower, but for recycled fiber were higher. Planned maintenance downtime costs were $16 million lower in 2016 than in 2015. Looking ahead to the first quarter of 2017, compared with the fourth quarter of 2016, sales volumes for boxes are expected to be slightly higher despite seasonally lower daily shipments due to four more shipping days. Shipments of containerboard to export markets are expected to decrease. Average sales price realizations should increase, reflecting the continuing implementation of the box price increase announced in the fourth quarter of 2016. Input costs are expected to be higher for recycled fiber, energy and wood. Planned maintenance downtime spending is expected to be about $57 million higher. Operating costs are expected to improve. In addition, the Company is evaluating the financial impact of the digester incident that occurred estimated that the total impact will be in excess of $50 million, but that property damage and business interruption insurance will cover a significant portion of the costs. The timing of these costs and potential insurance recoveries is unknown. on January 22, 2017 at the Pensacola mill. It is currently costs EMEA Industrial Packaging's sales volumes in 2016 were higher than in 2015 reflecting improved market demand in the Eurozone and recovery from the prior year labor strikes in Turkey. Average sales margins improved due to sales price increases and material cost decreases. Input costs for energy were lower, but operations were negatively impacted by foreign exchange rates, primarily in Turkey. Operating earnings in 2015 included a gain of $4 million related to the change in ownership of our OCC collection operations in Turkey. Entering the first quarter of 2017, compared with the fourth quarter of 2016 sales volumes are expected to be slightly lower. Average sales margins are expected to be slightly lower. Input costs for energy should be flat, but operating costs are expected to be lower. On June 30, 2016 the Company completed the acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill as well as associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill to produce recycled containerboard in 2017 with an expected capacity of 419,000 tons. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA. Brazilian Industrial Packaging In millions Net Sales Operating Profit (Loss) Brazil Packaging goodwill and trade name impairment Brazil Packaging integration 2016 2015 2014 $ $ 232 $ (43) $ 228 $ 349 (163) $ — — 137 — (3) — (1) (4) Operating Profit Before Special Items $ (43) $ (26) $ Brazilian Industrial Packaging's 2016 sales volumes decreased compared with 2015 for boxes and sheets due to overall weak economic conditions, but increased for containerboard. Average sales price realizations were higher. Input costs increased, primarily for recycled fiber. Operating costs were higher largely due to the effects of inflation. Planned maintenance downtime costs were $1 million higher in 2016 compared with 2015. — — $ $ 2014 2016 13 $ — — 15 $ 7 2016 2015 2014 $ 22 $ 13 $ 31 — — — — 5 1 1,227 $ 1,114 $ 1,307 25 — — — — 35 (5) $ 1,757 $ 2,009 $ 2,032 2015 $ 12,227 $ 12,541 $ 12,663 1,757 $ 2,009 $ 1,986 $ 16 EMEA Industrial Packaging In millions Net Sales Operating Profit (Loss) Turkey Mill Closure EMEA Packaging restructuring Turkey acquisition Operating Profit Before Special Items North American Industrial Packaging In millions Net Sales Operating Profit (Loss) Temple-Inland acquisition Multi-employer pension withdrawal liability Box plant closures Operating Profit Before Special Items Printing Papers BUSINESS SEGMENT RESULTS International Paper is one of the world’s largest producers of printing and writing papers. The primary product in this segment is uncoated papers. This business produces papers for use in copiers, desktop and laser printers and digital imaging. End use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. Uncoated papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms and file folders. Uncoated papers are sold under private label and International Paper brand names that include Hammermill, Springhill, Williamsburg, Postmark, Accent, Great White, Chamex, Ballet, Rey, Pol, and Svetocopy. The mills producing uncoated papers are located in the United States, France, Poland, Russia, Brazil and India. The mills have uncoated paper production capacity of approximately 4 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 329,000 acres of forestlands in Brazil. Consumer Packaging International Paper is one of the world’s largest producers of solid bleached sulfate board with annual U.S. production capacity of about 1.2 million tons . Our coated paperboard business produces high quality coated paperboard for a variety of packaging and foodservice end uses. Our Everest®, Fortress®, and Starcote® brands are used in packaging applications for everyday products such as food, cosmetics, pharmaceuticals and tobacco products. Our U.S. capacity is supplemented by about 395,000 tons of capacity at our mills producing coated board in Poland and Russia. Our Foodservice business produces cups, lids, food containers and plates through three domestic plants and four international facilities. Ilim Holding S.A. 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 3.4 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.9 million acres (6.0 million hectares). company. Products and brand designations appearing in italics are trademarks of International Paper or a related The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability. The tables include a detail of special items in each year, where applicable, in order to show operating profit before special items. 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. Industrial Packaging In millions Net Sales Operating Profit (Loss) $ 1,651 $ 1,853 $ 1,896 2016 2015 2014 $ 14,191 $ 14,484 $ 14,944 Turkey mill closure Asia Packaging restructuring and impairment Brazil Packaging goodwill and trade name impairment Temple-Inland acquisition Multi-employer pension withdrawal liability Box plant closures EMEA Packaging restructuring Turkey acquisition Brazil Packaging integration costs Asia Packaging goodwill impairment Operating Profit Before Special Items 7 70 — — — — — — — — 137 — — — — — — — — — — 7 — 16 35 (5) 5 1 (1) 100 $ 1,728 $ 1,990 $ 2,054 Industrial Packaging net sales for 2016 decreased 2% to $14.2 billion compared with $14.5 billion in 2015, and 5% compared with $14.9 billion in 2014. Operating profits in 2016 were 11% lower than in 2015 and 13% lower than in 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($61 million), lower maintenance outage costs ($15 million) and lower input costs ($42 million) were offset by lower average sales price realizations and mix ($278 million), higher operating costs ($101 million) and higher other costs ($1 million). In addition, special items were an expense of $77 million in 2016 compared with $137 million in 2015. Industrial Packaging's sales volumes North American increased in 2016 compared with 2015 reflecting higher box shipments and higher shipments of containerboard to export markets. In 2016, the business took about 914,000 tons of total downtime of which about 445,000 were economic downtime and 469,000 were maintenance downtime. The business took about 814,000 tons of total downtime in 2015 of which 363,000 were economic downtime and 451,000 were maintenance price downtime. Average realizations were significantly lower for containerboard due to pricing pressures in export markets. Average sales prices for boxes were lower primarily due to contract de-escalators that were triggered in the first quarter by a decrease in a key containerboard price index. Input costs for wood, energy and freight fuel surcharges were lower, but for recycled fiber were higher. Planned maintenance downtime costs were $16 million lower in 2016 than in 2015. sales the reflecting increase, Looking ahead to the first quarter of 2017, compared with the fourth quarter of 2016, sales volumes for boxes are expected to be slightly higher despite seasonally lower daily shipments due to four more shipping days. Shipments of containerboard to export markets are expected to decrease. Average sales price realizations should continuing implementation of the box price increase announced in the fourth quarter of 2016. Input costs are expected to be higher for recycled fiber, energy and wood. Planned maintenance downtime spending is expected to be about $57 million higher. Operating costs are expected to improve. In addition, the Company is evaluating the financial impact of the digester incident that occurred on January 22, 2017 at the Pensacola mill. It is currently estimated that the total impact will be in excess of $50 million, but that property damage and business interruption insurance will cover a significant portion of the costs. The timing of these costs and potential insurance recoveries is unknown. EMEA Industrial Packaging's sales volumes in 2016 were higher than in 2015 reflecting improved market demand in the Eurozone and recovery from the prior year labor strikes in Turkey. Average sales margins improved due to sales price increases and material cost decreases. Input costs for energy were lower, but operations were negatively foreign exchange rates, primarily in Turkey. Operating earnings in 2015 included a gain of $4 million related to the change in ownership of our OCC collection operations in Turkey. impacted by Entering the first quarter of 2017, compared with the fourth quarter of 2016 sales volumes are expected to be slightly lower. Average sales margins are expected to be slightly lower. Input costs for energy should be flat, but operating costs are expected to be lower. On June 30, 2016 the Company completed the acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill as well as associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill to produce recycled containerboard in 2017 with an expected capacity of 419,000 tons. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA. Brazilian Industrial Packaging In millions Net Sales Operating Profit (Loss) Brazil Packaging goodwill and trade name impairment Brazil Packaging integration costs Operating Profit Before Special Items 2016 2015 2014 $ $ 232 $ (43) $ 228 $ (163) $ 349 (3) — — 137 — $ (43) $ (26) $ — (1) (4) Brazilian Industrial Packaging's 2016 sales volumes decreased compared with 2015 for boxes and sheets due to overall weak economic conditions, but increased for containerboard. Average sales price realizations were higher. Input costs increased, primarily for recycled fiber. Operating costs were higher largely due to the effects of inflation. Planned maintenance downtime costs were $1 million higher in 2016 compared with 2015. 25 26 Looking ahead to the first quarter of 2017, compared with the fourth quarter of 2016 sales volumes are expected to be lower for containerboard and sheets, but higher for boxes. Average sales margins should improve reflecting a sales price increase for boxes. Input costs are expected to be slightly lower, but offset by higher operating costs. Planned maintenance downtime costs are expected to be $1 million higher. Asian Industrial Packaging In millions Net Sales Operating Profit (Loss) Asia Packaging restructuring and impairment Asia Packaging goodwill impairment Operating Profit Before Special Items 2016 2015 2014 $ $ 505 $ (78) $ 601 $ (6) $ 625 (112) 70 — — — 7 100 $ (8) $ (6) $ (5) Asian Industrial Packaging's sales volumes in the first half of 2016 for boxes were higher than the comparable period in 2015, but average sales margins were lower due to competitive pressures and weak economic conditions. On June 30, 2016, the Company completed the sale of its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data for further discussion of the sale of this business. Net sales and operating profits beginning with the third quarter of 2016 reflect the results of the distribution operations of the business. Global Cellulose Fibers Demand for Cellulose Fibers products is closely correlated with changes in demand for absorbent hygiene products and is further affected by changes in currency rates that can benefit or hurt producers in different geographic regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs. Global Cellulose Fibers In millions Net Sales 2016 2015 2014 $ 1,092 $ 975 $ 1,046 Operating Profit (Loss) $ (180) $ 68 $ Acquisition costs Inventory fair value step-up amortization Operating Profit Before Special Items 31 19 — — $ (130) $ 68 $ 61 — — 61 Global Cellulose Fibers results for 2016 include net sales of $111 million and an operating loss of $(21) million (including $38 million of special items) associated with the newly acquired pulp business from the date of acquisition on December 1, 2016. See Note 6 Acquisitions and Joint Ventures on pages 54 through 56 of Item 8. Financial Statements and Supplementary Data for additional information about the acquisition. Net sales for 2016 increased 12% to $1.1 billion compared with $975 million in 2015 and 4% compared with $1.0 billion in 2014. Operating profits in 2016 were significantly lower than in both 2015 and 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($10 million), lower input costs ($6 million), and lower other costs ($1 million) were offset by lower average sales price realizations and mix ($36 million), higher operating costs ($59 million) and higher planned maintenance downtime costs ($38 million). In addition, special items expense in 2016 was $50 million. Sales volumes for the legacy business were higher for both fluff and market pulp. Average sales margins decreased, reflecting lower sales price realizations for both fluff pulp and softwood market pulp and an unfavorable mix resulting the Riegelwood conversion and ramp-up. In Europe and Russia, average sales margins decreased due to competitive pressures. Input costs were slightly lower. Planned maintenance downtime costs were $38 million higher in 2016 primarily related to the Riegelwood mill. Operating costs were higher due to costs associated with the Riegelwood mill conversion. from Entering the first quarter of 2017, sales volumes will be higher due to the full-quarter impact of the acquisition. Average sales price realizations are expected to be stable and mix will continue to be challenged due to the ramp-up of the Riegelwood mill. Input costs are expected to increase primarily for wood. Planned maintenance downtime costs should be $47 million higher than in the fourth quarter of 2016 due to a large outage and capital investment project to upgrade the recovery boiler, turbine and power system at our Port Wentworth mill. 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. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs. Operating Profit (Loss) $ 540 $ 465 $ (77) Printing Papers In millions Net Sales Courtland mill closure Brazil tax amnesty India legal contingency Operating Profit Before Special Items 2016 2015 2014 $ 4,058 $ 4,056 $ 4,674 — — — — — — 554 32 (20) $ 540 $ 465 $ 489 Printing Papers net sales for 2016 of $4.1 billion were even with $4.1 billion in 2015, but decreased 13% compared with $4.7 billion in 2014. Operating profits in 2016 were 16% higher than in 2015 and significantly higher than in 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($11 million), higher average sales price realizations and mix ($25 million), lower operating costs ($20 million), lower planned maintenance downtime costs ($23 million) and lower input costs ($4 million) were partly offset by higher other costs ($8 million). North American Printing Papers In millions Net Sales Operating Profit (Loss) Courtland mill closure Operating Profit Before Special Items 2016 2015 2014 $ 1,890 $ 1,942 $ 2,055 236 $ 179 $ (398) — — 554 236 $ 179 $ 156 North American Printing Papers' sales volumes for 2016 were unchanged from 2015. Average sales price realizations decreased for both cutsize paper and rolls. Average sales margins were also impacted by an unfavorable mix. Input costs were lower, mainly for wood. Planned maintenance downtime costs were $24 million lower in 2016. Manufacturing operating costs also improved. Entering the first quarter of 2017, sales volumes are expected to be seasonally higher. Average sales margins should decrease reflecting lower average sales price realizations partially offset by a more favorable geographic mix. Input costs are expected to be higher, primarily for energy. Planned maintenance downtime costs are expected to be about $23 million higher with outages scheduled in the 2017 first quarter. Brazilian Papers In millions Net Sales Operating Profit (Loss) Brazil tax amnesty Operating Profit Before Special Items 2016 2015 2014 897 $ 173 $ — 878 $ 1,061 186 $ — 177 32 173 $ 186 $ 209 Brazilian Papers' sales volumes for in 2016 were lower compared with 2015 under weak economic conditions. Average sales price realizations improved for domestic $ $ $ $ $ uncoated freesheet paper due to the realization of price increases implemented in the first half of 2016. Sales prices to export markets decreased. Raw material costs increased for energy, wood, chemicals and virgin fiber. Operating costs were higher than in 2015, largely due to inflation. Planned maintenance downtime costs were $1 million lower. Looking ahead to 2017, compared with the fourth quarter of 2016 sales volumes for uncoated freesheet paper in the first quarter are expected to be seasonally weaker in both domestic and export markets. Average sales price realizations should increase due to the implementation of a domestic sales price increase for both cutsize and offset paper. Input costs are expected to be slightly higher for chemicals and energy. European Papers In millions Net Sales 2016 2015 2014 $ 1,109 $ 1,064 $ 1,321 Operating Profit (Loss) $ 142 $ 111 $ 136 European Papers' sales volumes for uncoated freesheet paper in 2016 were higher in both Russia and Europe compared with 2015. Average sales price realizations improved for uncoated freesheet paper following price increases implemented in 2015 in Europe and in the first quarter of 2016 in Russia. Input costs were lower for wood, energy and chemicals in Europe, but were higher in Russia. Planned maintenance downtime costs were $4 million lower in 2016 than in 2015. Entering 2017, sales volumes for uncoated freesheet paper in the first quarter are expected to be seasonally weaker in Russia but higher in Europe. Average sales price realizations are expected to be stable with price increases implemented in certain markets. Input costs should be slightly lower. Planned maintenance downtime costs should be $15 million lower than in the fourth quarter of 2016. Indian Papers In millions Net Sales Operating Profit (Loss) India legal contingency Operating Profit Before Special Items 2016 2015 2014 167 $ (11) $ — 172 $ (11) $ — 178 8 (20) (11) $ (11) $ (12) $ $ $ Indian Papers' average sales price realizations in 2016 were slightly higher than in 2015. Sales volumes were flat. Input costs were lower for wood and chemicals. Operating costs were higher in 2016, while planned maintenance downtime costs were even with 2015. Looking ahead to the first quarter of 2017, sales volumes are expected to be slightly lower, but seasonally strong. Average sales price realizations are expected to be stable. 27 28 Looking ahead to the first quarter of 2017, compared the newly acquired pulp business from the date of with the fourth quarter of 2016 sales volumes are acquisition on December 1, 2016. See Note 6 expected to be lower for containerboard and sheets, Acquisitions and Joint Ventures on pages 54 through but higher for boxes. Average sales margins should 56 of Item 8. Financial Statements and Supplementary improve reflecting a sales price increase for boxes. Data for additional information about the acquisition. Input costs are expected to be slightly lower, but offset Net sales for 2016 increased 12% to $1.1 billion by higher operating costs. Planned maintenance compared with $975 million in 2015 and 4% compared downtime costs are expected to be $1 million higher. with $1.0 billion in 2014. Operating profits in 2016 were Printing Papers In millions Net Sales Operating Profit (Loss) Courtland mill closure Brazil tax amnesty India legal contingency Operating Profit Before Special Items 2016 2015 $ 4,058 $ 4,056 $ 4,674 (77) $ 465 $ 2014 540 $ — — — — — — 554 32 (20) $ 540 $ 465 $ 489 significantly lower than in both 2015 and 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($10 million), lower input costs ($6 million), and lower other costs ($1 million) were offset by lower average sales price realizations and mix ($36 million), higher operating costs ($59 million) and higher planned maintenance downtime costs ($38 million). In addition, special items expense in 2016 was $50 million. Sales volumes for the legacy business were higher for both fluff and market pulp. Average sales margins decreased, reflecting lower sales price realizations for both fluff pulp and softwood market pulp and an unfavorable mix resulting from the Riegelwood conversion and ramp-up. In Europe and Russia, average sales margins decreased due to competitive pressures. Input costs were slightly lower. Planned maintenance downtime costs were $38 million higher in 2016 primarily related to the Riegelwood mill. Operating costs were higher due to costs associated with the Riegelwood mill conversion. Entering the first quarter of 2017, sales volumes will be higher due to the full-quarter impact of the acquisition. Average sales price realizations are expected to be stable and mix will continue to be challenged due to the ramp-up of the Riegelwood mill. Input costs are expected to increase primarily for wood. Planned maintenance downtime costs should be $47 million higher than in the fourth quarter of 2016 due to a large outage and capital investment project to upgrade the recovery boiler, turbine and power system at our Port Wentworth mill. 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. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs. Asian Industrial Packaging In millions Net Sales Operating Profit (Loss) Asia Packaging restructuring and impairment Asia Packaging goodwill impairment Operating Profit Before Special Items 2016 2015 2014 $ $ 505 $ (78) $ 601 $ 625 (6) $ (112) 70 — — — 7 100 $ (8) $ (6) $ (5) Asian Industrial Packaging's sales volumes in the first half of 2016 for boxes were higher than the comparable period in 2015, but average sales margins were lower due to competitive pressures and weak economic conditions. On June 30, 2016, the Company completed the sale of its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data for further discussion of the sale of this business. Net sales and operating profits beginning with the third quarter of 2016 reflect the results of the distribution operations of the business. Global Cellulose Fibers Demand for Cellulose Fibers products is closely correlated with changes in demand for absorbent hygiene products and is further affected by changes in currency rates that can benefit or hurt producers in different geographic regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs. Global Cellulose Fibers In millions Net Sales 2016 2015 2014 $ 1,092 $ 975 $ 1,046 Operating Profit (Loss) $ (180) $ 68 $ Acquisition costs Inventory fair value step-up amortization Operating Profit Before Special Items 31 19 — — $ (130) $ 68 $ 61 — — 61 Global Cellulose Fibers results for 2016 include net sales of $111 million and an operating loss of $(21) million (including $38 million of special items) associated with Printing Papers net sales for 2016 of $4.1 billion were even with $4.1 billion in 2015, but decreased 13% compared with $4.7 billion in 2014. Operating profits in 2016 were 16% higher than in 2015 and significantly higher than in 2014. Comparing 2016 with 2015, benefits from higher sales volumes ($11 million), higher average sales price realizations and mix ($25 million), lower operating costs ($20 million), lower planned maintenance downtime costs ($23 million) and lower input costs ($4 million) were partly offset by higher other costs ($8 million). North American Printing Papers In millions Net Sales Operating Profit (Loss) Courtland mill closure Operating Profit Before Special Items 2014 2016 2015 $ 1,890 $ 1,942 $ 2,055 (398) $ 554 236 $ — 179 $ — $ 236 $ 179 $ 156 North American Printing Papers' sales volumes for 2016 were unchanged from 2015. Average sales price realizations decreased for both cutsize paper and rolls. Average sales margins were also impacted by an unfavorable mix. Input costs were lower, mainly for wood. Planned maintenance downtime costs were $24 million lower in 2016. Manufacturing operating costs also improved. Entering the first quarter of 2017, sales volumes are expected to be seasonally higher. Average sales margins should decrease reflecting lower average sales price realizations partially offset by a more favorable geographic mix. Input costs are expected to be higher, primarily for energy. Planned maintenance downtime costs are expected to be about $23 million higher with outages scheduled in the 2017 first quarter. Brazilian Papers In millions Net Sales Operating Profit (Loss) Brazil tax amnesty Operating Profit Before Special Items 2016 2015 2014 897 $ 173 $ — 878 $ 1,061 186 $ — 177 32 173 $ 186 $ 209 $ $ $ Brazilian Papers' sales volumes for in 2016 were lower compared with 2015 under weak economic conditions. Average sales price realizations improved for domestic 27 28 uncoated freesheet paper due to the realization of price increases implemented in the first half of 2016. Sales prices to export markets decreased. Raw material costs increased for energy, wood, chemicals and virgin fiber. Operating costs were higher than in 2015, largely due to inflation. Planned maintenance downtime costs were $1 million lower. Looking ahead to 2017, compared with the fourth quarter of 2016 sales volumes for uncoated freesheet paper in the first quarter are expected to be seasonally weaker in both domestic and export markets. Average sales price realizations should increase due to the implementation of a domestic sales price increase for both cutsize and offset paper. Input costs are expected to be slightly higher for chemicals and energy. European Papers In millions Net Sales Operating Profit (Loss) 2016 2015 $ 1,109 $ 1,064 $ 1,321 136 $ 142 $ 111 $ 2014 European Papers' sales volumes for uncoated freesheet paper in 2016 were higher in both Russia and Europe compared with 2015. Average sales price realizations improved for uncoated freesheet paper following price increases implemented in 2015 in Europe and in the first quarter of 2016 in Russia. Input costs were lower for wood, energy and chemicals in Europe, but were higher in Russia. Planned maintenance downtime costs were $4 million lower in 2016 than in 2015. Entering 2017, sales volumes for uncoated freesheet paper in the first quarter are expected to be seasonally weaker in Russia but higher in Europe. Average sales price realizations are expected to be stable with price increases implemented in certain markets. Input costs should be slightly lower. Planned maintenance downtime costs should be $15 million lower than in the fourth quarter of 2016. Indian Papers In millions Net Sales Operating Profit (Loss) India legal contingency Operating Profit Before Special Items 2016 2015 2014 167 $ (11) $ — 172 $ (11) $ — 178 8 (20) (11) $ (11) $ (12) $ $ $ Indian Papers' average sales price realizations in 2016 were slightly higher than in 2015. Sales volumes were flat. Input costs were lower for wood and chemicals. Operating costs were higher in 2016, while planned maintenance downtime costs were even with 2015. Looking ahead to the first quarter of 2017, sales volumes are expected to be slightly lower, but seasonally strong. Average sales price realizations are expected to be stable. 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. Consumer Packaging In millions Net Sales Operating Profit (Loss) Riegelwood conversion costs net of proceeds from the sale of the Carolina coated bristols brand Asia Coated Paperboard goodwill and PP&E impairment NA Coated Paperboard sheet plant closures 2016 2015 $ 1,955 $ 2,940 $ 3,403 178 $ 191 $ (25) $ 2014 9 — — 8 174 2 — — 8 Operating Profit Before Special Items $ 200 $ 159 $ 186 Consumer Packaging net sales in 2016 decreased 34% to $2.0 billion from $2.9 billion in 2015, and decreased 43% from $3.4 billion in 2014. Operating profits increased significantly from 2015 and increased 7% from 2014. Comparing 2016 with 2015, benefits from lower operating costs ($78 million), lower planned maintenance downtime costs ($13 million) and lower input costs ($30 million) were partially offset by lower sales volumes ($20 million), lower average sales price realizations and mix ($56 million), and higher other costs ($4 million). In addition, special items expense was $9 million in 2016 and $184 million in 2015. North American Consumer Packaging In millions Net Sales 2016 2015 2014 $ 1,628 $ 1,939 $ 1,993 Operating Profit (Loss) $ 98 $ 81 $ 92 Riegelwood conversion costs net of proceeds from the sale of the Carolina coated bristols brand NA Coated Paperboard sheet plant closures Operating Profit Before Special Items 9 — 8 2 — 8 $ 107 $ 91 $ 100 North American Consumer Packaging coated paperboard sales volumes in 2016 were lower than in 2015 primarily due to our exit from the coated bristols market. Average sales price realizations decreased year over year due to competitive pressures. Input costs decreased for wood, chemicals and energy. Planned maintenance downtime costs were $11 million lower in 2016. Operating costs decreased, reflecting the impact of cost savings initiatives and lower depreciation expense. Foodservice sales volumes decreased slightly in 2016 compared with 2015. Average sales margins decreased due to lower sales price realizations partially offset by lower resin costs and a more favorable mix. Operating costs were higher, while distribution costs were lower. Looking ahead to the first quarter of 2017, Coated to be Paperboard sales volumes are expected seasonally higher than in the fourth quarter of 2016. Average sales price realizations are expected to be lower due to market pressures. Input costs are expected to be higher for energy and chemicals, partially offset by lower wood costs. Planned maintenance downtime costs should be $11 million lower with no maintenance outages scheduled in the first quarter. Foodservice sales volumes are expected to be seasonally lower. Sales margins are expected to continue under pressure, partially offset by lower operating costs. European Consumer Packaging In millions Net Sales Operating Profit (Loss) 2016 2015 2014 $ $ 327 $ 93 $ 319 $ 87 $ 365 91 European Consumer Packaging's sales volumes in 2016 compared with 2015 increased in both Europe and Russia. Average sales price realizations were higher in Russia. In Europe average sales margins decreased reflecting lower average sales prices. Input cost, primarily for wood and energy were lower in Europe, but were higher in Russia. Planned maintenance downtime costs were $2 million lower in 2016. Looking forward to the first quarter of 2017, compared with the fourth quarter of 2016, sales volumes are expected to increase. Average sales price realizations are expected to be flat in both Europe and Russia. Input higher. costs expected are be to Asian Consumer Packaging In millions Net Sales Operating Profit (Loss) Asia Coated Paperboard goodwill and PP&E impairment Operating Profit Before Special Items 2016 2015 2014 — $ — $ 682 $ 1,045 (193) $ (5) — 174 — — $ (19) $ (5) $ $ $ The Company sold its 55% equity share in IP Asia Coated Paperboard (IP-Sun JV) in October 2015. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data for further discussion of the sale of the IP Sun JV. Net sales and operating profits presented below include results through September 30, 2015. 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. 29 30 The Company recorded equity earnings, net of taxes, related to Ilim of $199 million in 2016 compared with a loss of $131 million in 2015 and a loss of $194 million in 2014. Operating results recorded in 2016 included an after-tax non-cash foreign exchange gain of $25 million compared with an after-tax foreign exchange loss of $75 million in 2015 and an after-tax foreign exchange loss of $269 million in 2014 primarily on the remeasurement of Ilim's U.S. dollar-denominated net debt. Sales volumes for the joint venture increased year over year for shipments to China of softwood pulp and linerboard, but decreased for hardwood pulp. Sales volumes in the domestic Russian market increased for softwood pulp, hardwood pulp and paper, but decreased for linerboard. Average sales price realizations were lower in 2016 for sales of softwood pulp and hardwood pulp to export markets and linerboard to the Russian domestic market, but were partially offset by higher average sales price realizations for sales of paper to export and domestic Russian markets. Input costs increased year-over-year for wood, chemicals and energy. Maintenance outage costs were also higher in 2016. The Company received cash dividends from the joint venture of $60 million in 2016, $35 million in 2015 and $56 million in 2014. Entering the first quarter of 2017, sales volumes are expected to be seasonally lower than in the fourth quarter of 2016 due to the January holidays in China and the seasonal slowdown in Russia. Average sales price realizations are expected to increase for exported hardwood pulp, softwood pulp and for sales of paper in the domestic Russian market. Average sales price realizations for linerboard in the Russian domestic market are expected to be lower. Distribution costs and input costs for energy are projected to be higher. Cash Provided by Operating Activities Cash provided by operations totaled $2.5 billion in 2016 compared with $2.6 billion for 2015 and $3.1 billion for 2014. Cash provided by working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, interest payable and other totaled $71 million in 2016, compared with a cash use of $222 million in 2015 and a cash use of $158 million in 2014. The Company generated Free Cash Flow of approximately $1.9 billion, $1.8 billion and $2.1 billion in 2016, 2015 and 2014, respectively. The following are reconciliations of free cash flow to cash provided by operations: In millions Cash provided by operations Adjustments: 2016 2015 2014 $ 2,478 $ 2,580 $ 3,077 Cash invested in capital projects Cash contribution to pension plan (1,348) (1,487) (1,366) 750 750 353 Free Cash Flow $ 1,880 $ 1,843 $ 2,064 Three Months Ended Three Months Ended Three Months Ended December 31, 2016 September December 30, 2016 31, 2015 $ 912 $ 341 $ 990 (445) (266) (489) In millions Cash provided by operations Adjustments: Cash invested in capital projects Cash contribution to pension plan Free Cash Flow $ 467 $ — 500 575 $ — 501 LIQUIDITY AND CAPITAL RESOURCES Investment Activities 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. Investment activities in 2016 were up from 2015 reflecting the purchase of Weyerhaeuser's pulp business for $2.2 billion in cash, the purchase of the Holmen business for $57 million in cash, net of cash acquired, and proceeds from the sale of the Asia Packaging business of $108 million, net of cash divested. In 2015, investment activity includes higher capital spending and the use of $198 million of cash in conjunction with the timber monetization restructuring (see Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data). Cash uses during 2016 were primarily focused on In addition, 2014 investment activity includes the receipt working capital requirements, capital spending, debt of approximately $400 million in connection with the reductions, pension contributions, the acquisitions of spin-off of the xpedx distribution business. The the Weyerhaeuser pulp business and the mill asset in Company maintains an average capital spending target Madrid, and returning cash to shareholders. around depreciation or amortization levels or modestly above due to strategic plans over the course of an economic cycle. Capital spending was $1.3 billion in Consumer Packaging Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, were lower. decreased due to lower sales price realizations partially offset by lower resin costs and a more favorable mix. Operating costs were higher, while distribution costs major factors affecting the profitability of Consumer Looking ahead to the first quarter of 2017, Coated Packaging are raw material and energy costs, freight Paperboard sales volumes are expected to be costs, manufacturing efficiency and product mix. Consumer Packaging In millions Net Sales 2016 2015 2014 $ 1,955 $ 2,940 $ 3,403 Operating Profit (Loss) $ 191 $ (25) $ 178 Riegelwood conversion costs net of proceeds from the sale of the Carolina coated bristols brand Asia Coated Paperboard goodwill and PP&E impairment NA Coated Paperboard sheet plant closures 9 — — 174 8 2 — — 8 Operating Profit Before Special Items $ 200 $ 159 $ 186 Consumer Packaging net sales in 2016 decreased 34% to $2.0 billion from $2.9 billion in 2015, and decreased 43% from $3.4 billion in 2014. Operating profits increased significantly from 2015 and increased 7% from 2014. Comparing 2016 with 2015, benefits from lower operating costs ($78 million), lower planned maintenance downtime costs ($13 million) and lower input costs ($30 million) were partially offset by lower sales volumes ($20 million), lower average sales price realizations and mix ($56 million), and higher other costs ($4 million). In addition, special items expense was $9 million in 2016 and $184 million in 2015. Operating Profit (Loss) $ 98 $ 81 $ 92 2016 2015 2014 $ 1,628 $ 1,939 $ 1,993 North American Consumer Packaging In millions Net Sales Riegelwood conversion costs net of proceeds from the sale of the Carolina coated bristols brand NA Coated Paperboard sheet plant closures Operating Profit Before Special Items 9 — 8 2 — 8 $ 107 $ 91 $ 100 North American Consumer Packaging coated paperboard sales volumes in 2016 were lower than in 2015 primarily due to our exit from the coated bristols market. Average sales price realizations decreased year over year due to competitive pressures. Input costs decreased for wood, chemicals and energy. Planned maintenance downtime costs were $11 million lower in 2016. Operating costs decreased, reflecting the impact of cost savings initiatives and lower depreciation expense. Foodservice sales volumes decreased slightly in 2016 compared with 2015. Average sales margins seasonally higher than in the fourth quarter of 2016. Average sales price realizations are expected to be lower due to market pressures. Input costs are expected to be higher for energy and chemicals, partially offset by lower wood costs. Planned maintenance downtime costs should be $11 million lower with no maintenance outages scheduled in the first quarter. Foodservice sales volumes are expected to be seasonally lower. Sales margins are expected to continue under pressure, partially offset by lower operating costs. European Consumer Packaging In millions Net Sales Operating Profit (Loss) 2016 2015 2014 $ $ 327 $ 319 $ 93 $ 87 $ 365 91 European Consumer Packaging's sales volumes in 2016 compared with 2015 increased in both Europe and Russia. Average sales price realizations were higher in Russia. In Europe average sales margins decreased reflecting lower average sales prices. Input cost, primarily for wood and energy were lower in Europe, but were higher in Russia. Planned maintenance downtime costs were $2 million lower in 2016. Looking forward to the first quarter of 2017, compared with the fourth quarter of 2016, sales volumes are expected to increase. Average sales price realizations are expected to be flat in both Europe and Russia. Input costs are expected to be higher. Asian Consumer Packaging In millions Net Sales Operating Profit (Loss) Asia Coated Paperboard goodwill and PP&E impairment Operating Profit Before Special Items 2016 2015 2014 — $ — $ 682 $ 1,045 (193) $ (5) — 174 — — $ (19) $ (5) $ $ $ The Company sold its 55% equity share in IP Asia Coated Paperboard (IP-Sun JV) in October 2015. See Note 7 Divestitures / Spinoff on pages 56 and 57 of Item 8. Financial Statements and Supplementary Data for further discussion of the sale of the IP Sun JV. Net sales and operating profits presented below include results through September 30, 2015. 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. The Company recorded equity earnings, net of taxes, related to Ilim of $199 million in 2016 compared with a loss of $131 million in 2015 and a loss of $194 million in 2014. Operating results recorded in 2016 included an after-tax non-cash foreign exchange gain of $25 million compared with an after-tax foreign exchange loss of $75 million in 2015 and an after-tax foreign exchange loss of $269 million in 2014 primarily on the remeasurement of Ilim's U.S. dollar-denominated net debt. for Sales volumes for the joint venture increased year over year for shipments to China of softwood pulp and linerboard, but decreased for hardwood pulp. Sales volumes in the domestic Russian market increased for softwood pulp, hardwood pulp and paper, but decreased linerboard. Average sales price realizations were lower in 2016 for sales of softwood pulp and hardwood pulp to export markets and linerboard to the Russian domestic market, but were partially offset by higher average sales price realizations for sales of paper to export and domestic Russian markets. Input costs increased year-over-year for wood, chemicals and energy. Maintenance outage costs were also higher in 2016. The Company received cash dividends from the joint venture of $60 million in 2016, $35 million in 2015 and $56 million in 2014. Entering the first quarter of 2017, sales volumes are expected to be seasonally lower than in the fourth quarter of 2016 due to the January holidays in China and the seasonal slowdown in Russia. Average sales price realizations are expected to increase for exported hardwood pulp, softwood pulp and for sales of paper in the domestic Russian market. Average sales price realizations for linerboard in the Russian domestic market are expected to be lower. Distribution costs and input costs for energy are projected to be higher. Cash Provided by Operating Activities Cash provided by operations totaled $2.5 billion in 2016 compared with $2.6 billion for 2015 and $3.1 billion for 2014. Cash provided by working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, interest payable and other totaled $71 million in 2016, compared with a cash use of $222 million in 2015 and a cash use of $158 million in 2014. The Company generated Free Cash Flow of approximately $1.9 billion, $1.8 billion and $2.1 billion in 2016, 2015 and 2014, respectively. The following are reconciliations of free cash flow to cash provided by operations: In millions Cash provided by operations Adjustments: 2016 2015 2014 $ 2,478 $ 2,580 $ 3,077 Cash invested in capital projects Cash contribution to pension plan Free Cash Flow $ (1,348) (1,487) (1,366) 750 1,880 $ 750 353 1,843 $ 2,064 Three Months Ended December 31, 2016 Three Months Ended September 30, 2016 Three Months Ended December 31, 2015 $ 912 $ 341 $ 990 (445) (266) (489) In millions Cash provided by operations Adjustments: Cash invested in capital projects Cash contribution to pension plan Free Cash Flow $ 467 $ — 500 575 $ — 501 LIQUIDITY AND CAPITAL RESOURCES Investment Activities 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 uses during 2016 were primarily focused on working capital requirements, capital spending, debt reductions, pension contributions, the acquisitions of the Weyerhaeuser pulp business and the mill asset in Madrid, and returning cash to shareholders. Investment activities in 2016 were up from 2015 reflecting the purchase of Weyerhaeuser's pulp business for $2.2 billion in cash, the purchase of the Holmen business for $57 million in cash, net of cash acquired, and proceeds from the sale of the Asia Packaging business of $108 million, net of cash divested. In 2015, investment activity includes higher capital spending and the use of $198 million of cash in conjunction with the timber monetization restructuring (see Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data). In addition, 2014 investment activity includes the receipt of approximately $400 million in connection with the spin-off of the xpedx distribution business. The Company maintains an average capital spending target around depreciation or amortization levels or modestly above due to strategic plans over the course of an economic cycle. Capital spending was $1.3 billion in 29 30 2016, or 110% of depreciation and amortization, compared with $1.5 billion in 2015, or 115% of depreciation and amortization, and $1.4 billion, or 97% of depreciation and amortization in 2014. Across our businesses, capital spending as a percentage of depreciation and amortization ranged from 37.3% to 161.1% in 2016. following The for operations by business segment for the years ended December 31, 2016, 2015 and 2014. table shows capital spending In millions Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Subtotal Corporate and other Capital Spending 2016 2015 2014 $ 816 $ 174 858 $ 754 75 129 215 124 1,329 232 216 1,435 243 233 1,305 19 61 $ 1,348 $ 1,487 $1,366 52 Capital expenditures in 2017 are currently expected to be about $1.5 billion, or 107% of depreciation and amortization. Acquisitions and Joint Ventures See Note 6 Acquisitions and Joint Ventures on pages 54 through 56 of Item 8. Financial Statements and Supplementary Data for a discussion of the Company's acquisitions. Financing Activities Amounts related to early debt extinguishment during the years ended December 31, 2016, 2015 and 2014 were as follows: In millions Debt reductions (a) Pre-tax early debt extinguishment costs (b) 2016 2015 2014 $ 266 $ 2,151 $ 1,625 29 207 276 (a) Reductions related to notes with interest rates ranging from 2.00% to 9.38% with original maturities from 2015 to 2030 for the years ended December 31, 2016, 2015 and 2014. Includes the $630 million payment for a portion of the Special Purpose Entity Liability for the year ended December 31, 2015 (see Note 12 Variable Interest Entities on pages 64 through 67 of Item 8. Financial Statements and Supplementary Data). (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. 2016: Financing activities during 2016 included debt issuances of $3.8 billion and retirements of $1.9 billion for a net increase of $1.9 billion. International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2016, International Paper had no interest rate swap contracts outstanding (see Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data). During 2016, the amortization of deferred gains on previously terminated swaps had no impact on the weighted average cost of long-term recourse debt. The inclusion of the offsetting interest income from short-term investments reduced the effective rate from 5.3% to 4.8%. to In 2016, International Paper issued $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027, and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047, the proceeds from which were the acquisition of fund primarily used Weyerhaeuser's pulp business. the In addition, Company repaid approximately $266 million of notes with an interest rate of 7.95% and an original maturity of 2018. Pre-tax early debt retirement costs of $29 million related to the debt repayments, including the $31 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2016. In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of December 31, 2016, the Company had $165 million outstanding under this program. Other financing activities during 2016 included the net repurchase of approximately 0.9 million shares of treasury stock, including restricted stock withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $132.3 million, including $100.1 million related to shares repurchased under the Company's share repurchase program. In October 2016, International Paper announced that the quarterly dividend would be increased from $0.44 per share to $0.46 per share, effective for the 2016 fourth quarter. 2015: Financing activities during 2015 included debt issuances of $6.9 billion and retirements of $6.9 billion for a net decrease of $74 million. During 2015, the Company restructured the timber monetization which resulted in the use of $630 million in cash to pay down a portion of the third party bank loans and refinance the loans on nonrecourse terms. (see Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data). International Paper utilizes interest rate swaps to notional amount of $230 million and maturities in 2018 change the mix of fixed and variable rate debt and (see Note 14 Derivatives and Hedging Activities on manage interest expense. At December 31, 2015, pages 67 through 70 of Item 8. Financial Statements International Paper had interest rate swaps with a total and Supplementary Data). During 2014, existing swaps notional amount of $17 million and maturities in 2018 and the amortization of deferred gains on previously (see Note 14 Derivatives and Hedging Activities on terminated swaps decreased the weighted average pages 67 through 70 of Item 8. Financial Statements cost of debt from 6.8% to an effective rate of 6.7%. The and Supplementary Data). During 2015, existing swaps inclusion of the offsetting interest income from short- and the amortization of deferred gains on previously term investments reduced this effective rate to 6.3%. terminated swaps decreased the weighted average cost of debt from 5.9% to an effective rate of 5.8%. The inclusion of the offsetting interest income from short- term investments reduced this effective rate to 5.1%. In 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to the debt repayments, including the $211 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2015. During the second quarter of 2014, International Paper issued $800 million of 3.65% senior unsecured notes with a maturity date in 2024 and $800 million of 4.80% senior unsecured notes with a maturity date in 2044. The proceeds from this borrowing were used to repay approximately $960 million of notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019. Pre-tax early debt retirement costs of $262 million related to these debt repayments, including $258 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2014. Other financing activities during 2014 included the net repurchase of approximately 17.9 million shares of treasury stock, including restricted stock withholding, and the issuance of 1.6 million shares of common stock for various plans, including stock options exercises that generated approximately $66 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.06 billion, including $983 million related to shares repurchased under the Company's share repurchase program. Other financing activities during 2015 included the net In September 2014, International Paper announced repurchase of approximately 8.0 million shares of that the quarterly dividend would be increased from treasury stock, including restricted stock withholding, $0.35 per share to $0.40 per share, effective for the and the issuance of 62,000 shares of common stock 2014 fourth quarter. for various plans, including stock option exercises that generated approximately $2.4 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $604.6 million, including $522.6 million related to shares repurchased under the Company's share repurchase program. In October 2015, International Paper announced that the quarterly dividend would be increased from $0.40 per share to $0.44 per share, effective for the 2015 fourth quarter. 2014: Financing activities during 2014 included debt issuances of $2.0 billion and retirements of $2.1 billion, for a net decrease of $113 million. International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2014, International Paper had interest rate swaps with a total Variable Interest Entities Information concerning variable interest entities is set forth in Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data for discussion. Liquidity and Capital Resources Outlook for 2017 Capital Expenditures and Long-Term Debt International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2017 through current cash balances and cash from operations. Additionally, the Company has existing credit facilities totaling $2.1 billion available at December 31, 2016. The Company’s financial covenants require the maintenance of a minimum net worth of $9 billion and 31 32 2016, or 110% of depreciation and amortization, outstanding (see Note 14 Derivatives and Hedging compared with $1.5 billion in 2015, or 115% of Activities on pages 67 through 70 of Item 8. Financial depreciation and amortization, and $1.4 billion, or 97% Statements and Supplementary Data). During 2016, of depreciation and amortization in 2014. Across our the amortization of deferred gains on previously businesses, capital spending as a percentage of terminated swaps had no impact on the weighted depreciation and amortization ranged from 37.3% to average cost of long-term recourse debt. The inclusion 161.1% in 2016. of the offsetting interest income from short-term investments reduced the effective rate from 5.3% to The following table shows capital spending for operations by business segment for the years ended 4.8%. December 31, 2016, 2015 and 2014. In millions Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Subtotal Corporate and other Capital Spending 2016 2015 2014 $ 816 $ 858 $ 754 174 215 124 1,329 19 129 232 216 75 243 233 1,435 1,305 52 61 $ 1,348 $ 1,487 $1,366 Capital expenditures in 2017 are currently expected to be about $1.5 billion, or 107% of depreciation and amortization. Acquisitions and Joint Ventures See Note 6 Acquisitions and Joint Ventures on pages 54 through 56 of Item 8. Financial Statements and Supplementary Data for a discussion of the Company's acquisitions. Financing Activities Amounts related to early debt extinguishment during the years ended December 31, 2016, 2015 and 2014 were as follows: In millions Debt reductions (a) Pre-tax early debt extinguishment costs (b) 2016 2015 2014 $ 266 $ 2,151 $ 1,625 29 207 276 (a) Reductions related to notes with interest rates ranging from 2.00% to 9.38% with original maturities from 2015 to 2030 for the years ended December 31, 2016, 2015 and 2014. Includes the $630 million payment for a portion of the Special Purpose Entity Liability for the year ended December 31, 2015 (see Note 12 Variable Interest Entities on pages 64 through 67 of Item 8. Financial Statements and Supplementary Data). (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. 2016: Financing activities during 2016 included debt issuances of $3.8 billion and retirements of $1.9 billion for a net increase of $1.9 billion. International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2016, International Paper had no interest rate swap contracts In 2016, International Paper issued $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027, and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047, the proceeds from which were primarily used to fund the acquisition of Weyerhaeuser's pulp business. In addition, the Company repaid approximately $266 million of notes with an interest rate of 7.95% and an original maturity of 2018. Pre-tax early debt retirement costs of $29 million related to the debt repayments, including the $31 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2016. In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of December 31, 2016, the Company had $165 million outstanding under this program. Other financing activities during 2016 included the net repurchase of approximately 0.9 million shares of treasury stock, including restricted stock withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $132.3 million, including $100.1 million related to shares repurchased under the Company's share repurchase program. In October 2016, International Paper announced that the quarterly dividend would be increased from $0.44 per share to $0.46 per share, effective for the 2016 fourth quarter. 2015: Financing activities during 2015 included debt issuances of $6.9 billion and retirements of $6.9 billion for a net decrease of $74 million. During 2015, the Company restructured the timber monetization which resulted in the use of $630 million in cash to pay down a portion of the third party bank loans and refinance the loans on nonrecourse terms. (see Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data). International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2015, International Paper had interest rate swaps with a total notional amount of $17 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data). During 2015, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 5.9% to an effective rate of 5.8%. The inclusion of the offsetting interest income from short- term investments reduced this effective rate to 5.1%. In 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to the debt repayments, the $211 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2015. including Other financing activities during 2015 included the net repurchase of approximately 8.0 million shares of treasury stock, including restricted stock withholding, and the issuance of 62,000 shares of common stock for various plans, including stock option exercises that generated approximately $2.4 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $604.6 million, including $522.6 million related to shares repurchased under the Company's share repurchase program. In October 2015, International Paper announced that the quarterly dividend would be increased from $0.40 per share to $0.44 per share, effective for the 2015 fourth quarter. 2014: Financing activities during 2014 included debt issuances of $2.0 billion and retirements of $2.1 billion, for a net decrease of $113 million. International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2014, International Paper had interest rate swaps with a total notional amount of $230 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data). During 2014, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.8% to an effective rate of 6.7%. The inclusion of the offsetting interest income from short- term investments reduced this effective rate to 6.3%. During the second quarter of 2014, International Paper issued $800 million of 3.65% senior unsecured notes with a maturity date in 2024 and $800 million of 4.80% senior unsecured notes with a maturity date in 2044. The proceeds from this borrowing were used to repay approximately $960 million of notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019. Pre-tax early debt retirement costs of $262 million related to these debt repayments, including $258 million of cash premiums, are included in Restructuring and other charges the accompanying consolidated statement of operations for the twelve months ended December 31, 2014. in Other financing activities during 2014 included the net repurchase of approximately 17.9 million shares of treasury stock, including restricted stock withholding, and the issuance of 1.6 million shares of common stock for various plans, including stock options exercises that generated approximately $66 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.06 billion, including $983 million related to shares repurchased under the Company's share repurchase program. In September 2014, International Paper announced that the quarterly dividend would be increased from $0.35 per share to $0.40 per share, effective for the 2014 fourth quarter. Variable Interest Entities Information concerning variable interest entities is set forth in Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data for discussion. Liquidity and Capital Resources Outlook for 2017 Capital Expenditures and Long-Term Debt International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2017 through current cash balances and cash from operations. Additionally, the Company has existing credit totaling $2.1 billion available at December 31, 2016. facilities The Company’s the maintenance of a minimum net worth of $9 billion and financial covenants require 31 32 a total debt-to-capital ratio of less than 60%. Net worth is defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock plus any cumulative goodwill impairment charges. The calculation also excludes accumulated other and Nonrecourse comprehensive Financial Liabilities of Special Purpose Entities. The total debt-to-capital ratio is defined as total debt divided by the sum of total debt plus net worth. The Company was in compliance with all its debt covenants at December 31, 2016 and was well below the thresholds stipulated under the covenants as defined in the credit agreements. income/loss The Company will continue to rely upon debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure the planning objectives. The primary goals of Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2016, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2016, were as follows: In millions 2017 2018 2019 2020 2021 Thereafter Maturities of long-term debt (a) $ 239 $ 690 $ 433 $ 179 $ 612 $ 9,161 Lease obligations 119 91 69 51 38 125 Purchase obligations (b) 3,165 635 525 495 460 2,332 Total (c) $ 3,523 $ 1,416 $ 1,027 $ 725 $ 1,110 $ 11,618 (a) Total debt includes scheduled principal payments only. (b) Includes $2 billion relating to fiber supply agreements entered into at the time of the 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. Also includes $1.1 billion relating to fiber supply agreements assumed in conjunction with the 2016 acquisition of Weyerhaeuser's pulp business. (c) Not included in the above table due to the uncertainty as to the amount and timing of the payment are unrecognized tax benefits of approximately $77 million. We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2016, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2016, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $620 million. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Pension Obligations and Funding to make to minimum that are subject timing and amount of At December 31, 2016, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $3.4 billion higher than the fair value of plan assets. Approximately $3.0 billion of this amount relates to plans funding requirements. Under current IRS funding rules, the calculation of minimum funding requirements differs from the calculation of the present value of plan benefits (the projected benefit obligation) for accounting purposes. In December 2008, the Worker, Retiree and Employer Recovery Act of 2008 (WERA) was passed by the U.S. Congress which provided for pension funding relief and technical corrections. Funding contributions depend on the funding method selected by the Company, and the timing of its implementation, as well as on actual demographic data and the targeted funding level. The Company continually reassesses the amount and timing of any discretionary contributions and elected to make contributions totaling $750 million for both years ended December 31, 2016 and 2015. At this time, we do not expect to have any required contributions to our plans in 2017, although the future voluntary Company may elect contributions. The future contributions, which could be material, will depend on a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. International Paper announced a former voluntary, employees who are participants in the Retirement Plan of International Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. The amount of total payments under this program was approximately $1.2 billion, and were made from Plan trust assets on June 30, 2016. Based on the level of payments made, settlement accounting rules applied and resulted in a plan remeasurement as of the June 30, 2016 payment date. As a result of settlement accounting, the Company recognized a pro-rata portion loss, after of remeasurement, resulting in a $439 million non-cash charge to the Company's earnings in the second quarter of 2016. Additional payments of $8 million and $9 million were made during the third and fourth quarters, respectively, due to mandatory cash payouts and a small lump sum payout, and the Pension Plan was subsequently remeasured at September 30, 2016 and December 31, 2016. As a result of settlement recognized non-cash accounting, settlement charges of $3 million in both the third and fourth quarters of 2016. the unamortized net actuarial limited-time opportunity the Company for Ilim Holding S.A. Shareholder’s Agreement In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement provides that at any time, either the Company or its partners may commence procedures specified under the deadlock agreement. If these or any other deadlock procedures under the shareholder's agreement are commenced, although it is not obligated to do so, the Company may in certain situations choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant anti-trust authorities. Based on the provisions of the agreement, the Company estimates that the current purchase price for its partners' 50% interests would be approximately $1.5 billion, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company's option. The purchase by the Company of its partners’ 50% interest in Ilim would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provisions of the shareholder’s agreement. CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES The preparation of financial statements in conformity estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. Impairment of Long-Lived Assets and Goodwill An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through cash flows from future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections. with accounting principles generally accepted in the Under the provisions of Accounting Standards United States requires International Paper to establish Codification (ASC) 350, “Intangibles – Goodwill and accounting policies and to make estimates that affect Other,” the testing of goodwill for possible impairment both the amounts and timing of the recording of assets, is a two-step process. In the first step, the fair value of liabilities, revenues and expenses. Some of these the Company’s reporting units is compared with their estimates require judgments about matters that are carrying value, including goodwill. If fair value exceeds inherently uncertain. Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include the accounting for contingencies, impairment or disposal of long-lived assets and goodwill, pensions and postretirement benefit obligations, stock options and income taxes. The Company has discussed the selection of critical accounting policies and the effect of significant estimates with the Audit and Finance Committee of the Company’s Board of Directors. Contingent Liabilities Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then step two is performed to measure the amount of the goodwill impairment loss for the reporting unit. This analysis requires the determination of the fair value of all of the individual assets and liabilities of the reporting unit, including any currently unrecognized intangible assets, as if the reporting unit had been purchased on the analysis date. Once these fair values have been determined, the implied fair value of the unit’s goodwill is calculated as the excess, if any, of the fair value of the reporting unit determined in step one over the fair value of the net assets determined in step two. The carrying value of goodwill is then reduced to this implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through a goodwill impairment charge. The impairment analysis requires a number of judgments by management. In calculating the estimated fair value of its reporting units in step one, 33 34 a total debt-to-capital ratio of less than 60%. Net worth in the ordinary course of business, including liquidity Ilim Holding S.A. Shareholder’s Agreement is defined as the sum of common stock, paid-in capital needs associated with our domestic debt service and retained earnings, less treasury stock plus any requirements. cumulative goodwill impairment charges. The calculation also excludes accumulated other comprehensive income/loss and Nonrecourse Financial Liabilities of Special Purpose Entities. The total debt-to-capital ratio is defined as total debt divided by the sum of total debt plus net worth. The Company was in compliance with all its debt covenants at December 31, 2016 and was well below the thresholds stipulated under the covenants as defined in the credit agreements. The Company will continue to rely upon debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. Pension Obligations and Funding At December 31, 2016, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $3.4 billion higher than the fair value of plan assets. Approximately $3.0 billion of this amount relates to plans that are subject to minimum funding requirements. Under current IRS funding rules, the calculation of minimum funding requirements differs from the calculation of the present value of plan benefits (the projected benefit obligation) for accounting purposes. In December 2008, the Worker, Retiree and Employer Recovery Act of 2008 (WERA) was passed by the U.S. Congress which provided for pension funding relief and technical corrections. Funding contributions depend on the funding method selected by the Company, and the timing of its implementation, as well as on actual demographic data and the targeted funding level. The Company continually reassesses the amount and timing of any discretionary contributions Maintaining an investment grade credit rating is an and elected to make contributions totaling $750 million important element of International Paper’s financing for both years ended December 31, 2016 and 2015. At strategy. At December 31, 2016, the Company held this time, we do not expect to have any required long-term credit ratings of BBB (stable outlook) and contributions to our plans in 2017, although the Baa2 (stable outlook) by S&P and Moody’s, Company may elect to make future voluntary respectively. Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2016, were as follows: In millions 2017 2018 2019 2020 2021 Thereafter Lease obligations 119 91 69 51 38 125 $ 239 $ 690 $ 433 $ 179 $ 612 $ 9,161 Maturities of long-term debt (a) Purchase obligations (b) Total (c) 3,165 635 525 495 460 2,332 $ 3,523 $ 1,416 $ 1,027 $ 725 $ 1,110 $ 11,618 (a) Total debt includes scheduled principal payments only. (b) Includes $2 billion relating to fiber supply agreements entered into at the time of the 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. Also includes $1.1 billion relating to fiber supply agreements assumed in conjunction with the 2016 acquisition of Weyerhaeuser's pulp business. (c) Not included in the above table due to the uncertainty as to the amount and timing of the payment are unrecognized tax benefits of approximately $77 million. We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2016, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2016, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $620 million. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising contributions. The timing and amount of future contributions, which could be material, will depend on a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. International Paper announced a voluntary, limited-time opportunity for former employees who are participants in the Retirement Plan of International Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. The amount of total payments under this program was approximately $1.2 billion, and were made from Plan trust assets on June 30, 2016. Based on the level of payments made, settlement accounting rules applied and resulted in a plan remeasurement as of the June 30, 2016 payment date. As a result of settlement accounting, the Company recognized a pro-rata portion of the unamortized net actuarial loss, after remeasurement, resulting in a $439 million non-cash charge to the Company's earnings in the second quarter of 2016. Additional payments of $8 million and $9 million were made during the third and fourth quarters, respectively, due to mandatory cash payouts and a small lump sum payout, and the Pension Plan was subsequently remeasured at September 30, 2016 and December 31, 2016. As a result of settlement accounting, the Company recognized non-cash settlement charges of $3 million in both the third and fourth quarters of 2016. In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement provides that at any time, either the Company or its partners may commence procedures specified under the deadlock agreement. If these or any other deadlock procedures under the shareholder's agreement are commenced, although it is not obligated to do so, the Company may in certain situations choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant anti-trust authorities. Based on the provisions of the agreement, the Company estimates that the current purchase price for its partners' 50% interests would be approximately $1.5 billion, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company's option. The purchase by the Company of its partners’ 50% interest in Ilim would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provisions of the shareholder’s agreement. CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include the accounting for contingencies, impairment or disposal of long-lived assets and goodwill, pensions and postretirement benefit obligations, stock options and income taxes. The Company has discussed the selection of critical accounting policies and the effect of significant estimates with the Audit and Finance Committee of the Company’s Board of Directors. Contingent Liabilities Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably 33 34 based estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss and historical recommendations of legal counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. experience on Impairment of Long-Lived Assets and Goodwill An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through cash flows from future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of goodwill and intangible asset balances is required annually. The amount and timing these of any assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections. impairment charges based on Under the provisions of Accounting Standards Codification (ASC) 350, “Intangibles – Goodwill and Other,” the testing of goodwill for possible impairment is a two-step process. In the first step, the fair value of the Company’s reporting units is compared with their carrying value, including goodwill. If fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then step two is performed to measure the amount of the goodwill impairment loss for the reporting unit. This analysis requires the determination of the fair value of all of the individual assets and liabilities of the reporting unit, including any currently unrecognized intangible assets, as if the reporting unit had been purchased on the analysis date. Once these fair values have been determined, the implied fair value of the unit’s goodwill is calculated as the excess, if any, of the fair value of the reporting unit determined in step one over the fair value of the net assets determined in step two. The carrying value of goodwill is then reduced to this implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through a goodwill impairment charge. impairment analysis requires a number of The judgments by management. the estimated fair value of its reporting units in step one, In calculating the Company uses the projected future cash flows to be generated by each unit, discounted using the estimated discount rate for each reporting unit. These calculations require many estimates, including discount rates, future growth rates, and cost and pricing trends for each reporting unit. Subsequent changes in economic and operating conditions can affect these assumptions and could result in additional interim testing and goodwill impairment charges in future periods. Upon completion, the resulting estimated fair values are then analyzed for reasonableness by comparing them to earnings multiples for historic industry business transactions, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares outstanding to the Company’s market price per share on the analysis date. No goodwill impairment charges were recorded in 2016. In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business using the discounted future cash flows and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy. In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using the discounted future cash flows and determined that all of the goodwill in this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business. Pension and Postretirement Benefit Obligations recorded The charges for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates. The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount rate used to calculate plan liabilities, the projected rate of future compensation increases and health care cost trend rates. Benefit obligations and fair values of plan assets as of December 31, 2016, for International Paper’s pension and postretirement plans were as follows: In millions U.S. qualified pension U.S. nonqualified pension U.S. postretirement Non-U.S. pension Non-U.S. postretirement Benefit Obligation Fair Value of Plan Assets $ 13,307 $ 10,312 376 280 219 23 — — 153 — table below shows assumptions used by to calculate U.S. pension The International Paper obligations for the years shown: Discount rate Rate of compensation increase 2016 2015 2014 4.10% 4.40% 4.10% 3.75% 3.75% 3.75% Additionally, health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were: Health care cost trend rate assumed for next year Rate that the cost trend rate gradually declines to Year that the rate reaches the rate it is assumed to remain 2016 2015 6.50% 7.00% 5.00% 5.00% 2022 2022 these actuarial International Paper determines assumptions, after consultation with our actuaries, on to calculate December 31 of each year liability information as of that date and pension and postretirement expense for the following year. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. The discount rate assumption was determined based on a hypothetical settlement portfolio selected from a universe of high quality corporate bonds. The expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year ended December 31, 2016 was 7.75%. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2017 pension expense by approximately $26 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $33 million. The effect on net postretirement benefit cost from a 1% increase or decrease in the annual health care cost Net periodic pension and postretirement plan trend rate would be approximately $1 million. expenses, calculated for all of International Paper’s Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were: Return Return Year 2016 2015 2014 2013 2012 7.1% 1.3% 6.4% 14.1% 14.1% Year 2011 2010 2009 2008 2007 2.5 % 15.1 % 23.8 % (23.6)% 9.6 % The 2012, 2013 and 2014 returns above represent weighted averages of International Paper and Temple- Inland asset returns. International Paper and Temple- Inland assets were combined in October 2014. The annualized time-weighted rate of return earned on U.S. pension plan assets was 8.5% and 6.3% for the past five and ten years, respectively. The following graph shows the growth of a $1,000 investment in plans, were as follows: In millions 2016 2015 2014 2013 2012 Pension expense U.S. plans (non- cash) Non-U.S. plans Postretirement expense U.S. plans Non-U.S. plans $ 809 $ 461 $ 387 $ 545 $ 342 — 5 3 4 13 1 6 8 5 7 7 (1) 7 (4) 1 Net expense $ 827 $ 480 $ 401 $ 556 $ 342 The increase in 2016 U.S. pension expense principally reflects a decrease in the discount rate and a large settlement charge in 2016 related to the optional lump sum payout partially offset by a higher return on assets and lower amortization of actuarial losses. International Paper’s U.S. Pension Plan Master Trust. Assuming that discount rates, expected long-term The graph portrays the time-weighted rate of return from returns on plan assets and rates of future compensation 2006 – 2016. increases remain the same as in 2016, projected future net periodic pension and postretirement plan expenses would be as follows: In millions Pension expense U.S. plans (non-cash) Non-U.S. plans Postretirement expense U.S. plans Non-U.S. plans Net expense 2018 (1) 2017 (1) $ 252 $ 310 3 15 1 4 18 1 $ 271 $ 333 (1) Based on assumptions at December 31, 2016. The Company estimates that it will record net pension expense of approximately $310 million for its U.S. defined benefit plans in 2017, with the decrease from expense of $809 million in 2016 mainly related to no expected settlement charges in 2017 and an increase in the assumed discount rate to 4.10% in 2017 from 4.05% in 2016, partially offset by a lower return on asset assumption of 7.50% in 2017, down from 7.75% in 2016. The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2016 totaled approximately $10.3 billion, consisting of approximately 51% equity securities, 27% debt securities, 10% real estate and 12% other assets. Plan assets include an immaterial amount of International Paper common stock. The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains and losses in subsequent years. The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost for the U.S. pension plans over the next fiscal year are $341 million and $28 million, respectively. 35 36 the Company uses the projected future cash flows to rate used to calculate plan liabilities, the projected rate be generated by each unit, discounted using the of future compensation increases and health care cost increase or decrease in the annual health care cost trend rate would be approximately $1 million. Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were: Year 2016 2015 2014 2013 2012 Return 7.1% 1.3% 6.4% 14.1% 14.1% Year 2011 2010 2009 2008 2007 Return 2.5 % 15.1 % 23.8 % (23.6)% 9.6 % The 2012, 2013 and 2014 returns above represent weighted averages of International Paper and Temple- Inland asset returns. International Paper and Temple- Inland assets were combined in October 2014. The annualized time-weighted rate of return earned on U.S. pension plan assets was 8.5% and 6.3% for the past five and ten years, respectively. The following graph shows in International Paper’s U.S. Pension Plan Master Trust. The graph portrays the time-weighted rate of return from 2006 – 2016. the growth of a $1,000 investment recognized ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and in pension expense losses are prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains and losses in subsequent years. The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost for the U.S. pension plans over the next fiscal year are $341 million and $28 million, respectively. 35 36 outstanding to the Company’s market price per share The table below shows assumptions used by estimated discount rate for each reporting unit. These trend rates. testing and goodwill impairment charges in future In millions calculations require many estimates, including discount rates, future growth rates, and cost and pricing trends for each reporting unit. Subsequent changes in economic and operating conditions can affect these assumptions and could result in additional interim periods. Upon completion, the resulting estimated fair values are then analyzed for reasonableness by comparing them to earnings multiples for historic industry business transactions, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares on the analysis date. No goodwill impairment charges were recorded in 2016. In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business using the discounted future cash flows and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy. In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using the discounted future cash flows and determined that all of the goodwill in this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business. Pension and Postretirement Benefit Obligations The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates. The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount Benefit obligations and fair values of plan assets as of December 31, 2016, for International Paper’s pension and postretirement plans were as follows: U.S. qualified pension U.S. nonqualified pension U.S. postretirement Non-U.S. pension Non-U.S. postretirement Benefit Obligation Fair Value of Plan Assets $ 13,307 $ 10,312 376 280 219 23 — — 153 — International Paper to calculate U.S. pension obligations for the years shown: Discount rate Rate of compensation increase 2016 2015 2014 4.10% 4.40% 4.10% 3.75% 3.75% 3.75% Additionally, health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were: Health care cost trend rate assumed for next year declines to Rate that the cost trend rate gradually Year that the rate reaches the rate it is assumed to remain 2016 2015 6.50% 7.00% 5.00% 5.00% 2022 2022 International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. The discount rate assumption was determined based on a hypothetical settlement portfolio selected from a universe of high quality corporate bonds. The expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year ended December 31, 2016 was 7.75%. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2017 pension expense by approximately $26 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $33 million. The effect on net postretirement benefit cost from a 1% Net periodic pension and postretirement plan expenses, calculated for all of International Paper’s plans, were as follows: In millions 2016 2015 2014 2013 2012 Pension expense U.S. plans (non- cash) Non-U.S. plans Postretirement expense U.S. plans Non-U.S. plans $ 809 $ 461 $ 387 $ 545 $ 342 4 13 1 6 8 5 — 5 3 7 7 (1) 7 (4) 1 Net expense $ 827 $ 480 $ 401 $ 556 $ 342 The increase in 2016 U.S. pension expense principally reflects a decrease in the discount rate and a large settlement charge in 2016 related to the optional lump sum payout partially offset by a higher return on assets and lower amortization of actuarial losses. Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2016, projected future net periodic pension and postretirement plan expenses would be as follows: In millions Pension expense U.S. plans (non-cash) Non-U.S. plans Postretirement expense U.S. plans Non-U.S. plans Net expense 2018 (1) 2017 (1) $ 252 $ 310 3 15 1 4 18 1 $ 271 $ 333 (1) Based on assumptions at December 31, 2016. The Company estimates that it will record net pension expense of approximately $310 million for its U.S. defined benefit plans in 2017, with the decrease from expense of $809 million in 2016 mainly related to no expected settlement charges in 2017 and an increase in the assumed discount rate to 4.10% in 2017 from 4.05% in 2016, partially offset by a lower return on asset assumption of 7.50% in 2017, down from 7.75% in 2016. The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2016 totaled approximately $10.3 billion, consisting of approximately 51% equity securities, 27% debt securities, 10% real estate and 12% other assets. Plan assets include an immaterial amount of International Paper common stock. The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate the the plan, considering tax funded status of deductibility, the cash flows generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make voluntary contributions in the future. There are no required contributions to the U.S. qualified plan in 2017. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $21 million for the year ended December 31, 2016. Income Taxes International Paper records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering technical merits of the position based on specific tax regulations and facts of each matter. Changes to recorded liabilities are only made when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a recent court case that addresses the matter. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. International Paper believes these While judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. that The Company’s effective income tax rates, before equity earnings and discontinued operations, were 26%, 37% and 14% for 2016, 2015 and 2014, respectively. These effective tax rates include the tax effects of certain special items that can significantly affect the effective income tax rate in a given year, but may not recur in subsequent years. Management believes that the effective tax rate computed after excluding these special items may provide a better estimate of the rate that might be expected in future years if no additional special items were to occur in those years. Excluding these special items, the effective income tax rate for 2016 was 32% of pre-tax earnings compared with 33% in 2015 and 31% in 2014. We estimate that the 2017 effective income tax rate will 37 be approximately 33% based on expected earnings and business conditions. Business Combinations The Company’s acquisitions of businesses are accounted for in accordance with ASC 805, "Business Combinations", as amended. We allocate the total purchase price of the assets acquired and liabilities assumed based on their estimated fair value as of the business combination date. In developing estimates of fair values for long-lived assets, including identifiable intangible assets, the Company utilizes a variety of inputs including forecasted cash flows, anticipated growth rates, discount rates, estimated replacement costs and depreciation and obsolescence factors. Determining the fair value for specifically identified intangible assets such as customer lists and developed technology involves judgment. We may refine our estimates and make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year. Upon the conclusion of the measurement period or the final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are charged to the consolidated statements of earnings. Subsequent actual results of the underlying business activity supporting the specifically identified intangible assets could change, requiring us to record impairment charges or adjust their economic lives in future periods. RECENT ACCOUNTING DEVELOPMENTS There were no new accounting pronouncements issued or effective during the fiscal year which have had or are expected to have a material impact on the Company’s consolidated financial statements. See Note 2 Recent Accounting Developments on pages 49 through 52 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements. LEGAL PROCEEDINGS Information concerning the Company’s environmental and legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data. EFFECT OF INFLATION Interest Rate Risk While inflationary increases in certain input costs, such as energy, wood fiber and chemical costs, have an impact on the Company’s operating results, changes in general inflation have had minimal impact on our operating results in each of the last three years. Sales prices and volumes are more strongly influenced by economic supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. FOREIGN CURRENCY EFFECTS risk exposure related to these investments was not International Paper has operations in a number of material. countries. Its operations in those countries also export We issue fixed and floating rate debt in a proportion that to, and compete with, imports from other regions. As management deems appropriate based on current and such, currency movements can have a number of direct projected market conditions. Derivative instruments, and indirect impacts on the Company’s financial such as, interest rate swaps, may be used to execute statements. Direct impacts include the translation of this strategy. At December 31, 2016 and 2015, the net international operations’ local currency financial fair value liability of financial instruments with exposure statements into U.S. dollars and the remeasurement to interest rate risk was approximately $11.3 billion and impact associated with non-functional currency $9.3 billion, respectively. The potential loss in fair value financial assets and liabilities. Indirect impacts include resulting from a 10% adverse shift in quoted interest the change in competitiveness of imports into, and rates would have been approximately $623 million and exports out of, the United States (and the impact on $565 million at December 31, 2016 and 2015, local currency pricing of products that are traded respectively. internationally). In general, a weaker U.S. dollar and stronger local currency is beneficial to International Paper. The currencies that have the most impact are the Euro, the Brazilian real, the Polish zloty and the Russian ruble. MARKET RISK Commodity Price Risk The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap or forward purchase contracts may be used to manage risks associated with market fluctuations in We use financial instruments, including fixed and energy prices. The net fair value of such outstanding variable rate debt, to finance operations, for capital energy hedge contracts at December 31, 2016 and spending programs and for general corporate 2015 was approximately a $2 million and a $7 million purposes. Additionally, financial instruments, including liability, respectively. The potential loss in fair value various derivative contracts, are used to hedge resulting from a 10% adverse change in the underlying exposures to interest rate, commodity and foreign commodity prices would have been approximately $1 currency risks. We do not use financial instruments for million at December 31, 2016 and 2015, respectively. trading purposes. Information related to International Paper’s debt obligations is included in Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data. Foreign Currency Risk International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate The fair value of our debt and financial instruments fluctuations on our after-tax cash flows. We address varies due to changes in market interest and foreign these risks on a limited basis by entering into cross- currency rates and commodity prices since the currency and interest rate swaps, or foreign exchange inception of the related instruments. We assess this contracts. At December 31, 2016 and 2015, the net fair market risk utilizing a sensitivity analysis. The sensitivity value of financial instruments with exposure to foreign analysis measures the potential loss in earnings, fair currency risk was approximately a $1 million liability and values and cash flows based on a hypothetical 10% a $4 million asset, respectively. The potential loss in fair change (increase and decrease) in interest and value for such financial instruments from a 10% adverse currency rates and commodity prices. change in quoted foreign currency exchange rates would have been approximately $23 million and $30 million at December 31, 2016 and 2015, respectively. Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment-grade securities of financial institutions and ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK money market mutual funds with a minimum rating of See the preceding discussion and Note 14 Derivatives AAA and limit exposure to any one issuer or fund. Our and Hedging Activities on pages 67 through 70 of investments in marketable securities at December 31, Item 8. Financial Statements and Supplementary Data. 2016 and 2015 are stated at cost, which approximates market due to their short-term nature. Our interest rate 38 considering the funded status of the plan, tax be approximately 33% based on expected earnings and FOREIGN CURRENCY EFFECTS deductibility, the cash flows generated by the Company, business conditions. and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make voluntary contributions in the future. There are no required contributions to the U.S. qualified plan in 2017. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $21 million for the year ended December 31, 2016. Income Taxes Business Combinations The Company’s acquisitions of businesses are accounted for in accordance with ASC 805, "Business Combinations", as amended. We allocate the total purchase price of the assets acquired and liabilities assumed based on their estimated fair value as of the business combination date. In developing estimates of fair values for long-lived assets, including identifiable intangible assets, the Company utilizes a variety of International Paper records its global tax provision inputs including forecasted cash flows, anticipated based on the respective tax rules and regulations for growth rates, discount rates, estimated replacement the jurisdictions in which it operates. Where the costs and depreciation and obsolescence factors. Company believes that a tax position is supportable for Determining the fair value for specifically identified income tax purposes, the item is included in its income intangible assets such as customer lists and developed tax returns. Where treatment of a position is uncertain, technology involves judgment. We may refine our liabilities are recorded based upon the Company’s estimates and make adjustments to the assets acquired evaluation of the “more likely than not” outcome and liabilities assumed over a measurement period, not considering technical merits of the position based on to exceed one year. Upon the conclusion of the specific tax regulations and facts of each matter. measurement period or the final determination of the Changes to recorded liabilities are only made when an values of assets acquired and liabilities assumed, identifiable event occurs that changes the likely whichever comes first, any subsequent adjustments are outcome, such as settlement with the relevant tax charged to the consolidated statements of earnings. authority, the expiration of statutes of limitation for the Subsequent actual results of the underlying business subject tax year, change in tax laws, or a recent court activity supporting the specifically identified intangible case that addresses the matter. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is assets could change, requiring us to record impairment charges or adjust their economic lives in future periods. RECENT ACCOUNTING DEVELOPMENTS required in evaluating the need for and magnitude of There were no new accounting pronouncements issued appropriate valuation allowances against deferred tax or effective during the fiscal year which have had or are assets. The realization of these assets is dependent on expected to have a material impact on the Company’s generating future taxable income, as well as successful consolidated financial statements. See Note 2 Recent implementation of various tax planning strategies. While International Paper believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. Accounting Developments on pages 49 through 52 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements. LEGAL PROCEEDINGS Information concerning the Company’s environmental and legal proceedings is set forth in Note 11 The Company’s effective income tax rates, before Commitments and Contingencies on pages 61 through equity earnings and discontinued operations, were 63 of Item 8. Financial Statements and Supplementary 26%, 37% and 14% for 2016, 2015 and 2014, Data. local currency International Paper has operations in a number of countries. Its operations in those countries also export to, and compete with, imports from other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ financial statements into U.S. dollars and the remeasurement impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of imports into, and exports out of, the United States (and the impact on local currency pricing of products that are traded internationally). In general, a weaker U.S. dollar and stronger local currency is beneficial to International Paper. The currencies that have the most impact are the Euro, the Brazilian real, the Polish zloty and the Russian ruble. MARKET RISK We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper’s debt obligations is included in Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data. The fair value of our debt and financial instruments varies due to changes in market interest and foreign currency rates and commodity prices since the inception of the related instruments. We assess this market risk utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices. respectively. These effective tax rates include the tax effects of certain special items that can significantly affect the effective income tax rate in a given year, but may not recur in subsequent years. Management believes that the effective tax rate computed after excluding these special items may provide a better estimate of the rate that might be expected in future years if no additional special items were to occur in those years. Excluding these special items, the effective income tax rate for 2016 was 32% of pre-tax earnings compared with 33% in 2015 and 31% in 2014. We estimate that the 2017 effective income tax rate will EFFECT OF INFLATION Interest Rate Risk While inflationary increases in certain input costs, such as energy, wood fiber and chemical costs, have an impact on the Company’s operating results, changes in general inflation have had minimal impact on our operating results in each of the last three years. Sales prices and volumes are more strongly influenced by economic supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment-grade securities of financial institutions and money market mutual funds with a minimum rating of AAA and limit exposure to any one issuer or fund. Our investments in marketable securities at December 31, 2016 and 2015 are stated at cost, which approximates market due to their short-term nature. Our interest rate 37 38 risk exposure related to these investments was not material. We issue fixed and floating rate debt in a proportion that management deems appropriate based on current and projected market conditions. Derivative instruments, such as, interest rate swaps, may be used to execute this strategy. At December 31, 2016 and 2015, the net fair value liability of financial instruments with exposure to interest rate risk was approximately $11.3 billion and $9.3 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $623 million and $565 million at December 31, 2016 and 2015, respectively. Commodity Price Risk The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap or forward purchase contracts may be used to manage risks associated with market fluctuations in energy prices. The net fair value of such outstanding energy hedge contracts at December 31, 2016 and 2015 was approximately a $2 million and a $7 million liability, respectively. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would have been approximately $1 million at December 31, 2016 and 2015, respectively. Foreign Currency Risk transacts business International Paper in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis by entering into cross- currency and interest rate swaps, or foreign exchange contracts. At December 31, 2016 and 2015, the net fair value of financial instruments with exposure to foreign currency risk was approximately a $1 million liability and a $4 million asset, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would have been approximately $23 million and $30 million at December 31, 2016 and 2015, respectively. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the preceding discussion and Note 14 Derivatives and Hedging Activities on pages 67 through 70 of Item 8. Financial Statements and Supplementary Data. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT ON: Financial Statements The management of International Paper Company is responsible for the preparation of the consolidated financial statements in this annual report and for establishing and maintaining adequate internal controls over financial reporting. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances to present fairly the Company’s consolidated financial position, results of operations and cash flows on a consistent basis. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements. As can be expected in a complex and dynamic business environment, some financial statement amounts are based on estimates and judgments. Even though estimates and judgments are used, measures have been taken to provide reasonable assurance of the integrity and reliability of the financial information contained in this annual report. We have formed a Disclosure Committee to oversee this process. The accompanying consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP. During its audits, Deloitte & Touche LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders and the board of directors and all committees of the board. Management believes that all representations made to the independent auditors during their audits were valid and appropriate. Internal Control Over Financial Reporting The management of International Paper Company is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of for external purposes. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control financial statements of financial system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. The Company has assessed the effectiveness of its internal control over reporting as of December 31, 2016. In making this assessment, it used the criteria described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations the Treadway Commission (COSO). Based on this assessment, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting was effective. practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout International Paper, and an extensive program of internal audits with management follow-up. The Board of Directors, assisted by the Audit and Finance Committee (Committee), monitors the integrity of the Company’s financial statements and financial reporting procedures, the performance of the Company’s internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists of independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. The Committee’s Charter takes into account the New York Stock Exchange rules relating to Audit Committees and the SEC rules and regulations promulgated as a result of the Sarbanes-Oxley Act of 2002. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2016, including critical accounting policies and significant management judgments, with management and the independent auditors. The Committee’s report recommending the inclusion of such financial statements in this Annual Report on Form 10-K will be set forth in our Proxy Statement. MARK S. SUTTON CHAIRMAN AND CHIEF EXECUTIVE OFFICER CAROL L. ROBERTS OFFICER SENIOR VICE PRESIDENT AND CHIEF FINANCIAL The Company completed the acquisition of Holmen Paper’s newsprint mill in Madrid, Spain as well as associated recycling operations and 50% ownership in a cogeneration facility in June 2016. Due to the timing of the acquisition we have excluded the Holmen operations from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Holmen operations represented approximately 0.4% of net sales and 0.3% of total assets. The Company completed the acquisition of Weyerhaeuser’s pulp business in December 2016. Due to the timing of the acquisition we have excluded the former Weyerhaeuser pulp business from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Weyerhaeuser pulp business represented approximately 0.5% of net sales and 6.5% of total assets. The Company’s registered public independent accounting firm, Deloitte & Touche LLP, has issued its report on the effectiveness of the Company’s internal control over financial reporting. The report appears on pages 41 and 42. Internal Control Environment And Board Of Directors Oversight internal control environment includes an Our enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may anonymously report suspected violations of law or International Paper’s policy; and an office of ethics and business 39 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT ON: Financial Statements The management of International Paper Company is responsible for the preparation of the consolidated financial statements in this annual report and for establishing and maintaining adequate internal controls over financial reporting. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances to present fairly the Company’s consolidated financial position, results of operations and cash flows on a consistent basis. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements. As can be expected in a complex and dynamic business environment, some financial statement amounts are based on estimates and judgments. Even though estimates and judgments are used, measures have been taken to provide reasonable assurance of the integrity and reliability of the financial information contained in this annual report. We have formed a Disclosure Committee to oversee this process. The accompanying consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP. During its audits, Deloitte & Touche LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders and the board of directors and all committees of the board. system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2016. In making this assessment, it used the criteria described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting was effective. The Company completed the acquisition of Holmen Paper’s newsprint mill in Madrid, Spain as well as associated recycling operations and 50% ownership in a cogeneration facility in June 2016. Due to the timing of the acquisition we have excluded the Holmen operations from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Holmen operations represented approximately 0.4% of net sales and 0.3% of total assets. The Company completed the acquisition of Weyerhaeuser’s pulp business in December 2016. Due to the timing of the acquisition we have excluded the former Weyerhaeuser pulp business from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Weyerhaeuser pulp business represented approximately 0.5% of net sales and 6.5% of total assets. Management believes that all representations made to The Company’s independent registered public the independent auditors during their audits were valid accounting firm, Deloitte & Touche LLP, has issued its and appropriate. report on the effectiveness of the Company’s internal control over financial reporting. The report appears on Internal Control Over Financial Reporting pages 41 and 42. The management of International Paper Company is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control Internal Control Environment And Board Of Directors Oversight Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may anonymously report suspected violations of law or International Paper’s policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout International Paper, and an extensive program of internal audits with management follow-up. the performance of The Board of Directors, assisted by the Audit and Finance Committee (Committee), monitors the integrity of the Company’s financial statements and financial reporting procedures, the Company’s internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists of independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives their activities. The review in attendance, Committee’s Charter takes into account the New York Stock Exchange rules relating to Audit Committees and the SEC rules and regulations promulgated as a result of the Sarbanes-Oxley Act of 2002. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2016, including critical accounting policies and significant management judgments, with management and the report independent auditors. The Committee’s recommending financial statements in this Annual Report on Form 10-K will be set forth in our Proxy Statement. inclusion of such the to MARK S. SUTTON CHAIRMAN AND CHIEF EXECUTIVE OFFICER CAROL L. ROBERTS SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 39 40 REPORT OF INDEPENDENT REGISTERED PUBLIC FIRM, ON CONSOLIDATED ACCOUNTING FINANCIAL STATEMENTS Commission, and our report dated February 22, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting. To the Board of Directors and Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway /s/ Deloitte & Touche LLP Memphis, Tennessee February 22, 2017 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Shareholders of International Paper Company: in in a cogeneration We have audited the internal control over financial reporting of International Paper Company and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee the Treadway of Sponsoring Organizations of Commission. As described the Report of Internal Control over Financial Management on Reporting, management excluded from its assessment the internal control over financial reporting of Holmen Paper’s newsprint mill in Madrid, Spain as well as the the associated recycling operations and a 50% a ownership facility (collectively Holmen) and Weyerhaeuser’s pulp business, which were acquired on June 30, 2016 and December 1, 2016 respectively. Holmen constitutes 0.4% of net sales and 0.3% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2016. The former Weyerhaeuser pulp business constitutes 0.5% of net sales and 6.5% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Holmen or Weyerhaeuser is pulp business. The Company's management responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material 41 respects. Our audit included obtaining an and financial statement schedule as of and for the year understanding of internal control over financial ended December 31, 2016 of the Company and our reporting, assessing the risk that a material weakness report dated February 22, 2017 expressed an exists, testing and evaluating the design and operating unqualified opinion on those financial statements and effectiveness of internal control based on the assessed financial statement schedule. /s/ Deloitte & Touche LLP Memphis, Tennessee February 22, 2017 risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements 42 and financial statement schedule as of and for the year ended December 31, 2016 of the Company and our report dated February 22, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ Deloitte & Touche LLP Memphis, Tennessee February 22, 2017 audit obtaining included internal control over an respects. Our financial understanding of reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED Commission, and our report dated February 22, 2017 expressed an unqualified opinion on the Company’s FINANCIAL STATEMENTS internal control over financial reporting. To the Board of Directors and Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway /s/ Deloitte & Touche LLP Memphis, Tennessee February 22, 2017 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Shareholders of International Paper Company: We have audited the internal control over financial reporting of International Paper Company and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in the Report of Management on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting of Holmen Paper’s newsprint mill in Madrid, Spain as well as the the associated recycling operations and a 50% a ownership in a cogeneration facility (collectively Holmen) and Weyerhaeuser’s pulp business, which were acquired on June 30, 2016 and December 1, 2016 respectively. Holmen constitutes 0.4% of net sales and 0.3% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2016. The former Weyerhaeuser pulp business constitutes 0.5% of net sales and 6.5% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Holmen or Weyerhaeuser pulp business. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and the company's board of directors, effected by management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded financial as necessary statements in accordance with generally accepted accounting principles, and receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. to permit preparation of that Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations the Treadway Commission. of We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements 41 42 CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) In millions for the years ended December 31 NET EARNINGS (LOSS) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Amortization of pension and postretirement prior service costs and net loss: U.S. plans (less tax of $343, $186 and $154) Pension and postretirement liability adjustments: U.S. plans (less tax of $283, $206 and $798) Non-U.S. plans (less tax of $4, $0 and $5) Change in cumulative foreign currency translation adjustment Net gains/losses on cash flow hedging derivatives: Net gains (losses) arising during the period (less tax of $3, $3 and $3) Reclassification adjustment for (gains) losses included in net earnings (less tax of $3, $8 and $1) TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Comprehensive Income (Loss) Net (Earnings) Loss Attributable to Noncontrolling Interests Other Comprehensive (Income) Loss Attributable to Noncontrolling Interests 2016 2015 2014 $ 902 $ 917 $ 536 545 296 242 (451) 3 260 (329) (1,253) (2) (1,042) (18) (876) 344 1,246 (1,068) (151) (1,899) (1,363) (3) 12 21 6 10 (4) 19 12 (6) (7) 2 2 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY $ 1,250 $ (124) $ (1,332) The accompanying notes are an integral part of these financial statements. In millions, except per share amounts, for the years ended December 31 NET SALES COSTS AND EXPENSES Cost of products sold Selling and administrative expenses Depreciation, amortization and cost of timber harvested Distribution expenses Taxes other than payroll and income taxes Restructuring and other charges Impairment of goodwill and other intangibles Net (gains) losses on sales and impairments of businesses Interest expense, net EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY EARNINGS (LOSSES) Income tax provision (benefit) Equity earnings (loss), net of taxes EARNINGS (LOSS) FROM CONTINUING OPERATIONS Discontinued operations, net of taxes NET EARNINGS (LOSS) Less: Net earnings (loss) attributable to noncontrolling interests NET EARNINGS (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) AMOUNTS ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) The accompanying notes are an integral part of these financial statements. 2016 2015 2014 $ 21,079 $ 22,365 $ 23,617 15,152 15,468 16,254 1,575 1,227 1,361 164 54 — 70 520 956 247 198 907 (5) 902 (2) 1,645 1,294 1,406 168 252 137 174 555 1,266 466 117 917 — 917 (21) 1,793 1,406 1,521 180 846 100 38 607 872 123 (200) 549 (13) 536 (19) $ $ $ $ $ $ $ 904 $ 938 $ 555 2.21 $ 2.25 $ 1.33 (0.01) — (0.03) 2.20 $ 2.25 $ 1.30 2.19 $ 2.23 $ 1.31 (0.01) — (0.02) 2.18 $ 2.23 $ 1.29 909 $ 938 $ (5) — 904 $ 938 $ 568 (13) 555 43 44 CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) In millions for the years ended December 31 NET EARNINGS (LOSS) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Amortization of pension and postretirement prior service costs and net loss: U.S. plans (less tax of $343, $186 and $154) Pension and postretirement liability adjustments: U.S. plans (less tax of $283, $206 and $798) Non-U.S. plans (less tax of $4, $0 and $5) Change in cumulative foreign currency translation adjustment Net gains/losses on cash flow hedging derivatives: Net gains (losses) arising during the period (less tax of $3, $3 and $3) Reclassification adjustment for (gains) losses included in net earnings (less tax of $3, $8 and $1) TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Comprehensive Income (Loss) Net (Earnings) Loss Attributable to Noncontrolling Interests Other Comprehensive (Income) Loss Attributable to Noncontrolling Interests 2016 2015 2014 $ 902 $ 917 $ 536 545 296 242 (451) 3 260 (6) (7) 344 1,246 2 2 (329) (1,253) (2) (1,042) (3) 12 (18) (876) 10 (4) (1,068) (151) (1,899) (1,363) 21 6 19 12 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY $ 1,250 $ (124) $ (1,332) The accompanying notes are an integral part of these financial statements. In millions, except per share amounts, for the years ended December 31 NET SALES COSTS AND EXPENSES Cost of products sold Selling and administrative expenses Depreciation, amortization and cost of timber harvested Distribution expenses Taxes other than payroll and income taxes Restructuring and other charges Impairment of goodwill and other intangibles Net (gains) losses on sales and impairments of businesses Interest expense, net EARNINGS (LOSSES) Income tax provision (benefit) Equity earnings (loss), net of taxes EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY EARNINGS (LOSS) FROM CONTINUING OPERATIONS Discontinued operations, net of taxes NET EARNINGS (LOSS) Less: Net earnings (loss) attributable to noncontrolling interests NET EARNINGS (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) COMMON SHAREHOLDERS Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY AMOUNTS ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS 2016 2015 2014 $ 21,079 $ 22,365 $ 23,617 15,152 15,468 16,254 1,575 1,227 1,361 164 54 — 70 520 956 247 198 907 (5) 902 (2) 1,645 1,294 1,406 168 252 137 174 555 1,266 466 117 917 — 917 (21) 1,793 1,406 1,521 180 846 100 38 607 872 123 (200) 549 (13) 536 (19) $ $ $ $ $ $ $ 904 $ 938 $ 555 2.21 $ 2.25 $ 1.33 (0.01) — (0.03) 2.20 $ 2.25 $ 1.30 2.19 $ 2.23 $ 1.31 (0.01) — (0.02) 2.18 $ 2.23 $ 1.29 909 $ 938 $ (5) — 904 $ 938 $ 568 (13) 555 The accompanying notes are an integral part of these financial statements. 43 44 CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CASH FLOWS In millions, except per share amounts, at December 31 2016 2015 In millions for the years ended December 31 ASSETS Current Assets Cash and temporary investments Accounts and notes receivable, less allowances of $70 in 2016 and $70 in 2015 Inventories Deferred income tax assets Other current assets Total Current Assets Plants, Properties and Equipment, net Forestlands Investments Financial Assets of Special Purpose Entities (Note 12) Goodwill Deferred Charges and Other Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Notes payable and current maturities of long-term debt Accounts payable Accrued payroll and benefits Other accrued liabilities Total Current Liabilities Long-Term Debt Nonrecourse Financial Liabilities of Special Purpose Entities (Note 12) Deferred Income Taxes Pension Benefit Obligation Postretirement and Postemployment Benefit Obligation Other Liabilities Commitments and Contingent Liabilities (Note 11) Equity Common stock $1 par value, 2016 - 448.9 shares & 2015 – 448.9 shares Paid-in capital Retained earnings Accumulated other comprehensive loss Less: Common stock held in treasury, at cost, 2016 – 37.671 shares and 2015 – 36.776 shares Total Shareholders’ Equity Noncontrolling interests Total Equity TOTAL LIABILITIES AND EQUITY $ 1,033 $ 1,050 3,001 2,438 299 198 2,675 2,228 312 212 6,969 6,477 13,990 11,980 456 360 7,033 3,364 1,173 366 228 7,014 3,335 1,131 $ 33,345 $ 30,531 $ 239 $ 426 2,309 430 1,094 4,072 11,075 6,284 3,376 3,400 330 449 449 6,189 4,818 2,078 434 986 3,924 8,844 6,277 3,231 3,548 364 434 449 6,243 4,649 (5,362) (5,708) 6,094 1,753 4,341 18 5,633 1,749 3,884 25 4,359 3,909 $ 33,345 $ 30,531 OPERATING ACTIVITIES Net earnings (loss) Depreciation, amortization, and cost of timber harvested Deferred income tax provision (benefit), net Restructuring and other charges Pension plan contribution Periodic pension expense, net Net (gains) losses on sales and impairments of businesses Equity (earnings) losses, net of taxes Impairment of goodwill and other intangible assets Other, net Changes in current assets and liabilities Accounts and notes receivable Accounts payable and accrued liabilities Inventories Interest payable Other INVESTMENT ACTIVITIES Invested in capital projects Acquisitions, net of cash acquired Proceeds from divestitures Proceeds from spinoff Investment in Special Purpose Entities Proceeds from sale of fixed assets Other FINANCING ACTIVITIES Issuance of common stock Issuance of debt Reduction of debt Change in book overdrafts Dividends paid Debt tender premiums paid Other Acquisition of redeemable noncontrolling interest Effect of Exchange Rate Changes on Cash Change in Cash and Temporary Investments Cash and Temporary Investments Beginning of the period End of the period CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES Repurchase of common stock and payments of restricted stock tax withholding The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements. 2016 2015 2014 $ 902 $ 917 $ 536 1,227 1,294 1,414 281 252 (750) 461 174 (117) 137 153 7 (131) (89) (17) 8 — 23 — 37 (198) (14) (685) — (211) (14) (71) (831) (135) 881 (353) 387 38 200 100 167 (97) (103) (18) (18) 78 411 — — — 61 34 30 (620) (114) (269) (4) (52) 79 (1,487) (1,366) (49) (114) (3,498) (1,739) (860) (605) (1,062) 2 66 6,873 1,982 (6,947) (2,095) 136 54 (750) 809 70 (198) — 157 (94) 11 98 41 15 (1,348) (2,228) 108 — — 19 (132) — 3,830 (1,938) — (733) — (31) (14) 982 21 (17) 1,050 1,881 1,802 $ 1,033 $ 1,050 $ 1,881 CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 2,478 2,580 3,077 CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (1,601) (2,086) 45 46 CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CASH FLOWS In millions, except per share amounts, at December 31 2016 2015 In millions for the years ended December 31 $ 1,033 $ 1,050 Depreciation, amortization, and cost of timber harvested Deferred income tax provision (benefit), net OPERATING ACTIVITIES Net earnings (loss) Restructuring and other charges Pension plan contribution Periodic pension expense, net Net (gains) losses on sales and impairments of businesses Equity (earnings) losses, net of taxes Impairment of goodwill and other intangible assets Other, net Changes in current assets and liabilities Accounts and notes receivable Inventories Accounts payable and accrued liabilities Interest payable Other 2016 2015 2014 $ 902 $ 917 $ 536 1,227 1,294 1,414 136 54 (750) 809 70 (198) — 157 (94) 11 98 41 15 281 252 (750) 461 174 (117) 137 153 7 (131) (89) (17) 8 (135) 881 (353) 387 38 200 100 167 (97) (103) (18) (18) 78 CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 2,478 2,580 3,077 INVESTMENT ACTIVITIES Invested in capital projects Acquisitions, net of cash acquired Proceeds from divestitures Proceeds from spinoff Investment in Special Purpose Entities Proceeds from sale of fixed assets Other CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES FINANCING ACTIVITIES Repurchase of common stock and payments of restricted stock tax withholding Issuance of common stock Issuance of debt Reduction of debt Change in book overdrafts Dividends paid Acquisition of redeemable noncontrolling interest Debt tender premiums paid Other CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES Effect of Exchange Rate Changes on Cash Change in Cash and Temporary Investments Cash and Temporary Investments Beginning of the period End of the period (1,348) (2,228) 108 — — 19 (49) (1,487) (1,366) — 23 — (198) 37 (114) — — 411 — 61 34 (3,498) (1,739) (860) (132) — 3,830 (1,938) — (733) — (31) (14) 982 21 (17) (605) (1,062) 2 66 6,873 1,982 (6,947) (2,095) (14) (685) — (211) (14) 30 (620) (114) (269) (4) (1,601) (2,086) (71) (831) (52) 79 1,050 1,881 1,802 $ 1,033 $ 1,050 $ 1,881 Accounts and notes receivable, less allowances of $70 in 2016 and $70 in 2015 ASSETS Current Assets Cash and temporary investments Inventories Deferred income tax assets Other current assets Total Current Assets Plants, Properties and Equipment, net Forestlands Investments Goodwill Deferred Charges and Other Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Accounts payable Accrued payroll and benefits Other accrued liabilities Total Current Liabilities Long-Term Debt Deferred Income Taxes Pension Benefit Obligation Financial Assets of Special Purpose Entities (Note 12) Notes payable and current maturities of long-term debt Nonrecourse Financial Liabilities of Special Purpose Entities (Note 12) Postretirement and Postemployment Benefit Obligation Commitments and Contingent Liabilities (Note 11) Other Liabilities Equity Paid-in capital Retained earnings Common stock $1 par value, 2016 - 448.9 shares & 2015 – 448.9 shares Total Shareholders’ Equity Noncontrolling interests Total Equity TOTAL LIABILITIES AND EQUITY 6,969 6,477 13,990 11,980 $ 33,345 $ 30,531 $ 239 $ 426 3,001 2,438 299 198 456 360 7,033 3,364 1,173 2,309 430 1,094 4,072 11,075 6,284 3,376 3,400 330 449 449 6,189 4,818 6,094 1,753 4,341 18 2,675 2,228 312 212 366 228 7,014 3,335 1,131 2,078 434 986 3,924 8,844 6,277 3,231 3,548 364 434 449 6,243 4,649 5,633 1,749 3,884 25 4,359 3,909 $ 33,345 $ 30,531 Accumulated other comprehensive loss (5,362) (5,708) Less: Common stock held in treasury, at cost, 2016 – 37.671 shares and 2015 – 36.776 shares The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements. 45 46 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Common Stock Issued Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total International Paper Shareholders’ Equity Noncontrolling Interests Total Equity $ 447 $ 6,463 $ 4,446 $ (2,759) $ 492 $ 8,105 $ 179 $ 8,284 In millions BALANCE, JANUARY 1, 2014 Issuance of stock for various plans, net Repurchase of stock xpedx spinoff Dividends Acquisition of redeemable noncontrolling interests Remeasurement of redeemable noncontrolling interest Comprehensive income (loss) BALANCE, DECEMBER 31, 2014 Issuance of stock for various plans, net Repurchase of stock Dividends Transactions of equity method investees Divestiture of noncontrolling interests Comprehensive income (loss) BALANCE, DECEMBER 31, 2015 Issuance of stock for various plans, net Repurchase of stock Dividends Transactions of equity method investees Divestiture of noncontrolling interests Other Comprehensive income (loss) BALANCE, DECEMBER 31, 2016 $ 2 — — — — — — 69 — (287) — — — — — — — (633) 46 (5) 555 — — — — — — (1,887) (212) 1,062 — — — — — 449 6,245 4,409 (4,646) 1,342 — — — — — — 35 — — (37) — — — — (698) — — 938 — — — — — (1,062) (198) 605 — — — — 449 6,243 4,649 (5,708) 1,749 — — — — — — — (6) — — (48) — — — — — (743) — — 8 904 — — — — — — 346 (128) 132 — — — — — 283 (1,062) (287) (633) 46 (5) (1,332) 5,115 233 (605) (698) (37) — (124) 3,884 122 (132) (743) (48) — 8 1,250 — — — — — — 283 (1,062) (287) (633) 46 (5) (31) (1,363) 148 5,263 — — — — (96) (27) 25 — — — — (3) — (4) 233 (605) (698) (37) (96) (151) 3,909 122 (132) (743) (48) (3) 8 1,246 449 $ 6,189 $ 4,818 $ (5,362) $ 1,753 $ 4,341 $ 18 $ 4,359 CONSOLIDATION The accompanying notes are an integral part of these financial statements. 47 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS International Paper (the Company) is a global paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. FINANCIAL STATEMENTS These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require the use of management’s estimates. Actual results could differ from management’s estimates. Prior-period amounts have been adjusted to conform with current year presentation. During the fourth quarter of 2016, the Company finalized its purchase of Weyerhaeuser's pulp business (see Note 6). Subsequent to the acquisition, the Company began reporting Global Cellulose Fibers as a separate business segment in the fourth quarter of 2016 due to the increased materiality of the results of this business. This segment includes the Company's legacy pulp business and the newly acquired pulp business. As such, amounts related to the legacy pulp business have been reclassified out of the Printing Papers' business segment and included in the new Global Cellulose Fibers business segment for all prior periods to conform with current year presentation. The consolidated financial statements include the accounts of International Paper and its wholly-owned, controlled majority-owned and financially controlled subsidiaries. All significant intercompany balances and transactions are eliminated. Investments in affiliated companies where the Company has significant influence over their operations are accounted for by the equity method. International Paper’s share of affiliates’ results of operations totaled earnings (loss) of $198 million, $117 million and $(200) million in 2016, 2015 and 2014, respectively. REVENUE RECOGNITION Revenue is recorded at the time of shipment for terms designated f.o.b. (free on board) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site, when title and risk of loss are transferred. Timber and forestland sales revenue is generally recognized when title and risk of loss pass to the buyer. SHIPPING AND HANDLING COSTS Shipping and handling costs, such as freight to our customers’ destinations, are included in distribution expenses in the consolidated statement of operations. When shipping and handling costs are included in the sales price charged for our products, they are recognized in net sales. ANNUAL MAINTENANCE COSTS Costs for repair and maintenance activities are expensed in the month that the related activity is performed under the direct expense method of accounting. TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market value. INVENTORIES Inventories are valued at the lower of cost or market value and include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. In the United States, costs of raw materials and finished pulp and paper products, are generally determined using the last-in, first-out method. Other inventories are valued using the first-in, first-out or average cost methods. PLANTS, PROPERTIES AND EQUIPMENT Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized, whereas normal repairs and maintenance are expensed as incurred. The units- of-production method of depreciation is used for pulp and paper mills, and the straight-line method is used for other plants and equipment. Annual straight-line depreciation rates generally are, for buildings — 2.50% to 5.00%, and for machinery and equipment — 5% to 33%. FORESTLANDS Revenue is recognized when the customer takes title and assumes the risks and rewards of ownership. At December 31, 2016, International Paper and its subsidiaries owned or managed approximately 329,000 acres of forestlands in Brazil, and through 449 6,245 4,409 (4,646) 1,342 (1,887) (31) (1,363) 148 5,263 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Common Stock Issued Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Shareholders’ Noncontrolling Equity Interests Total Equity International Total Paper $ 447 $ 6,463 $ 4,446 $ (2,759) $ 492 $ 8,105 $ 179 $ 8,284 In millions BALANCE, JANUARY 1, 2014 Issuance of stock for various plans, net Repurchase of stock xpedx spinoff Dividends Acquisition of redeemable noncontrolling interests Remeasurement of redeemable noncontrolling Comprehensive income interest (loss) 2014 BALANCE, DECEMBER 31, Issuance of stock for various plans, net Repurchase of stock Dividends Transactions of equity method investees Divestiture of noncontrolling interests Comprehensive income BALANCE, DECEMBER 31, (loss) 2015 Issuance of stock for various plans, net Repurchase of stock Dividends Transactions of equity method investees Divestiture of noncontrolling interests Other (loss) 2016 Comprehensive income BALANCE, DECEMBER 31, 2 — — — — — — — — — — — — — — — — — — — (287) 69 — — — — — 35 — — — — (37) (6) — — (48) — — — — — — 46 (633) (5) 555 (698) — — — — — — — — 8 (743) 904 346 The accompanying notes are an integral part of these financial statements. 938 (1,062) 449 6,243 4,649 (5,708) 1,749 — — — — — — — — — — — — — — — — — (212) 1,062 — — — — — — — — — — — — — — (198) 605 (128) 132 283 (1,062) (287) (633) 46 (5) (1,332) 5,115 233 (605) (698) (37) — (124) 3,884 122 (132) (743) (48) — 8 1,250 — — — — — — — — — — (96) (27) 25 — — — — (3) — (4) 283 (1,062) (287) (633) 46 (5) 233 (605) (698) (37) (96) (151) 3,909 122 (132) (743) (48) (3) 8 1,246 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS International Paper (the Company) is a global paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. FINANCIAL STATEMENTS These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require the use of management’s estimates. Actual results could differ from management’s estimates. Prior-period amounts have been adjusted to conform with current year presentation. During the fourth quarter of 2016, the Company finalized its purchase of Weyerhaeuser's pulp business (see Note 6). Subsequent to the acquisition, the Company began reporting Global Cellulose Fibers as a separate business segment in the fourth quarter of 2016 due to the increased materiality of the results of this business. This segment includes the Company's legacy pulp business and the newly acquired pulp business. As such, amounts related to the legacy pulp business have been reclassified out of the Printing Papers' business segment and included in the new Global Cellulose Fibers business segment for all prior periods to conform with current year presentation. $ 449 $ 6,189 $ 4,818 $ (5,362) $ 1,753 $ 4,341 $ 18 $ 4,359 CONSOLIDATION The consolidated financial statements include the accounts of International Paper and its wholly-owned, controlled majority-owned and financially controlled subsidiaries. All significant intercompany balances and transactions are eliminated. in affiliated companies where the Investments Company has significant influence over their operations are accounted for by the equity method. International Paper’s share of affiliates’ results of operations totaled earnings (loss) of $198 million, $117 million and $(200) million in 2016, 2015 and 2014, respectively. transactions designated Revenue is recorded at the time of shipment for terms designated f.o.b. (free on board) shipping point. For sales f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site, when title and risk of loss are transferred. Timber and forestland sales revenue is generally recognized when title and risk of loss pass to the buyer. SHIPPING AND HANDLING COSTS Shipping and handling costs, such as freight to our customers’ destinations, are included in distribution expenses in the consolidated statement of operations. When shipping and handling costs are included in the sales price charged for our products, they are recognized in net sales. ANNUAL MAINTENANCE COSTS Costs for repair and maintenance activities are expensed in the month that the related activity is performed under the direct expense method of accounting. TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market value. INVENTORIES Inventories are valued at the lower of cost or market value and include all costs directly associated with labor and manufacturing products: materials, manufacturing overhead. In the United States, costs of raw materials and finished pulp and paper products, are generally determined using the last-in, first-out method. Other inventories are valued using the first-in, first-out or average cost methods. PLANTS, PROPERTIES AND EQUIPMENT Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized, whereas normal repairs and maintenance are expensed as incurred. The units- of-production method of depreciation is used for pulp and paper mills, and the straight-line method is used for other plants and equipment. Annual straight-line depreciation rates generally are, for buildings — 2.50% to 5.00%, and for machinery and equipment — 5% to 33%. 47 48 REVENUE RECOGNITION FORESTLANDS Revenue is recognized when the customer takes title and assumes the risks and rewards of ownership. At December 31, 2016, International Paper and its subsidiaries owned or managed approximately 329,000 acres of forestlands in Brazil, and through licenses and forest management agreements, had harvesting rights on government-owned forestlands in Russia. Costs attributable to timber are expensed as trees are cut. The rate charged is determined annually based on the relationship of incurred costs to estimated current merchantable volume. GOODWILL Goodwill relating to a single business reporting unit is included as an asset of the applicable segment. For goodwill impairment testing, this goodwill is allocated to reporting units. Annual testing for possible goodwill impairment is performed as of the beginning of the fourth quarter of each year, with additional interim testing performed when management believes that it is more likely than not events or circumstances have occurred that would result in the impairment of a reporting unit’s goodwill. In performing this testing, the Company estimates the fair value of its reporting units using the projected future cash flows to be generated by each unit, discounted for each reporting unit. These estimated fair values are then analyzed for reasonableness by comparing them to historic market transactions for businesses in the industry, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares outstanding to the Company’s traded stock price on the testing date. For reporting units whose recorded value of net assets plus goodwill is in excess of their estimated fair values, the fair values of the individual assets and liabilities of the respective reporting units are then determined to calculate the amount of any goodwill impairment charge required. See Note 9 for further discussion. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, measured by comparing their net book value to the undiscounted projected future cash flows generated by their use. Impaired assets are recorded at their estimated fair value. INCOME TAXES for the taxes are recorded International Paper uses the asset and liability method of accounting for income taxes whereby deferred income tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are remeasured to future reflect new tax rates in the periods rate changes are enacted. International Paper records its worldwide tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering the technical merits of the position based on specific tax regulations and the facts of each matter. Changes to recorded liabilities are made only when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, a change in tax laws, or a recent court case that addresses the matter. While the judgments and estimates made by the Company are based on management’s evaluation of the technical merits of a matter, assisted as necessary by consultation with outside consultants, historical experience and other assumptions that management believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. ENVIRONMENTAL REMEDIATION COSTS Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable. TRANSLATION OF FINANCIAL STATEMENTS international operations are Balance sheets of translated into U.S. dollars at year-end exchange rates, while statements of operations are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated other comprehensive loss. NOTE 2 RECENT ACCOUNTING DEVELOPMENTS Other than as described below, no new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements. VARIABLE INTEREST ENTITIES In October 2016, the FASB issued ASU 2016-17, "Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control." Under consolidation guidance in ASU 2015-02 issued by the FASB in 2015, a single decision maker was required to consider an indirect interest held by a related party under common control in its entirety. Under the new guidance, the single decision maker will consider that indirect interest on a proportionate basis. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. This guidance should be applied retrospectively to all relevant prior periods beginning with the fiscal years in which ASU 2015-02 was initially applied. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and will adopt this ASU in the first quarter of 2017. INCOME TAXES In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs rather than defer the income tax effects which is current practice. This new guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): "Balance Classification of Deferred Taxes." This ASU requires entities to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and will adopt this ASU in the first quarter of 2017. CASH FLOW CLASSIFICATION In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods with those years and must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. STOCK COMPENSATION In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): "Improvements to Employee Share-Based Payment Accounting." Under this new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur and will therefore impact the Company's effective tax rate. This guidance replaces current guidance which requires tax benefits that exceed compensation costs (windfalls) to be recognized in equity. The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows rather than financing activities as they are currently classified. In addition, the new guidance will allow companies to provide net settlement of stock-based compensation to cover tax withholding as long as the net settlement doesn't exceed the maximum individual statutory tax rate in the employee's tax jurisdiction. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods with those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance. INVESTMENTS - EQUITY METHOD AND JOINT VENTURES In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): "Simplifying the Transition to the Equity Method of Accounting." The amendments in the ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in 49 50 licenses and forest management agreements, had reflect new tax rates in the periods rate changes are VARIABLE INTEREST ENTITIES harvesting rights on government-owned forestlands in enacted. Russia. Costs attributable to timber are expensed as trees are cut. The rate charged is determined annually International Paper records its worldwide tax provision based on the relationship of incurred costs to estimated based on the respective tax rules and regulations for current merchantable volume. GOODWILL Goodwill relating to a single business reporting unit is included as an asset of the applicable segment. For goodwill impairment testing, this goodwill is allocated to reporting units. Annual testing for possible goodwill impairment is performed as of the beginning of the fourth quarter of each year, with additional interim testing performed when management believes that it is more likely than not events or circumstances have occurred that would result in the impairment of a reporting unit’s goodwill. In performing this testing, the Company estimates the fair value of its reporting units using the projected future cash flows to be generated by each unit, discounted for each reporting unit. These estimated fair values are then analyzed for reasonableness by comparing them to historic market transactions for businesses in the industry, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares outstanding to the Company’s traded stock price on the testing date. For reporting units whose recorded value of net assets plus goodwill is in excess of their estimated fair values, the fair values of the individual assets and liabilities of the required. See Note 9 for further discussion. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, measured by comparing their net book value to the undiscounted projected future cash flows generated by their use. Impaired assets are recorded at their estimated fair value. INCOME TAXES International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are remeasured to the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering the technical merits of the position based on specific tax regulations and the facts of each matter. Changes to recorded liabilities are made only when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, a change in tax laws, or a recent court case that addresses the matter. While the judgments and estimates made by the Company are based on management’s evaluation of the technical merits of a matter, assisted as necessary by consultation with outside consultants, historical experience and other assumptions that management believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. ENVIRONMENTAL REMEDIATION COSTS and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable. TRANSLATION OF FINANCIAL STATEMENTS Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of operations are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated other comprehensive loss. NOTE 2 RECENT ACCOUNTING DEVELOPMENTS Other than as described below, no new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements. respective reporting units are then determined to Costs associated with environmental remediation calculate the amount of any goodwill impairment charge obligations are accrued when such costs are probable In October 2016, the FASB issued ASU 2016-17, "Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control." Under consolidation guidance in ASU 2015-02 issued by the FASB in 2015, a single decision maker was required to consider an indirect interest held by a related party under common control in its entirety. Under the new guidance, the single decision maker will consider that indirect interest on a proportionate basis. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. This guidance should be applied retrospectively to all relevant prior periods beginning with the fiscal years in which ASU 2015-02 was initially applied. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and will adopt this ASU in the first quarter of 2017. INCOME TAXES In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs rather than defer the income tax effects which is current practice. This new guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): "Balance Classification of Deferred Taxes." This ASU requires entities to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and will adopt this ASU in the first quarter of 2017. CASH FLOW CLASSIFICATION In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual reporting 49 50 periods beginning after December 15, 2017, and interim periods with those years and must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. STOCK COMPENSATION In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): "Improvements to Employee Share-Based Payment Accounting." Under this new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur and will therefore impact the Company's effective tax rate. This guidance replaces current guidance which requires tax benefits that exceed compensation costs (windfalls) to be recognized in equity. The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows rather than financing activities as they are currently classified. In addition, the new guidance will allow companies to provide net settlement of stock-based compensation to cover tax withholding as long as the net settlement doesn't exceed the maximum individual statutory tax rate in the employee's tax jurisdiction. Amendments related to the timing of when excess tax benefits are recognized, minimum withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods with those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance. statutory INVESTMENTS - EQUITY METHOD AND JOINT VENTURES In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): "Simplifying the Transition to the Equity Method of Accounting." The amendments in the ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and should be applied prospectively upon the effective date. Early adoption is permitted. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. DERIVATIVES AND HEDGING Also in March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in this ASU apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, and allows for the amendments to be applied on either a prospective basis or a modified retrospective basis. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. LEASES In February 2016, the FASB issued ASU 2016-02, Leases Topic (842): "Leases." This ASU will require most leases to be recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting will remain substantially similar to current U.S. GAAP. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, and mandates a modified retrospective transition method for all entities. The Company expects to adopt this guidance using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to recognize a liability 51 and corresponding asset associated with in-scope operating and finance leases but we are still in the process of determining those amounts and the processes required to account for leasing activity on an ongoing basis. BUSINESS COMBINATIONS In September 2015, the FASB issued ASU 2015-16, "Business Combinations - Simplifying the Accounting for Measurement Period Adjustments." This ASU provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date. The Company adopted this guidance during 2016 with no material impact on the consolidated financial statements. INVENTORY "Simplifying In July 2015, the FASB issued ASU 2015-11, Inventory the Measurement of (Topic 330): Inventory." This ASU provides that entities should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and is transportation. Subsequent measurement unchanged for inventory measured using LIFO or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. FAIR VALUE MEASUREMENT the existing requirement In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." This to guidance eliminates categorize within the fair value hierarchy investments whose fair values are measured at net asset value (NAV) using the practical expedient in ASC 820. Instead entities are required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those years and should be applied retrospectively. The Company adopted the provisions of this guidance in impact to be the additional required disclosures around 2016 with no material impact on the consolidated revenue recognition in the notes to the consolidated financial statements. DEBT ISSUANCE COSTS In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs)," which simplifies the balance sheet presentation of the costs for issuing debt. This ASU was effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements. REVENUE RECOGNITION In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This guidance replaces most existing revenue recognition guidance and provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and permits the use of either the retrospective or cumulative effect transition method; however, in August 2015, the FASB issued ASU 2015-14 which defers the effective date by one year making the guidance effective for annual reporting periods beginning after December 15, 2017. The FASB has continued to clarify this guidance in various updates during 2015 and 2016, all of which, have the same effective date as the original guidance. We are currently evaluating the impact of ASU 2014-09 and all related ASU's on our consolidated financial statements. We plan to adopt the new revenue guidance effective January 1, 2018 using the full retrospective transition method. The Company does not expect the impact on its consolidated financial statements to be material and we anticipate the primary NOTE 4 OTHER COMPREHENSIVE INCOME financial statements. NOTE 3 EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per share is computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares. A reconciliation of the amounts included in the computation of basic earnings (loss) per share from continuing operations, and diluted earnings (loss) per share from continuing operations is as follows: In millions, except per share amounts operations Earnings (loss) from continuing 2016 2015 2014 $ 909 $ 938 $ 568 Effect of dilutive securities — — — Earnings (loss) from continuing operations – assuming dilution $ 909 $ 938 $ 568 Average common shares outstanding Effect of dilutive securities: Restricted performance share plan Stock options (a) Average common shares 411.1 417.4 427.7 4.5 — 3.2 — 4.2 0.1 outstanding – assuming dilution 415.6 420.6 432.0 Basic earnings (loss) per share from continuing operations Diluted earnings (loss) per share from continuing operations $ 2.21 $ 2.25 $ 1.33 $ 2.19 $ 2.23 $ 1.31 (a) Options to purchase shares were not included in the computation of diluted common shares outstanding if their exercise price exceeded the average market price of the Company’s common stock for each respective reporting date. The following table presents changes in AOCI for the year ended December 31, 2016: In millions Balance as of December 31, 2015 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (3,169) $ (2,549) $ 10 $ (448) 545 97 — 263 (3) 260 2 (6) (7) (13) — (5,708) (191) 535 344 2 Balance as of December 31, 2016 (3,072) $ (2,287) $ (3) $ (5,362) (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. $ $ 52 the level of ownership interest or degree of influence, and corresponding asset associated with in-scope an investor must adjust the investment, results of operating and finance leases but we are still in the operations, and retained earnings retroactively on a process of determining those amounts and the step-by-step basis as if the equity method had been in processes required to account for leasing activity on an effect during all previous periods that the investment ongoing basis. Also in March 2016, the FASB issued ASU 2016-05, financial statements. had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and should be applied prospectively upon the effective date. Early adoption is permitted. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. DERIVATIVES AND HEDGING Derivatives and Hedging (Topic 815): "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in this ASU apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, and allows for the amendments to be applied on either a prospective basis or a modified retrospective basis. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. LEASES In February 2016, the FASB issued ASU 2016-02, Leases Topic (842): "Leases." This ASU will require most leases to be recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting will remain substantially similar to current U.S. GAAP. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, and mandates a modified retrospective transition method for all entities. The Company expects to adopt this guidance using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to recognize a liability BUSINESS COMBINATIONS In September 2015, the FASB issued ASU 2015-16, "Business Combinations - Simplifying the Accounting for Measurement Period Adjustments." This ASU provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date. The Company adopted this guidance during 2016 with no material impact on the consolidated INVENTORY In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): "Simplifying the Measurement of Inventory." This ASU provides that entities should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company early adopted this guidance during 2016 with no material impact on the consolidated financial statements. FAIR VALUE MEASUREMENT In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." This guidance eliminates the existing requirement to categorize within the fair value hierarchy investments whose fair values are measured at net asset value (NAV) using the practical expedient in ASC 820. Instead entities are required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those years and should be applied retrospectively. The Company adopted the provisions of this guidance in 2016 with no material impact on the consolidated financial statements. impact to be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements. DEBT ISSUANCE COSTS In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs)," which simplifies the balance sheet presentation of the costs for issuing debt. This ASU was effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements. REVENUE RECOGNITION In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This guidance replaces most existing revenue recognition guidance and provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and permits the use of either the retrospective or cumulative effect transition method; however, in August 2015, the FASB issued ASU 2015-14 which defers the effective date by one year making the guidance effective for annual reporting periods beginning after December 15, 2017. The FASB has continued to clarify this guidance in various updates during 2015 and 2016, all of which, have the same effective date as the original guidance. We are currently evaluating the impact of ASU 2014-09 and all related ASU's on our consolidated financial statements. We plan to adopt the new revenue guidance effective January 1, 2018 using the full retrospective transition method. The Company does not expect financial statements to be material and we anticipate the primary its consolidated impact on the NOTE 3 EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per share is computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares. A reconciliation of the amounts included in the computation of basic earnings (loss) per share from continuing operations, and diluted earnings (loss) per share from continuing operations is as follows: In millions, except per share amounts Earnings (loss) from continuing operations 2016 2015 2014 $ 909 $ 938 $ 568 Effect of dilutive securities — — — Earnings (loss) from continuing operations – assuming dilution $ 909 $ 938 $ 568 Average common shares outstanding Effect of dilutive securities: Restricted performance share plan Stock options (a) 411.1 417.4 427.7 4.5 — 3.2 — 4.2 0.1 Average common shares outstanding – assuming dilution Basic earnings (loss) per share from continuing operations Diluted earnings (loss) per share from continuing operations 415.6 420.6 432.0 $ 2.21 $ 2.25 $ 1.33 $ 2.19 $ 2.23 $ 1.31 (a) Options to purchase shares were not included in the computation of diluted common shares outstanding if their exercise price exceeded the average market price of the Company’s common stock for each respective reporting date. NOTE 4 OTHER COMPREHENSIVE INCOME The following table presents changes in AOCI for the year ended December 31, 2016: In millions Balance as of December 31, 2015 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Balance as of December 31, 2016 Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (3,169) $ (2,549) $ 10 $ (448) 545 97 — 263 (3) 260 2 (6) (7) (13) — (5,708) (191) 535 344 2 (3,072) $ (2,287) $ (3) $ (5,362) $ $ (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. 51 52 The following table presents changes in AOCI for the year ended December 31, 2015: OTHER ITEMS NOTE 5 RESTRUCTURING CHARGES AND NOTE 6 ACQUISITIONS AND JOINT VENTURES In millions Balance as of December 31, 2014 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Balance as of December 31, 2015 Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (3,134) $ (1,513) $ 1 $ (331) 296 (35) — (1,002) (40) (1,042) 6 (3) 12 9 — (3,169) $ (2,549) $ 10 $ $ $ (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. The following table presents changes in AOCI for the year ended December 31, 2014: In millions Balance as of December 31, 2013 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Balance as of December 31, 2014 Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (2,105) $ (649) $ (5) $ (1,271) 242 (1,029) — (863) (13) (876) 12 10 (4) 6 — (3,134) $ (1,513) $ 1 $ $ $ (4,646) (1,336) 268 (1,068) 6 (5,708) (2,759) (2,124) 225 (1,899) 12 (4,646) (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. The following table presents details of the reclassifications out of AOCI for the three years ended: Details About Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income (a) 2016 2015 2014 Location of Amount Reclassified from AOCI In millions Defined benefit pension and postretirement items: Prior-service costs Actuarial gains/(losses) Total pre-tax amount Tax (expense)/benefit Net of tax Change in cumulative foreign currency translation adjustments: $ Business acquisition/divestiture Tax (expense)/benefit Net of tax Net gains and losses on cash flow hedging derivatives: Foreign exchange contracts Total pre-tax amount Tax (expense)/benefit Net of tax (37) $ (851) (888) 343 (545) 3 — 3 10 10 (3) 7 (33) $ (17) (b) Cost of products sold (449) (482) 186 (296) 40 — 40 (20) (20) 8 (12) (379) (b) Cost of products sold (396) 154 (242) 13 — 13 Net (gains) losses on sales and impairments of businesses or Retained earnings 3 (c) Cost of products sold 3 1 4 Total reclassifications for the period $ (535) $ (268) $ (225) (a) Amounts in parentheses indicate debits to earnings/loss. (b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details). (c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 14 for additional employees. details). 2016: During 2016, total restructuring and other charges of $54 million before taxes were recorded. These charges included: In millions 2016 Early debt extinguishment costs (see Note 13) India packaging evaluation write-off Gain on sale of investment in Arizona Chemical Riegelwood mill conversion costs (a) Turkey mill closure (b) Total $ $ 29 17 (8) 9 7 54 (a) Includes $3 million of accelerated depreciation, $3 million of inventory write-off charges and $3 million of other charges. (b) Includes $4 million of accelerated depreciation and $3 million of severance charges which is related to 85 employees. 2015: During 2015, total restructuring and other charges of $252 million before taxes were recorded. These charges included: In millions Early debt extinguishment costs (see Note 13) $ Timber monetization restructuring Legal liability reserve adjustment Riegelwood mill conversion costs net of proceeds from the sale of Carolina Coated Bristols brand (a) 207 16 15 8 6 $ 252 Other Total (a) Includes $5 million of severance charges, which is related to 69 employees, $24 million of accelerated depreciation, sale proceeds of $22 million and $1 million of other charges. 2014: During 2014, total restructuring and other charges of $846 million before taxes were recorded. These charges included: Early debt extinguishment costs (see Note 13) Courtland mill shutdown (a) In millions Other (b) Total 2014 276 554 16 846 $ $ (a) Includes $464 million of accelerated depreciation, $24 million of inventory impairment charges, $26 million of severance charges related to 49 employees and $40 million of other charges which are recorded in the Printing Papers segment. (b) Includes $15 million of severance charges related to 908 2015 In millions Cash and temporary investments $ WEYERHAEUSER PULP BUSINESS 2016: On December 1, 2016, the Company finalized the purchase of Weyerhaeuser's pulp business for approximately $2.2 billion in cash, subject to post- closing adjustments. Under the terms of the agreement, International Paper acquired four fluff pulp mills, one northern bleached softwood kraft mill and two converting facilities of modified fiber, located in the United States, Canada and Poland. The Company is accounting for the acquisition under ASC 805, "Business Combinations" and the newly acquired pulp business's results of operations have been included in International Paper's consolidated financial statements beginning with the date of acquisition. The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of December 1, 2016. Plants, properties and equipment 1,711 Accounts and notes receivable Inventory Other current assets Goodwill Other intangible assets Deferred charges and other assets Total assets acquired Accounts payable and accrued liabilities Long-term debt Other long-term liabilities Total liabilities assumed Net assets acquired 12 195 254 11 19 212 6 111 104 22 237 2,420 $ 2,183 Due to the timing of the completion of the acquisition, the purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding assets acquired and liabilities assumed, and revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to inventory, property, plant and equipment and intangible assets. These changes to the purchase price allocation could be significant. The purchase price allocation will be finalized within the measurement period of up to one year from the acquisition date. 53 54 NOTE 5 RESTRUCTURING CHARGES AND OTHER ITEMS NOTE 6 ACQUISITIONS AND JOINT VENTURES WEYERHAEUSER PULP BUSINESS 2016: During 2016, total restructuring and other charges of $54 million before taxes were recorded. These charges included: In millions 2016 Early debt extinguishment costs (see Note 13) India packaging evaluation write-off Gain on sale of investment in Arizona Chemical Riegelwood mill conversion costs (a) Turkey mill closure (b) Total $ $ 29 17 (8) 9 7 54 (a) Includes $3 million of accelerated depreciation, $3 million of inventory write-off charges and $3 million of other charges. (b) Includes $4 million of accelerated depreciation and $3 million of severance charges which is related to 85 employees. 2016: On December 1, 2016, the Company finalized the purchase of Weyerhaeuser's pulp business for approximately $2.2 billion in cash, subject to post- closing adjustments. Under the terms of the agreement, International Paper acquired four fluff pulp mills, one northern bleached softwood kraft mill and two converting facilities of modified fiber, located in the United States, Canada and Poland. The Company is accounting for the acquisition under ASC 805, "Business Combinations" and the newly acquired pulp business's results of operations have been included in International Paper's consolidated financial statements beginning with the date of acquisition. 2015: During 2015, total restructuring and other charges of $252 million before taxes were recorded. These charges included: following The the preliminary table summarizes allocation of the purchase price to the fair value of assets and liabilities acquired as of December 1, 2016. Balance as of December 31, 2014 (3,134) $ (1,513) $ 1 $ In millions 2015 In millions The following table presents changes in AOCI for the year ended December 31, 2015: In millions Balance as of December 31, 2014 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (3,134) $ (1,513) $ 1 $ (331) 296 (35) — (1,002) (40) (1,042) 6 Balance as of December 31, 2015 (3,169) $ (2,549) $ 10 $ (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. The following table presents changes in AOCI for the year ended December 31, 2014: In millions Balance as of December 31, 2013 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net Current Period Other Comprehensive Income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Defined Benefit Pension and Postretirement Items (a) Change in Cumulative Foreign Currency Translation Adjustments (a) Net Gains and Losses on Cash Flow Hedging Derivatives (a) Total (a) (2,105) $ (649) $ (5) $ (1,271) 242 (1,029) — (863) (13) (876) 12 (3) 12 9 — 10 (4) 6 — (4,646) (1,336) 268 (1,068) 6 (5,708) (2,759) (2,124) 225 (1,899) 12 (4,646) (a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. The following table presents details of the reclassifications out of AOCI for the three years ended: Details About Accumulated Other Comprehensive Income Amount Reclassified from Accumulated Other Comprehensive Income (a) 2016 2015 2014 Location of Amount Reclassified from AOCI Defined benefit pension and postretirement items: $ (33) $ (17) (b) Cost of products sold (379) (b) Cost of products sold Change in cumulative foreign currency translation adjustments: Net gains and losses on cash flow hedging derivatives: Components In millions Prior-service costs Actuarial gains/(losses) Total pre-tax amount Tax (expense)/benefit Net of tax Business acquisition/divestiture Tax (expense)/benefit Net of tax Foreign exchange contracts Total pre-tax amount Tax (expense)/benefit Net of tax additional details). details). $ $ $ $ (37) $ (851) (888) 343 (545) 3 — 3 10 10 (3) 7 53 Early debt extinguishment costs (see Note 13) $ Timber monetization restructuring Legal liability reserve adjustment Riegelwood mill conversion costs net of proceeds from the sale of Carolina Coated Bristols brand (a) Other Total 207 16 15 8 6 $ 252 (449) (482) 186 (296) 40 — 40 (20) (20) 8 (12) (396) 154 (242) 13 — 13 3 1 4 Net (gains) losses on sales and impairments of businesses or Retained earnings 3 (c) Cost of products sold (a) Includes $5 million of severance charges, which is related to 69 employees, $24 million of accelerated depreciation, sale proceeds of $22 million and $1 million of other charges. 2014: During 2014, total restructuring and other charges of $846 million before taxes were recorded. These charges included: In millions Early debt extinguishment costs (see Note 13) Courtland mill shutdown (a) Other (b) Total 2014 276 554 16 846 $ $ (a) Includes $464 million of accelerated depreciation, $24 million of inventory impairment charges, $26 million of severance charges related to 49 employees and $40 million of other charges which are recorded in the Printing Papers segment. (b) Includes $15 million of severance charges related to 908 Total reclassifications for the period $ (535) $ (268) $ (225) (a) Amounts in parentheses indicate debits to earnings/loss. (b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for (c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 14 for additional employees. Due to the timing of the completion of the acquisition, the purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding assets acquired and liabilities assumed, and revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to inventory, property, plant and equipment and intangible assets. These changes to the purchase price allocation could be significant. The purchase price allocation will be finalized within the measurement period of up to one year from the acquisition date. 54 Accounts and notes receivable Inventory Other current assets Plants, properties and equipment Goodwill Other intangible assets Deferred charges and other assets Total assets acquired Accounts payable and accrued liabilities Long-term debt Other long-term liabilities Total liabilities assumed Net assets acquired 12 195 254 11 1,711 19 212 6 2,420 111 104 22 237 $ 2,183 Cash and temporary investments $ In connection with the purchase price allocation, inventories were written up by $33 million to their estimated fair value. During December 2016, $19 million before taxes ($12 million after taxes) were expensed to Cost of products sold as the related inventory was sold. Since the date of acquisition, Net sales of $111 million and Earnings (loss) from continuing operations before income taxes and equity earnings of $(21) million from the acquired business have been included in the Company's consolidated statement of operations. Additionally, Selling and administrative expenses for 2016 include $28 million in charges before taxes ($18 million after taxes) for integration costs associated with the acquisition. identifiable The in connection with the acquisition of the Weyerhaeuser pulp business included the following: intangible assets acquired In millions Asset Class: Customer relationships and lists Trade names, patents, trademarks and developed technology Other Total Average Remaining Useful Life (at acquisition date) 24 years 8 years 10 years Estimated Fair Value $ $ 95 113 4 212 On an unaudited pro forma basis, assuming the acquisition of the newly acquired pulp business had closed January 1, 2015, the consolidated results would have reflected Net sales of $22.4 billion and $23.9 billion and Earnings (loss) from continuing operations before income taxes and equity earnings of $1.1 billion and $1.4 billion for the years ended December 31, 2016 and 2015, respectively. The 2016 pro forma information includes adjustments for additional amortization expense on identifiable intangible assets of $18 million and eliminating the write-off of the estimated fair value of inventory of $19 million and non-recurring integration costs associated with the acquisition of $30 million. The 2015 pro forma information includes adjustments for additional amortization expense on identifiable intangible assets of $18 million, non-recurring integration costs associated with the acquisition of $30 million, and incremental expense of $33 million associated with the write-off of the estimated fair value of inventory. forma consolidated financial The unaudited pro information was prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may have differed materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to represent International Paper's actual results of operations as if the transaction described above would have occurred as of January 1, 2015, nor is it necessarily an indicator of future results. HOLMEN PAPER NEWSPRINT MILL 2016: On June 30, 2016, the Company completed the previously announced acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill, as well as, associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill during the second half of 2017 to produce recycled containerboard with an expected capacity of 419,000 tons. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA. The Company's aggregated purchase price for the mill, recycling operations and 50% ownership of the cogeneration facility was €53 million (approximately $59 million using June 30, 2016 exchange rate). The measurement period adjustments recognized in the third and fourth quarters of 2016 were to reallocate the purchase price from property, plant and equipment to the specific asset and liability balance sheet line items. Approximately $60 million of the purchase price was allocated to property, plant and equipment, $14 million to current assets (primarily cash and accounts receivable), $7 million to equity method investments, $3 million to long-term assets, $9 million to short-term liabilities and $16 million to long-term liabilities related to a supply contract entered into with the seller. The initial valuation amounts are not considered complete as of December 31, 2016 as tax implications of the valuation amounts are still being considered, however, their impacts are not expected to be material to the Company. The amount of revenue and earnings recognized since the acquisition date are $90 million and a net loss of $2 million, respectively, for the year ended December 31, 2016. Pro forma information related to the acquisition of the Holmen businesses has not been included as it is impractical to obtain the information due to the lack of availability of financial data and does not have a material effect on the Company's consolidated results of operations. ORSA 2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalangens S.A. (Orsa IP) from its joint venture partner, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Jari company, for approximately $127 million, all periods presented in the consolidated statement of of which $105 million was paid in cash with the operations: consolidated balance sheet. The net difference Earnings remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. An additional $11 million, which was not included in the purchase price, was placed in an escrow account pending resolution of certain open matters. During 2014, these open matters were successfully resolved, which resulted in $9 million paid out of escrow to Jari and correspondingly added to the final purchase consideration. The remaining $2 million was released back to the Company. As a result of this transaction, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 between the Redeemable noncontrolling interest balance plus $14 million of currency translation adjustment reclassified out of Other comprehensive income less the 25% purchase price was reflected as an increase to Retained earnings on the consolidated balance sheet. In the fourth quarter of 2016, International Paper released the amount held back for indemnification obligations, net of certain claims. Cash of $10 million was paid to Jari, which included $3 million of accrued interest. The remaining unpaid balance of $12 million was reversed in the third quarter of 2016 with $8 million recorded to Retained earnings as a final purchase price adjustment, and $3 million to interest expense. DISCONTINUED OPERATIONS 2014: On July 1, 2014, International Paper completed the spinoff of its distribution business, xpedx, which subsequently merged with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv). The xpedx business had historically represented the Company's Distribution reportable segment. The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received a payment of approximately $411 million, financed with new debt in Veritiv's capital structure. All historical operating results for xpedx are included in Discontinued operations, net of tax, in the accompanying consolidated statement of operations. The following summarizes the major classes of line items comprising Earnings (Loss) Before Income Taxes and Equity Earnings reconciled to Discontinued Operations, net of tax, related to the xpedx spinoff for In millions Net Sales Costs and Expenses Cost of products sold Selling and administrative expenses Depreciation, amortization and cost of timber harvested Distribution expenses Restructuring and other charges Impairment of goodwill and other intangibles Other, net Earnings (Loss) Before Income Taxes and Equity Income tax provision (benefit) Discontinued Operations, Net of Taxes (a) $ 2014 $ 2,604 2,309 191 9 69 25 — 3 (2) (1) (1) (a) These amounts, along with those disclosed below related to the Temple-Inland Building Products divestitures, are included in Discontinued operations, net of tax, in the consolidated statement of operations. Total cash provided by operations related to xpedx of $29 million for 2014 is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash provided by (used for) investing activities related to xpedx of $3 million for 2014 is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows. 2016: On March 14, 2016, the Company announced that it had entered into a definitive agreement to sell its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. The sale of this business was completed on June 30, 2016. Under the terms of the transaction and after post-closing adjustments, International Paper received a total of approximately RMB 957 million (approximately $144 million at the June 30, 2016 exchange rate), which included the buyer's assumption of a liability for outstanding loans of approximately $55 million. Based on the final sales price, a determination was made that the current book value of the asset group was not recoverable. As a result, a combined pre-tax charge of $46 million was recorded during 2016 in the Company's Industrial Packaging segment to write down the long-lived assets of this business to their estimated fair value. In addition, the Company recorded a pre-tax charge of $24 million for severance that was contingent upon the sale of this business. The 2016 net loss totaling $70 million related to the impairment and severance of IP Asia Packaging is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. NOTE 7 DIVESTITURES / SPINOFF OTHER DIVESTITURES AND IMPAIRMENTS 55 56 In connection with the purchase price allocation, available information and actual amounts may have inventories were written up by $33 million to their differed materially from these estimates. They do not estimated fair value. During December 2016, $19 reflect the effect of costs or synergies that would have million before taxes ($12 million after taxes) were been expected to result from the integration of the expensed to Cost of products sold as the related acquisition. The pro forma information does not purport inventory was sold. to represent International Paper's actual results of operations as if the transaction described above would Since the date of acquisition, Net sales of $111 million have occurred as of January 1, 2015, nor is it and Earnings (loss) from continuing operations before necessarily an indicator of future results. income taxes and equity earnings of $(21) million from the acquired business have been included in the Company's consolidated statement of operations. Additionally, Selling and administrative expenses for 2016 include $28 million in charges before taxes ($18 million after taxes) for integration costs associated with the acquisition. The identifiable intangible assets acquired in connection with the acquisition of the Weyerhaeuser pulp business included the following: In millions Asset Class: Other Total Customer relationships and lists Trade names, patents, trademarks and developed technology Average Remaining Useful Life (at acquisition date) 24 years 8 years 10 years Estimated Fair Value $ $ 95 113 4 212 On an unaudited pro forma basis, assuming the acquisition of the newly acquired pulp business had closed January 1, 2015, the consolidated results would have reflected Net sales of $22.4 billion and $23.9 billion and Earnings (loss) from continuing operations before income taxes and equity earnings of $1.1 billion and $1.4 billion for the years ended December 31, 2016 and 2015, respectively. The 2016 pro forma information includes adjustments for additional amortization expense on identifiable intangible assets of $18 million and eliminating the write-off of the estimated fair value of inventory of $19 million and non-recurring integration costs associated with the acquisition of $30 million. The 2015 pro forma information includes adjustments for additional amortization expense on identifiable intangible assets of $18 million, non-recurring integration costs associated with the acquisition of $30 million, and incremental expense of $33 million associated with the write-off of the estimated fair value of inventory. The unaudited pro forma consolidated financial information was prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently HOLMEN PAPER NEWSPRINT MILL 2016: On June 30, 2016, the Company completed the previously announced acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill, as well as, associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill during the second half of 2017 to produce recycled containerboard with an expected capacity of 419,000 tons. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA. The Company's aggregated purchase price for the mill, recycling operations and 50% ownership of the cogeneration facility was €53 million (approximately $59 million using June 30, 2016 exchange rate). The measurement period adjustments recognized in the third and fourth quarters of 2016 were to reallocate the purchase price from property, plant and equipment to the specific asset and liability balance sheet line items. Approximately $60 million of the purchase price was allocated to property, plant and equipment, $14 million to current assets (primarily cash and accounts receivable), $7 million to equity method investments, $3 million to long-term assets, $9 million to short-term liabilities and $16 million to long-term liabilities related to a supply contract entered into with the seller. The initial valuation amounts are not considered complete as of December 31, 2016 as tax implications of the valuation amounts are still being considered, however, their impacts are not expected to be material to the Company. The amount of revenue and earnings recognized since the acquisition date are $90 million and a net loss of $2 million, respectively, for the year ended December 31, 2016. Pro forma information related to the acquisition of the Holmen businesses has not been included as it is impractical to obtain the information due to the lack of availability of financial data and does not have a material effect on the Company's consolidated results of operations. 2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalangens S.A. (Orsa IP) from its joint venture partner, Jari Celulose, Papel e Embalagens S.A. (Jari), ORSA 55 a Grupo Jari company, for approximately $127 million, of which $105 million was paid in cash with the remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. An additional $11 million, which was not included in the purchase price, was placed in an escrow account pending resolution of certain open matters. During 2014, these open matters were successfully resolved, which resulted in $9 million paid out of escrow to Jari and final purchase correspondingly added consideration. The remaining $2 million was released back to the Company. As a result of this transaction, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet. The net difference between interest the Redeemable noncontrolling balance plus $14 million of currency translation adjustment reclassified out of Other comprehensive income less the 25% purchase price was reflected as an increase to Retained earnings on the consolidated balance sheet. the to In the fourth quarter of 2016, International Paper released the amount held back for indemnification obligations, net of certain claims. Cash of $10 million was paid to Jari, which included $3 million of accrued interest. The remaining unpaid balance of $12 million was reversed in the third quarter of 2016 with $8 million recorded to Retained earnings as a final purchase price adjustment, and $3 million to interest expense. all periods presented in the consolidated statement of operations: 2014 $ 2,604 2,309 191 9 69 25 — 3 (2) (1) (1) In millions Net Sales Costs and Expenses Cost of products sold Selling and administrative expenses Depreciation, amortization and cost of timber harvested Distribution expenses Restructuring and other charges Impairment of goodwill and other intangibles Other, net Earnings (Loss) Before Income Taxes and Equity Earnings Income tax provision (benefit) Discontinued Operations, Net of Taxes (a) $ (a) These amounts, along with those disclosed below related to the Temple-Inland Building Products divestitures, are included in Discontinued operations, net of tax, in the consolidated statement of operations. Total cash provided by operations related to xpedx of $29 million for 2014 is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash provided by (used for) investing activities related to xpedx of $3 million for 2014 is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows. NOTE 7 DIVESTITURES / SPINOFF OTHER DIVESTITURES AND IMPAIRMENTS DISCONTINUED OPERATIONS 2014: On July 1, 2014, International Paper completed the spinoff of its distribution business, xpedx, which subsequently merged with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv (Veritiv). The xpedx business had Corporation historically represented the Company's Distribution reportable segment. The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received a payment of approximately $411 million, financed with new debt in Veritiv's capital structure. All historical operating results for xpedx are included in Discontinued operations, net of the accompanying consolidated statement of operations. The following summarizes the major classes of line items comprising Earnings (Loss) Before Income Taxes to Discontinued and Equity Earnings reconciled Operations, net of tax, related to the xpedx spinoff for tax, in 2016: On March 14, 2016, the Company announced that it had entered into a definitive agreement to sell its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. The sale of this business was completed on June 30, 2016. Under the terms of the transaction and after post-closing adjustments, International Paper received a total of approximately RMB 957 million (approximately $144 million at the June 30, 2016 exchange rate), which included the buyer's assumption of a liability for outstanding loans of approximately $55 million. Based on the final sales price, a determination was made that the current book value of the asset group was not recoverable. As a result, a combined pre-tax charge of $46 million was recorded during 2016 in the Company's Industrial Packaging segment to write down the long-lived assets of this business to their estimated fair value. In addition, the Company recorded a pre-tax charge of $24 million for severance that was contingent upon the sale of this business. The 2016 net loss totaling $70 million related to the impairment and severance of IP Asia Packaging is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. 56 The final purchase price payment of RMB 20 million (approximately $3 million at the December 31, 2016 exchange rate) was received in the fourth quarter of 2016. The remaining payments to be received relate to the assumed loans which total $14 million and are payable up to three years from the closing of the sale. The amount of pre-tax losses related to the IP Asia Packaging business the Company's included consolidated statement of operations were $83 million, $8 million and $70 million for years ended December 31, 2016, 2015 and 2014, respectively. in 2015: On October 13, 2015, the Company finalized the sale of its 55% interest in IP Asia Coated Paperboard (IP-Sun JV) business, within the Company's Consumer Packaging segment, to its Chinese coated board joint venture partner, Shandong Sun Holding Group Co., Ltd. for RMB 149 million (approximately USD $23 million). During the third quarter of 2015, a determination was made that the current book value of the asset group was not recoverable. As a result, the net pre-tax impairment charge of $174 million ($113 million after taxes) was recorded to write down the long-lived assets of this business to their estimated fair value. The impairment charge is included in Net (gains) losses on sales and the accompanying consolidated statement of operations. The amount of pre-tax losses related to noncontrolling interest of the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015 and 2014 were $19 million and $12 million, respectively. The amount of pre-tax losses related to the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015 and 2014 were $226 million and $51 million, respectively. impairments of businesses in 2014: During 2014, the Company recorded a net pre- tax charge of $47 million ($36 million after taxes) for the loss on the sale of a business by our equity method investee, to as AGI- Shorewood), and the subsequent partial impairment of this ASG investment. (formerly referred ASG The 2014 net loss totaling $38 million, including the ASG impairment discussed above, to other divestitures and impairments is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. related NOTE 8 SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $757 million and $738 million at December 31, 2016 and 2015, respectively. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable, net of allowances, by classification were: Depreciation expense was $1.2 billion, $1.2 billion and Amounts related to interest were as follows: $1.3 billion for the years ended December 31, 2016, 2015 and 2014, respectively. INTEREST Interest payments of $682 million, $680 million and $718 million were made during the years ended December 31, 2016, 2015 and 2014, respectively. In millions Interest expense (a) Interest income (a) Capitalized interest costs 2016 2015 2014 $ 695 $ 644 $ 677 175 28 89 25 70 23 (a) Interest expense and interest income exclude approximately $25 million and $38 million in 2015 and 2014, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 12). NOTE 9 GOODWILL AND OTHER INTANGIBLES In millions at December 31 Accounts and notes receivable: 2016 2015 GOODWILL Trade Other Total INVENTORIES In millions at December 31 Raw materials Finished pulp, paper and packaging products Operating supplies Other Inventories $ 2,759 $ 2,480 242 195 $ 3,001 $ 2,675 2016 2015 $ 296 $ 339 1,381 1,248 661 100 563 78 $ 2,438 $ 2,228 The following tables present changes in the goodwill balances as allocated to each business segment for the years ended Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Total December 31, 2016 and 2015: Balance as of January 1, 2016 In millions Goodwill Accumulated impairment losses (a) Reclassifications and other (b) Additions/reductions Impairment loss Balance as of December 31, 2016 Goodwill Total Accumulated impairment losses (a) Balance as of January 1, 2015 In millions Goodwill Accumulated impairment losses (a) Reclassifications and other (b) Additions/reductions Impairment loss Balance as of December 31, 2015 Goodwill Total Accumulated impairment losses (a) (a) Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002. (b) Represents the effects of foreign currency translations and reclassifications. (c) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in the U.S. (d) Reflects the acquisition of the newly acquired pulp business. (e) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Total 19 (d) (14) (e) $— — — — — 19 — $19 $— — — — — — — — $— $2,124 (1,877) 247 33 — 2,143 (1,877) $266 $2,234 (1,877) 357 (95) — 2,124 (1,877) $247 $1,664 (1,664) — — — — 1,664 (1,664) $— $1,784 (1,664) 120 (3) — 1,664 (1,664) $— (15) (c) (117) (d) $7,113 (3,778) 3,335 29 — — 7,142 (3,778) $3,364 $7,414 (3,641) 3,773 (168) (133) (137) 7,113 (3,778) $3,335 $3,325 (237) 3,088 (4) (5) (c) — 3,316 (237) $3,079 $3,396 (100) 3,296 (70) (1) (137) (e) 3,325 (237) $3,088 58 PLANTS, PROPERTIES AND EQUIPMENT In millions at December 31 2016 2015 Pulp, paper and packaging facilities $ 34,259 $ 31,466 Other properties and equipment Gross cost Less: Accumulated depreciation 1,311 1,242 35,570 32,708 21,580 20,728 Plants, properties and equipment, net $ 13,990 $ 11,980 57 (a) Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002. (b) Represents the effects of foreign currency translations and reclassifications. (c) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. (d) Reduction due to the sale and de-consolidation of Shandong Sun joint venture in Asia. (e) Reflects a charge for goodwill impairment related to our Brazil Industrial Packaging business. The last-in, first-out inventory method is used to value most of inventories. Approximately 79% of total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have inventory balances by approximately $376 million and $345 million at December 31, 2016 and 2015, respectively. International Paper’s U.S. increased total The final purchase price payment of RMB 20 million (approximately $3 million at the December 31, 2016 exchange rate) was received in the fourth quarter of 2016. The remaining payments to be received relate to the assumed loans which total $14 million and are payable up to three years from the closing of the sale. The amount of pre-tax losses related to the IP Asia Packaging business included in the Company's consolidated statement of operations were $83 million, $8 million and $70 million for years ended December 31, 2016, 2015 and 2014, respectively. 2015: On October 13, 2015, the Company finalized the sale of its 55% interest in IP Asia Coated Paperboard (IP-Sun JV) business, within the Company's Consumer Packaging segment, to its Chinese coated board joint venture partner, Shandong Sun Holding Group Co., Ltd. for RMB 149 million (approximately USD $23 million). During the third quarter of 2015, a determination was made that the current book value of the asset group was not recoverable. As a result, the net pre-tax impairment charge of $174 million ($113 million after taxes) was recorded to write down the long-lived assets of this business to their estimated fair value. The impairment charge is included in Net (gains) losses on accompanying consolidated statement of operations. The amount of pre-tax losses related to noncontrolling interest of the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015 and 2014 were $19 million and $12 million, respectively. The amount of pre-tax losses related to the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015 and 2014 were $226 million and $51 million, respectively. 2014: During 2014, the Company recorded a net pre- tax charge of $47 million ($36 million after taxes) for the loss on the sale of a business by our equity method investee, ASG (formerly referred to as AGI- Shorewood), and the subsequent partial impairment of this ASG investment. The 2014 net loss totaling $38 million, including the ASG impairment discussed above, related to other divestitures and impairments is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. NOTE 8 SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $757 million and $738 million at December 31, 2016 and 2015, respectively. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable, net of allowances, by classification were: In millions at December 31 Accounts and notes receivable: Trade Other Total INVENTORIES In millions at December 31 Raw materials Finished pulp, paper and packaging Operating supplies Other Inventories $ 2,759 $ 2,480 242 195 $ 3,001 $ 2,675 2016 2015 $ 296 $ 339 1,381 1,248 661 100 563 78 $ 2,438 $ 2,228 The last-in, first-out inventory method is used to value most of International Paper’s U.S. inventories. Approximately 79% of total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have increased total inventory balances by approximately $376 million and $345 million at December 31, 2016 and 2015, respectively. PLANTS, PROPERTIES AND EQUIPMENT In millions at December 31 2016 2015 Other properties and equipment Gross cost Less: Accumulated depreciation 1,311 1,242 35,570 32,708 21,580 20,728 Plants, properties and equipment, net $ 13,990 $ 11,980 sales and impairments of businesses in the products Depreciation expense was $1.2 billion, $1.2 billion and $1.3 billion for the years ended December 31, 2016, 2015 and 2014, respectively. INTEREST Interest payments of $682 million, $680 million and $718 million were made during the years ended December 31, 2016, 2015 and 2014, respectively. Amounts related to interest were as follows: In millions Interest expense (a) Interest income (a) Capitalized interest costs 2016 2015 2014 $ 695 $ 644 $ 677 175 28 89 25 70 23 (a) Interest expense and interest income exclude approximately $25 million and $38 million in 2015 and 2014, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 12). 2016 2015 GOODWILL NOTE 9 GOODWILL AND OTHER INTANGIBLES The following tables present changes in the goodwill balances as allocated to each business segment for the years ended December 31, 2016 and 2015: In millions Balance as of January 1, 2016 Goodwill Accumulated impairment losses (a) Reclassifications and other (b) Additions/reductions Impairment loss Balance as of December 31, 2016 Goodwill Accumulated impairment losses (a) Total Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Total $3,325 (237) 3,088 (4) (5) (c) — 3,316 (237) $3,079 $— — — — 19 (d) — 19 — $19 $2,124 (1,877) $1,664 (1,664) 247 33 (14) (e) — — — — — 2,143 (1,877) $266 1,664 (1,664) $— $7,113 (3,778) 3,335 29 — — 7,142 (3,778) $3,364 (a) Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002. (b) Represents the effects of foreign currency translations and reclassifications. (c) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in the U.S. (d) Reflects the acquisition of the newly acquired pulp business. (e) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. Pulp, paper and packaging facilities $ 34,259 $ 31,466 Goodwill In millions Balance as of January 1, 2015 Accumulated impairment losses (a) Reclassifications and other (b) Additions/reductions Impairment loss Balance as of December 31, 2015 Goodwill Accumulated impairment losses (a) Total Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Total $3,396 (100) 3,296 (70) (1) (137) (e) 3,325 (237) $3,088 $— — — — — — — — $— $2,234 (1,877) 357 (95) $1,784 (1,664) 120 (3) (15) (c) (117) (d) — — 2,124 (1,877) $247 1,664 (1,664) $— $7,414 (3,641) 3,773 (168) (133) (137) 7,113 (3,778) $3,335 57 58 (a) Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002. (b) Represents the effects of foreign currency translations and reclassifications. (c) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. (d) Reduction due to the sale and de-consolidation of Shandong Sun joint venture in Asia. (e) Reflects a charge for goodwill impairment related to our Brazil Industrial Packaging business. its reporting units In the fourth quarter of 2015, in conjunction with the annual for possible goodwill testing of impairments, the Company calculated the estimated fair value of its Brazil Packaging business and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy. OTHER INTANGIBLES Identifiable intangible assets comprised the following: In millions at December 31 2016 2015 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Customer relationships and lists $ 605 $ 211 $ 495 $ Non-compete agreements Tradenames, patents and trademarks, and developed technology Land and water rights Software Other Total 69 173 10 21 48 64 56 2 20 26 69 61 33 22 46 166 56 54 6 20 29 $ 926 $ 379 $ 726 $ 331 The Company recognized the following amounts as amortization expense related to intangible assets: In millions 2016 2015 2014 Amortization expense related to intangible assets The provision (benefit) for income taxes (excluding noncontrolling interests) by taxing jurisdiction was as follows: In millions 2016 2015 2014 Current tax provision (benefit) U.S. federal U.S. state and local Non-U.S. Deferred tax provision (benefit) U.S. federal U.S. state and local Non-U.S. $ 35 $ 62 $ 175 — 76 12 111 9 74 $ 111 $ 185 $ 258 $ 138 $ 321 $ (67) 23 (25) 30 (70) 5 (73) $ 136 $ 281 $ (135) Income tax provision (benefit) $ 247 $ 466 $ 123 The Company’s deferred income tax provision (benefit) includes a $18 million provision, a $3 million provision and a $13 million benefit for 2016, 2015 and 2014, respectively, for the effect of changes in non-U.S. and U.S. state tax rates. International Paper made income tax payments, net of refunds, of $90 million, $149 million and $172 million in 2016, 2015 and 2014, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows: $ 54 $ 60 $ 73 In millions 2016 2015 2014 Based on current intangibles subject to amortization, estimated amortization expense for each of the succeeding years is as follows: 2017 – $60 million, 2018 – $53 million, 2019 – $51 million, 2020 – $51 million, 2021 – $51 million, and cumulatively thereafter – $275 million. NOTE 10 INCOME TAXES The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows: In millions Earnings (loss) U.S. Non-U.S. 2016 2015 2014 $ 573 $ 1,147 $ 383 119 565 307 Earnings (loss) from continuing operations before income taxes and equity earnings $ 956 $ 1,266 $ 872 Earnings (loss) from continuing operations before income taxes and equity earnings $ 956 $ 1,266 $ 872 Statutory U.S. income tax rate 35% 35% 35% Tax expense (benefit) using statutory U.S. income tax rate State and local income taxes Tax rate and permanent differences on non-U.S. earnings Net U.S. tax on non-U.S. dividends Tax benefit on manufacturing activities Non-deductible business expenses Non-deductible impairments Sale of non-strategic assets Tax audits Subsidiary liquidation Retirement plan dividends Tax credits Other, net 335 15 443 27 305 10 (27) (44) (72) 21 12 16 (12) (14) (46) 9 — 12 (14) (63) (6) (28) 5 8 109 (61) — — (5) (15) 6 7 35 — — (85) (5) (34) (8) Income tax provision (benefit) $ 247 $ 466 $ 123 Effective income tax rate 26% 37% 14% 59 60 The tax effects of significant temporary differences, A reconciliation of the beginning and ending amount of representing deferred income tax assets and liabilities unrecognized tax benefits for the years ended at December 31, 2016 and 2015, were as follows: December 31, 2016, 2015 and 2014 is as follows: In millions 2016 2015 In millions 2016 2015 2014 Balance at January 1 $ (150) $ (158) $ (161) $ 165 $ 172 1,344 1,403 (Additions) reductions based on tax positions related to current Deferred income tax assets: Postretirement benefit accruals Pension obligations Alternative minimum and other tax credits Net operating and capital loss carryforwards Compensation reserves Other Gross deferred income tax assets Less: valuation allowance Net deferred income tax asset Deferred income tax liabilities: Intangibles Plants, properties and equipment Forestlands, related installment sales, and investment in subsidiary 270 662 257 251 283 732 265 244 $ $ 2,949 (403) 3,099 (430) 2,546 $ 2,669 (231) $ (271) (2,828) (2,727) (2,260) (2,253) Gross deferred income tax liabilities $ (5,319) $ (5,251) Net deferred income tax liability $ (2,773) $ (2,582) Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities, and Deferred income taxes. There is a decrease in deferred income tax assets principally relating to the tax impact of changes in qualified pension liabilities and the utilization of tax credits and net operating loss carryforwards. Deferred tax liabilities increased primarily due to tax greater than book depreciation. Of the $2.3 billion forestlands, related installment sales, and investment in subsidiary deferred tax liability, $1.4 billion is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $831 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 12). Certain tax attributes reflected on our tax returns as filed differ from those reflected in the deferred income tax accounts due to uncertain tax benefits. The valuation allowance for deferred income tax assets as of December 31, 2016, 2015 and 2014 was $403 million, $430 million and $415 million, respectively. The net change in the total valuation allowance for the years ended December 31, 2016 and 2015 was a decrease of $27 million and an increase of $15 million, respectively. Additions for tax positions of prior Reductions for tax positions of year years prior years Settlements Expiration of statutes of limitations Currency translation adjustment (4) (3) 33 19 5 2 (6) (6) 7 2 4 7 (15) (1) 9 — 2 8 Balance at December 31 $ (98) $ (150) $ (158) Included in the balance at December 31, 2016, 2015 and 2014 are $0 million, $1 million and $1 million, respectively, for tax positions for which the ultimate benefits are highly certain, but for which there is uncertainty about the timing of such benefits. However, except for the possible effect of any penalties, any disallowance that would change the timing of these benefits would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. The Company had approximately $22 million and $34 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at December 31, 2016 and 2015, respectively. The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2003 through 2015 remain open and subject to examination by the relevant tax authorities. The Company is typically engaged in various tax examinations at any given time, both in the United States and overseas. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $5 million during the next twelve months. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates. value of its Brazil Packaging business and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the Non-U.S. overall Brazilian economy. OTHER INTANGIBLES Identifiable intangible assets comprised the following: Customer relationships and lists $ 605 $ 211 $ 495 $ In millions at December 31 Non-compete agreements Tradenames, patents and trademarks, and developed technology Land and water rights Software Other Total 2016 2015 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization 69 173 10 21 48 64 56 2 20 26 69 61 33 22 46 166 56 54 6 20 29 $ 926 $ 379 $ 726 $ 331 The Company recognized the following amounts as amortization expense related to intangible assets: In millions 2016 2015 2014 Amortization expense related to intangible assets Based on current intangibles subject to amortization, estimated amortization expense for each of the succeeding years is as follows: 2017 – $60 million, 2018 – $53 million, 2019 – $51 million, 2020 – $51 million, 2021 – $51 million, and cumulatively thereafter – $275 million. NOTE 10 INCOME TAXES The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows: In millions Earnings (loss) U.S. Non-U.S. 2016 2015 2014 $ 573 $ 1,147 $ 383 119 565 307 Earnings (loss) from continuing operations before income taxes and equity earnings $ 956 $ 1,266 $ 872 In millions 2016 2015 2014 Current tax provision (benefit) U.S. federal U.S. state and local Deferred tax provision (benefit) U.S. federal U.S. state and local Non-U.S. $ 35 $ 62 $ 175 — 76 12 111 9 74 $ 111 $ 185 $ 258 $ 138 $ 321 $ (67) 23 (25) 30 (70) 5 (73) $ 136 $ 281 $ (135) Income tax provision (benefit) $ 247 $ 466 $ 123 The Company’s deferred income tax provision (benefit) includes a $18 million provision, a $3 million provision and a $13 million benefit for 2016, 2015 and 2014, respectively, for the effect of changes in non-U.S. and U.S. state tax rates. International Paper made income tax payments, net of refunds, of $90 million, $149 million and $172 million in 2016, 2015 and 2014, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows: Earnings (loss) from continuing operations before income taxes and equity earnings $ 956 $ 1,266 $ 872 Statutory U.S. income tax rate 35% 35% 35% Tax expense (benefit) using statutory U.S. income tax rate State and local income taxes Tax rate and permanent differences on non-U.S. earnings Net U.S. tax on non-U.S. dividends Tax benefit on manufacturing activities Non-deductible business expenses Non-deductible impairments Sale of non-strategic assets Tax audits Subsidiary liquidation Retirement plan dividends Tax credits Other, net 335 15 443 27 305 10 (27) (44) (72) 21 12 16 (12) (14) (46) 9 — 12 (14) (63) (6) (28) 5 8 109 (61) — — (5) (15) 6 7 35 — — (85) (5) (34) (8) Income tax provision (benefit) $ 247 $ 466 $ 123 Effective income tax rate 26% 37% 14% $ 54 $ 60 $ 73 In millions 2016 2015 2014 In the fourth quarter of 2015, in conjunction with the annual The provision (benefit) for income taxes (excluding testing of its reporting units for possible goodwill noncontrolling interests) by taxing jurisdiction was as impairments, the Company calculated the estimated fair follows: The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2016 and 2015, were as follows: A reconciliation of the beginning and ending amount of the years ended unrecognized December 31, 2016, 2015 and 2014 is as follows: tax benefits for In millions 2016 2015 In millions 2016 2015 2014 Deferred income tax assets: Postretirement benefit accruals Pension obligations Alternative minimum and other tax credits Net operating and capital loss carryforwards Compensation reserves Other Gross deferred income tax assets Less: valuation allowance Net deferred income tax asset Deferred income tax liabilities: Intangibles Plants, properties and equipment Forestlands, related installment sales, and investment in subsidiary $ 165 $ 172 1,344 1,403 270 662 257 251 283 732 265 244 $ $ 2,949 (403) 3,099 (430) 2,546 $ 2,669 (231) $ (271) (2,828) (2,727) (2,260) (2,253) Gross deferred income tax liabilities $ (5,319) $ (5,251) Net deferred income tax liability $ (2,773) $ (2,582) Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities, and Deferred income taxes. There is a decrease in deferred income tax assets principally relating to the tax impact of changes in qualified pension liabilities and the utilization of tax credits and net operating loss increased carryforwards. Deferred primarily due to tax greater than book depreciation. Of the $2.3 billion forestlands, related installment sales, and investment in subsidiary deferred tax liability, $1.4 billion is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $831 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 12). Certain tax attributes reflected on our tax returns as filed differ from those reflected in the deferred income tax accounts due to uncertain tax benefits. liabilities tax The valuation allowance for deferred income tax assets as of December 31, 2016, 2015 and 2014 was $403 million, $430 million and $415 million, respectively. The net change in the total valuation allowance for the years ended December 31, 2016 and 2015 was a decrease of $27 million and an increase of $15 million, respectively. 59 60 Balance at January 1 $ (150) $ (158) $ (161) (Additions) reductions based on tax positions related to current year Additions for tax positions of prior years Reductions for tax positions of prior years Settlements Expiration of statutes of limitations Currency translation adjustment (4) (3) 33 19 5 2 (6) (6) 7 2 4 7 (15) (1) 9 — 2 8 Balance at December 31 $ (98) $ (150) $ (158) Included in the balance at December 31, 2016, 2015 and 2014 are $0 million, $1 million and $1 million, respectively, for tax positions for which the ultimate benefits are highly certain, but for which there is uncertainty about the timing of such benefits. However, except for the possible effect of any penalties, any disallowance that would change the timing of these benefits would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. The Company had approximately $22 million and $34 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at December 31, 2016 and 2015, respectively. The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2003 through 2015 remain open and subject to examination by the relevant tax authorities. The Company is typically engaged in various tax examinations at any given time, both in the United States and overseas. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $5 million during the next twelve months. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates. Included in the Company’s 2016, 2015 and 2014 income tax provision (benefit) are $(74) million, $(121) million and $(453) million, respectively, related to special items. The components of the net provisions related to special items were as follows: In millions Special items Tax-related adjustments: Return to accrual Internal restructurings Settlement of tax audits and legislative changes Tax rate changes Other tax adjustments 2016 2015 2014 $ (51) $ (84) $ (372) 23 (63) (14) 23 8 23 (62) — — 2 — (90) 10 — (1) Weyerhaeuser Company’s Containerboard, Packaging and Recycling business and the 2016 acquisition of Weyerhaeuser's pulp business. At December 31, 2016, future minimum commitments under existing non-cancelable operating leases and purchase obligations were as follows: total In millions 2017 2018 2019 2020 2021 Thereafter $ 119 $ 91 $ 69 $ 51 $ 38 $ 125 Lease obligations Purchase obligations (a) 3,165 635 525 495 460 Total $ 3,284 $ 726 $ 594 $ 546 $ 498 $ 2,332 2,457 Income tax provision (benefit) related to special items $ (74) $ (121) $ (453) (a) The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards: Includes $2.0 billion relating to fiber supply agreements entered into at the time of the Company’s 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. Also includes $1.1 billion relating to fiber supply agreements assumed in conjunction with the 2016 acquisition of Weyerhaeuser's pulp business. 2017 Through 2026 2027 Through 2036 Indefinite Total Rent expense was $161 million, $170 million and $154 million for 2016, 2015 and 2014, respectively. $ 67 $ 9 $ 455 $ 531 GUARANTEES associated with these matters to be approximately $134 two other parties to comply with the order subject to million in the aggregate as of December 31, 2016. Other its sufficient cause defenses. remedial actions is not expected to have a material • In October 2016, the Company and another PRP than as described above, completion of required effect on our consolidated financial statements. Cass Lake: One of the matters included above arises out of a closed wood-treating facility located in Cass Lake, Minnesota. In June 2011, the United States Environmental Protection Agency (EPA) selected and published a proposed soil remedy at the site with an estimated cost of $46 million. The overall remediation reserve for the site is currently $50 million to address the selection of an alternative for the soil remediation component of the overall site remedy, which includes the ongoing groundwater remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In March 2016, the EPA issued a proposed plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the $50 million reserve referenced above. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other potentially responsible parties of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred. Kalamazoo River: The Company is a PRP with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site in Michigan. The EPA asserts that the site is contaminated by polychlorinated biphenyls (PCBs) primarily as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill (the Allied Paper Mill) formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis. • In March 2016, the Company and other PRPs received a special notice letter from the EPA (i) inviting participation in implementing a remedy for a portion of the site, and (ii) demanding reimbursement of EPA past costs totaling $37 million, including $19 million in past costs previously demanded by the EPA. The Company responded to the special notice letter. In December 2016, EPA issued a unilateral administrative order to the Company and other PRPs to perform the remedy. The unilateral administrative order has not yet become effective and the Company is evaluating its response. • In April 2016, the EPA issued a separate unilateral administrative order to the Company and certain other PRPs for a time-critical removal action (TCRA) of PCB-contaminated sediments from a different portion of the site. The Company responded to the unilateral administrative order and agreed along with received a special notice letter from the EPA inviting participation in the remedial design component of the landfill remedy for the Allied Paper Mill. The record of decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. The Company responded to the Allied Paper Mill special notice letter in late December 2016. The Company’s CERCLA liability has not been finally determined with respect to these or any other portions of the site, and except as noted above, the Company has declined to perform any work or reimburse the EPA at this time. As noted below, the Company is involved in allocation/apportionment litigation with regard to the site. Accordingly, it is premature to predict the outcome or estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable. The Company was named as a defendant by Georgia- Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. The suit seeks contribution under CERCLA for costs purportedly expended by plaintiffs ($79 million as of the filing of the complaint) and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013. Weyerhaeuser conceded prior to trial that it was a liable party with respect to the site. In September 2013, an opinion and order was issued in the suit. The order concluded that the Company (as the successor to St. Regis) was not an “operator,” but was an “owner,” of the mill at issue during a portion of the relevant period and is therefore liable under CERCLA. The order also determined that NCR is a liable party as an "arranger for disposal" of PCBs in waste paper that was de-inked and recycled by mills along the Kalamazoo River. The order did not address the Company's responsibility, if any, for past or future costs. The parties’ responsibility, including that of the Company, was the subject of a second trial, which was concluded in late 2015. A decision has not been rendered and it is unclear to what extent the Court will address responsibility for future costs in that decision. We are unable to predict the outcome or estimate our In connection with sales of businesses, property, equipment, forestlands and other assets, International Paper commonly makes representations and warranties relating to such businesses or assets, and may agree to indemnify buyers with respect to tax and environmental liabilities, breaches of representations and warranties, and other matters. Where liabilities for such matters are determined to be probable and subject liabilities are to reasonable estimation, accrued recorded at the time of sale as a cost of the transaction. ENVIRONMENTAL AND LEGAL PROCEEDINGS Environmental International Paper has been named as a potentially responsible party (PRP) in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many PRPs. There are other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet. Remediation costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability 61 62 In millions U.S. federal and non-U.S. NOLs State taxing jurisdiction NOLs U.S. federal, non- U.S. and state tax credit carryforwards U.S. federal and state capital loss carryforwards 139 176 22 52 21 — — 191 183 380 — 22 Total $ 404 $ 82 $ 638 $ 1,124 Deferred income taxes are not provided for temporary differences of approximately $5.9 billion, $5.7 billion and $5.2 billion as of December 31, 2016, 2015 and 2014, respectively, representing earnings of non-U.S. subsidiaries intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings and other basis differences is not practicable. NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES PURCHASE COMMITMENTS AND OPERATING LEASES Certain property, machinery and equipment are leased under cancelable and non-cancelable agreements. Unconditional purchase obligations have been entered into in the ordinary course of business, principally for capital projects and the purchase of certain pulpwood, logs, wood chips, raw materials, energy and services, to purchase including pulpwood that were entered into concurrently with the Company’s 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of fiber supply agreements Included in the Company’s 2016, 2015 and 2014 Weyerhaeuser Company’s Containerboard, Packaging income tax provision (benefit) are $(74) million, $(121) and Recycling business and the 2016 acquisition of million and $(453) million, respectively, related to Weyerhaeuser's pulp business. 2027 Through Through 2017 2026 2036 Indefinite Total Rent expense was $161 million, $170 million and $154 million for 2016, 2015 and 2014, respectively. $ 67 $ 9 $ 455 $ 531 GUARANTEES special items. The components of the net provisions related to special items were as follows: In millions Special items Tax-related adjustments: Return to accrual Internal restructurings Settlement of tax audits and legislative changes Tax rate changes Other tax adjustments 2016 2015 2014 $ (51) $ (84) $ (372) 23 (63) (14) 23 8 23 (62) — — 2 — (90) 10 — (1) Income tax provision (benefit) related to special items $ (74) $ (121) $ (453) The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards: In millions U.S. federal and non-U.S. NOLs State taxing jurisdiction NOLs U.S. federal, non- U.S. and state tax credit carryforwards U.S. federal and state capital loss carryforwards 139 176 22 52 21 — — 191 183 380 — 22 Total $ 404 $ 82 $ 638 $ 1,124 Deferred income taxes are not provided for temporary differences of approximately $5.9 billion, $5.7 billion and $5.2 billion as of December 31, 2016, 2015 and 2014, respectively, representing earnings of non-U.S. subsidiaries intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings and other basis differences is not practicable. NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES PURCHASE COMMITMENTS AND OPERATING LEASES Lease obligations Purchase obligations (a) Total At December 31, 2016, total future minimum commitments under existing non-cancelable operating leases and purchase obligations were as follows: In millions 2017 2018 2019 2020 2021 Thereafter $ 119 $ 91 $ 69 $ 51 $ 38 $ 125 3,165 635 525 495 460 $ 3,284 $ 726 $ 594 $ 546 $ 498 $ 2,332 2,457 (a) Includes $2.0 billion relating to fiber supply agreements entered into at the time of the Company’s 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. Also includes $1.1 billion relating to fiber supply agreements assumed in conjunction with the 2016 acquisition of Weyerhaeuser's pulp business. In connection with sales of businesses, property, equipment, forestlands and other assets, International Paper commonly makes representations and warranties relating to such businesses or assets, and may agree to indemnify buyers with respect to tax and environmental liabilities, breaches of representations and warranties, and other matters. Where liabilities for such matters are determined to be probable and subject to reasonable estimation, accrued liabilities are recorded at the time of sale as a cost of the transaction. ENVIRONMENTAL AND LEGAL PROCEEDINGS Environmental International Paper has been named as a potentially responsible party (PRP) in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the Certain property, machinery and equipment are leased several liability is authorized under CERCLA and under cancelable and non-cancelable agreements. Unconditional purchase obligations have been entered many PRPs. There are other remediation costs into in the ordinary course of business, principally for typically associated with the cleanup of hazardous capital projects and the purchase of certain pulpwood, substances at the Company’s current, closed or logs, wood chips, raw materials, energy and services, formerly-owned facilities, and recorded as liabilities in including fiber supply agreements to purchase the balance sheet. Remediation costs are recorded in pulpwood that were entered into concurrently with the the consolidated financial statements when they Company’s 2006 Transformation Plan forestland sales become probable and reasonably estimable. and in conjunction with the 2008 acquisition of International Paper has estimated the probable liability associated with these matters to be approximately $134 million in the aggregate as of December 31, 2016. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements. Cass Lake: One of the matters included above arises out of a closed wood-treating facility located in Cass Lake, Minnesota. In June 2011, the United States Environmental Protection Agency (EPA) selected and published a proposed soil remedy at the site with an estimated cost of $46 million. The overall remediation reserve for the site is currently $50 million to address the selection of an alternative for the soil remediation component of the overall site remedy, which includes the ongoing groundwater remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In March 2016, the EPA issued a proposed plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the $50 million reserve referenced above. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other potentially responsible parties of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred. Kalamazoo River: The Company is a PRP with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site in Michigan. The EPA asserts that the site is contaminated by polychlorinated biphenyls (PCBs) primarily as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill (the Allied Paper Mill) formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis. the site, and • In March 2016, the Company and other PRPs received a special notice letter from the EPA (i) inviting participation in implementing a remedy for a portion of (ii) demanding reimbursement of EPA past costs totaling $37 million, including $19 million in past costs previously demanded by the EPA. The Company responded to the special notice letter. In December 2016, EPA issued a unilateral administrative order to the Company and other PRPs to perform the remedy. The unilateral administrative order has not yet become effective and the Company is evaluating its response. • In April 2016, the EPA issued a separate unilateral administrative order to the Company and certain other PRPs for a time-critical removal action (TCRA) of PCB-contaminated sediments from a different portion of the site. The Company responded to the unilateral administrative order and agreed along with two other parties to comply with the order subject to its sufficient cause defenses. • In October 2016, the Company and another PRP received a special notice letter from the EPA inviting participation in the remedial design component of the landfill remedy for the Allied Paper Mill. The record of decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. The Company responded to the Allied Paper Mill special notice letter in late December 2016. The Company’s CERCLA liability has not been finally determined with respect to these or any other portions of the site, and except as noted above, the Company has declined to perform any work or reimburse the EPA at this time. As noted below, the Company is involved in allocation/apportionment litigation with regard to the site. Accordingly, it is premature to predict the outcome or estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable. The Company was named as a defendant by Georgia- Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. The suit seeks contribution under CERCLA for costs purportedly expended by plaintiffs ($79 million as of the filing of the complaint) and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013. Weyerhaeuser conceded prior to trial that it was a liable party with respect to the site. In September 2013, an opinion and order was issued in the suit. The order concluded that the Company (as the successor to St. Regis) was not an “operator,” but was an “owner,” of the mill at issue during a portion of the relevant period and is therefore liable under CERCLA. The order also determined that NCR is a liable party as an "arranger for disposal" of PCBs in waste paper that was de-inked and recycled by mills along the Kalamazoo River. The order did not address the Company's responsibility, if any, for past or future costs. The parties’ responsibility, including that of the Company, was the subject of a second trial, which was concluded in late 2015. A decision has not been rendered and it is unclear to what extent the Court will address responsibility for future costs in that decision. We are unable to predict the outcome or estimate our 61 62 maximum reasonably possible loss. However, we do not believe that any material loss is probable. Harris County: International Paper and McGinnis Industrial Maintenance Corporation (MIMC), a subsidiary of Waste Management, Inc., are PRPs at the San Jacinto River Waste Pits Superfund Site (the San Jacinto River Superfund Site) in Harris County, Texas. The PRPs have been actively participating in the activities at the site. In September 2016, the EPA issued a proposed remedial action plan (PRAP) for the site, which identifies the preferred remedy as the removal of the contaminated material currently protected by an armored cap. In addition, the EPA selected a preferred remedy for the separate southern impoundments that requires offsite disposal. The PRPs submitted comments on the PRAP. At this stage, it is premature to predict the outcome or estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable. In December 2011, Harris County, Texas filed a suit against the Company seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River from the San Jacinto River Superfund Site. In November 2014, International Paper secured a zero liability jury verdict and the Texas Court of Appeals affirmed in 2016. Harris County did not seek to appeal, nor file for an extension, before the Supreme Court of Texas prior to the filing deadline. The Company is also defending a lawsuit related to the San Jacinto River Superfund Site brought by approximately 400 individuals who allege property damage and personal injury. Because this case is still in the discovery phase, it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred. Antitrust that 2010, including In September eight Containerboard: containerboard producers, International Paper and Temple-Inland, were named as defendants in a purported class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. International Paper Co. (N.D. the Ill.). The complaint alleges defendants, beginning in February 2004 through November 2010, conspired to limit the supply and thereby increase prices of containerboard products. The class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period February 2004 to November 2010. The complaint seeks to recover unspecified treble damages and attorneys' fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. In March 2015, the District Court certified a class of direct purchasers of containerboard products; in June 2015, the United States Court of Appeals for the Seventh Circuit granted the defendants' petition to appeal, and on August 4, 2016, affirmed the District Court's decision on all counts. We will continue to aggressively defend this case, including challenges to class certification. Likewise, in June 2016, a lawsuit captioned Ashley Furniture Indus., Inc. v. Packaging Corporation of America (W.D. Wis.), was filed in federal court in Wisconsin. The Ashley Furniture lawsuit closely tracks the allegations found in the Kleen Products complaint but also asserts Wisconsin state antitrust claims. Moreover, in January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that International Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys' fees. No class certification materials have been filed to date in the Tennessee action. The Company disputes the allegations made and is vigorously defending each action. However, because the Kleen Products action is in the pretrial motions stage and the Tennessee and Ashley Furniture actions are in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss. to invoices Tax On October 16, 2015, the Company was notified of a $110 million tax assessment issued by the state of Sao Paulo, Brazil for tax years 2011 through 2013. The assessment pertains the Company related to the sale of paper to the editorial segment, which is exempt from the payment of ICMS value-added tax. This assessment is in the preliminary stage. The Company does not believe that a material loss is probable. During the second quarter of 2016, the Company received a favorable first instance judgment vacating the State's assessment. The Company anticipates that the State will appeal the judgment. issued by General The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, personal injury, labor and employment, contracts, sales of property, intellectual property and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of these lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on financial statements. its consolidated 63 64 NOTE 12 VARIABLE INTEREST ENTITIES In connection with the 2006 sale of approximately 5.6 million acres of forestlands, International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their maturity which was originally August 2016, are supported by irrevocable letters of credit obtained by the buyers of the forestlands. During 2006, International Paper contributed the Timber Notes to newly formed special purpose entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed special purpose entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes. Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provided that International Paper had, and intended to effect, a legal right to offset its obligation under these debt instruments with its investments in the Entities and despite the offset treatment, these remained debt obligations of International Paper. The use of the Entities facilitated the monetization of the credit enhanced Timber Notes in a cost effective manner by increasing borrowing capacity and lowering the interest rate, while providing for the offset accounting treatment described above. Additionally, the monetization structure preserved the $1.4 billion tax deferral that resulted from the 2006 forestlands sales. During 2015, International Paper initiated a series of actions in order to extend the 2006 monetization structure and maintain the long-term nature of the $1.4 billion deferred tax liability. First, International Paper acquired the Class A interests in the Investor Entities from a third party for $198 million in cash. As a result, International Paper became the owner of all of the Class A and Class B interests in the Entities and became the primary beneficiary of the Entities. The assets and liabilities of the Entities, primarily consisting of the Timber Notes and third party bank loans, were recorded at fair value as of the acquisition date of the Class A interests. Subsequent to purchasing the Class A interests in the Investor Entities, International Paper restructured the Entities, which resulted in the formation of wholly- owned, bankruptcy-remote special purpose entities (the 2015 Financing Entities). As part of the restructuring, the Timber Notes held by the Borrower Entities, subject to the third party bank loans, were contributed to the 2015 Financing Entities along with approximately $150 million in International Paper debt obligations, approximately $600 million in cash and approximately $130 million in demand loans from International Paper, and certain Entities were liquidated. As a result of these transactions, International Paper began consolidating the 2015 Financing Entities during the third quarter of 2015. Also, during the third quarter of 2015, the 2015 Financing Entities used $630 million in cash to pay down a portion of the third party bank loans and refinanced approximately $4.2 billion of those loans on nonrecourse terms (the 2015 Refinance Loans). During the fourth quarter of 2015, International Paper extended the maturity date on the Timber Notes for an additional 5 years. The Timber Notes are shown in Financial assets of special purpose entities on the accompanying consolidated balance sheet and mature in August 2021 unless extended for an additional 5 years. These notes are supported by approximately $4.8 billion of irrevocable letters of credit. In addition, the Company extinguished the 2015 Refinance Loans scheduled to mature in May 2016 and entered into new nonrecourse third party bank loans totaling approximately $4.2 billion (the Extension Loans). Provisions of loan agreements related to approximately $1.1 billion of the Extension Loans require the bank issuing letters of credit supporting the Timber Notes pledged as collateral to maintain a credit rating at or above a specified threshold. In the event the credit rating of the letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days with letters of credit from a qualifying financial institution. The Extension Loans are shown in Nonrecourse financial liabilities of special purpose entities on the accompanying consolidated balance sheet and mature in the fourth quarter of 2020. The extinguishment of the 2015 Refinance Loans of approximately $4.2 billion and the issuance of the Extension Loans of approximately $4.2 billion are shown as part of reductions of debt and issuances of debt, respectively, in the financing activities of the consolidated statement of cash flows. maximum reasonably possible loss. However, we do Appeals for the Seventh Circuit granted the defendants' NOTE 12 VARIABLE INTEREST ENTITIES not believe that any material loss is probable. Harris County: International Paper and McGinnis Industrial Maintenance Corporation (MIMC), a subsidiary of Waste Management, Inc., are PRPs at the San Jacinto River Waste Pits Superfund Site (the San Jacinto River Superfund Site) in Harris County, Texas. The PRPs have been actively participating in the activities at the site. In September 2016, the EPA issued a proposed remedial action plan (PRAP) for the site, which identifies the preferred remedy as the removal of the contaminated material currently protected by an armored cap. In addition, the EPA selected a preferred remedy for the separate southern impoundments that requires offsite disposal. The PRPs submitted comments on the PRAP. At this stage, it is premature to predict the outcome or estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable. In December 2011, Harris County, Texas filed a suit against the Company seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River from the San Jacinto River Superfund Site. In November 2014, International Paper secured a zero liability jury verdict and the Texas Court of Appeals affirmed in 2016. Harris County did not seek to appeal, nor file for an extension, before the Supreme Court of Texas prior to the filing deadline. The Company is also defending a lawsuit related to the San Jacinto River Superfund Site brought by approximately 400 individuals who allege property damage and personal injury. Because this case is still in the discovery phase, it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred. Antitrust Containerboard: In September 2010, eight containerboard producers, including International Paper and Temple-Inland, were named as defendants in a purported class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. International Paper Co. (N.D. Ill.). The complaint alleges that the defendants, beginning in February 2004 through November 2010, conspired to limit the supply and thereby increase prices of containerboard products. The class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period February 2004 to November 2010. The complaint seeks to recover unspecified treble damages and attorneys' fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. In March 2015, the District Court certified a class of direct purchasers of containerboard products; in June 2015, the United States Court of petition to appeal, and on August 4, 2016, affirmed the District Court's decision on all counts. We will continue to aggressively defend this case, including challenges to class certification. Likewise, in June 2016, a lawsuit captioned Ashley Furniture Indus., Inc. v. Packaging Corporation of America (W.D. Wis.), was filed in federal court in Wisconsin. The Ashley Furniture lawsuit closely tracks the allegations found in the Kleen Products complaint but also asserts Wisconsin state antitrust claims. Moreover, in January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that International Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys' fees. No class certification materials have been filed to date in the Tennessee action. The Company disputes the allegations made and is vigorously defending each action. However, because the Kleen Products action is in the pretrial motions stage and the Tennessee and Ashley Furniture actions are in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss. Tax On October 16, 2015, the Company was notified of a $110 million tax assessment issued by the state of Sao Paulo, Brazil for tax years 2011 through 2013. The assessment pertains to invoices issued by the Company related to the sale of paper to the editorial segment, which is exempt from the payment of ICMS value-added tax. This assessment is in the preliminary stage. The Company does not believe that a material loss is probable. During the second quarter of 2016, the Company received a favorable first instance judgment vacating the State's assessment. The Company anticipates that the State will appeal the judgment. General The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, personal injury, labor and employment, contracts, sales of property, intellectual property and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of these lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on its consolidated financial statements. forestlands, In connection with the 2006 sale of approximately 5.6 million acres of International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their maturity which was originally August 2016, are supported by irrevocable letters of credit obtained by the buyers of the forestlands. in During 2006, International Paper contributed the Timber Notes to newly formed special purpose entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed special purpose entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes. Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provided that International Paper had, and intended to effect, a legal right to offset its obligation under these debt instruments with its investments in the Entities and despite the offset treatment, these remained debt obligations of International Paper. The use of the Entities facilitated the monetization of the credit enhanced Timber Notes in a cost effective manner by increasing borrowing capacity and lowering the interest rate, while providing for the offset accounting treatment described above. Additionally, the monetization structure preserved the $1.4 billion tax deferral that resulted from the 2006 forestlands sales. During 2015, International Paper initiated a series of actions in order to extend the 2006 monetization structure and maintain the long-term nature of the $1.4 billion deferred tax liability. First, International Paper acquired the Class A interests in the Investor Entities from a third party for $198 million in cash. As a result, International Paper became the owner of all of the Class 63 64 A and Class B interests in the Entities and became the primary beneficiary of the Entities. The assets and liabilities of the Entities, primarily consisting of the Timber Notes and third party bank loans, were recorded at fair value as of the acquisition date of the Class A interests. Subsequent to purchasing the Class A interests in the Investor Entities, International Paper restructured the Entities, which resulted in the formation of wholly- owned, bankruptcy-remote special purpose entities (the 2015 Financing Entities). As part of the restructuring, the Timber Notes held by the Borrower Entities, subject to the third party bank loans, were contributed to the 2015 Financing Entities along with approximately $150 million in International Paper debt obligations, approximately $600 million in cash and approximately $130 million in demand loans from International Paper, and certain Entities were liquidated. As a transactions, result of International Paper began consolidating the 2015 Financing Entities during the third quarter of 2015. Also, during the third quarter of 2015, the 2015 Financing Entities used $630 million in cash to pay down a portion loans and refinanced of approximately $4.2 billion of loans on nonrecourse terms (the 2015 Refinance Loans). third party bank these those the loans third party bank During the fourth quarter of 2015, International Paper extended the maturity date on the Timber Notes for an additional 5 years. The Timber Notes are shown in Financial assets of special purpose entities on the accompanying consolidated balance sheet and mature in August 2021 unless extended for an additional 5 years. These notes are supported by approximately $4.8 billion of irrevocable letters of credit. In addition, the Company extinguished the 2015 Refinance Loans scheduled to mature in May 2016 and entered into new nonrecourse totaling approximately $4.2 billion (the Extension Loans). Provisions of loan agreements related to approximately $1.1 billion of the Extension Loans require the bank issuing letters of credit supporting the Timber Notes pledged as collateral to maintain a credit rating at or above a specified threshold. In the event the credit rating of the letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days with letters of credit from a qualifying financial institution. The Extension Loans are shown in Nonrecourse financial liabilities of special purpose entities on the accompanying consolidated balance sheet and mature in the fourth quarter of 2020. The extinguishment of the 2015 Refinance Loans of approximately $4.2 billion and the issuance of the Extension Loans of approximately $4.2 billion are shown as part of reductions of debt and issuances of debt, respectively, in the financing activities of the consolidated statement of cash flows. The Extension Loans are nonrecourse to the Company, and are secured by approximately $4.8 billion of Timber Notes, the irrevocable letters of credit supporting the Timber Notes and approximately $150 million of International Paper debt obligations. The $150 million of International Paper debt obligations are eliminated in the consolidation of the 2015 Financing Entities and are not reflected in the Company’s consolidated balance sheet. above facilitated described The purchase of the Class A interests and subsequent restructuring the refinancing and extensions of the third party bank loans on nonrecourse terms. The transactions described in long-term these paragraphs result classification of the $1.4 billion deferred tax liability recognized in connection with the 2006 forestlands sale. in continued As of December 31, 2016 and 2015, the fair value of the Timber Notes was $4.7 billion for both the years ended 2016 and 2015, and the fair value of the Extension Loans was $4.3 billion for both the years ended 2016 and 2015. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14. Activity between the Company and the 2015 Financing Entities (the Entities prior to the purchase of the Class A interest discussed above) was as follows: In millions Revenue (a) Expense (a) Cash receipts (b) Cash payments (c) 2014 2015 2016 $ 95 $ 43 $ 38 72 128 81 77 98 21 71 22 73 (a) The net expense related to the Company’s interest in the Entities is included in the accompanying consolidated statement of operations, as International Paper has and intends to effect its legal right to offset as discussed above. After formation of the 2015 Financing Entities, the revenue and expense are included in Interest expense, net in the accompanying consolidated statement of operations. (b) The cash receipts are equity distributions from the Entities to International Paper prior to the formation of the 2015 Financing Entities. After formation of the 2015 Financing Entities, cash receipts are interest received on the Financial assets of special purpose entities. (c) The cash payments are interest payments on the associated debt obligations discussed above. After formation of the 2015 Financing Entities, the payments represent interest paid on Nonrecourse financial liabilities of special purpose entities. In connection with the acquisition of Temple-Inland in February 2012, two special purpose entities became wholly-owned subsidiaries of International Paper. The use of the two wholly-owned special purpose entities discussed below preserved the tax deferral that resulted from the 2007 Temple-Inland timberlands sales. The Company recognized an $831 million deferred tax liability in connection with the 2007 sales, which will be settled with the maturity of the notes in 2027. In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.4 billion. The total consideration consisted almost entirely of notes due in 2027 issued by the buyer of the timberland, which Temple-Inland contributed to two wholly-owned, bankruptcy-remote special purpose entities. The notes are shown in Financial assets of special purpose entities in the accompanying consolidated balance sheet and are supported by $2.4 billion of irrevocable letters of credit issued by three banks, which are required to maintain minimum credit ratings on their long-term debt. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the notes and determined it to be $2.1 billion. As of December 31, 2016 and 2015, the fair value of the notes was $2.2 billion and $2.1 billion, respectively. These notes are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14. In December 2007, Temple-Inland's two wholly-owned special purpose entities borrowed $2.1 billion shown in Nonrecourse financial liabilities of special purpose entities. The loans are repayable in 2027 and are secured only by the $2.4 billion of notes and the irrevocable letters of credit securing the notes and are nonrecourse to us. The loan agreements provide that if a credit rating of any of the banks issuing the letters of credit is downgraded below the specified threshold, the letters of credit issued by that bank must be replaced within 30 days with letters of credit from another qualifying financial institution. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the borrowings and determined it to be $2.0 billion. As of December 31, 2016 and 2015, the fair value of this debt was $2.1 billion and $2.0 billion, respectively. This debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 14. Activity between the Company and the 2007 financing entities was as follows: In millions Revenue (a) Expense (b) Cash receipts (c) Cash payments (d) 2014 2015 2016 $ 37 $ 27 $ 26 25 27 37 15 27 7 18 7 18 (a) The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $19 million for the years ended December 31, 2016, 2015 and 2014, respectively, of accretion income for the amortization of the purchase accounting adjustment on the Financial assets of special purpose entities. (b) The expense is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $7 million for the years ended 65 66 December 31, 2016, 2015 and 2014, respectively, of accretion (a) Reductions related to notes with interest rates ranging from expense for the amortization of the purchase accounting adjustment on the Nonrecourse financial liabilities of special (c) The cash receipts are interest received on the Financial assets purpose entities. of special purpose entities. 2.00% to 9.38% with original maturities from 2015 to 2030 for the years ended December 31, 2016, 2015 and 2014. Includes the $630 million payment for a portion of the Special Purpose Entity Liability for the year ended December 31, 2015 (see Note 12 Variable Interest Entities). (d) The cash payments are interest paid on Nonrecourse financial (b) Amounts are included in Restructuring and other charges in liabilities of special purpose entities. the accompanying consolidated statements of operations. NOTE 13 DEBT AND LINES OF CREDIT A summary of long-term debt follows: In 2016, International Paper issued $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027, and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047. In addition, the Company repaid approximately $266 million of notes with an interest rate of 7.95% and an original maturity of 2018. Pre-tax early debt retirement costs of $29 million related to the debt repayments, including $31 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2016. In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of December 31, 2016, the Company had $165 million outstanding under this program. In 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to these debt repayments, including the $211 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2015. Amounts related to early debt extinguishment during the years ended December 31, 2016, 2015 and 2014 were as follows: In millions Debt reductions (a) Pre-tax early debt extinguishment costs (b) 29 207 276 2016 2015 2014 $ 266 $ 2,151 $ 1,625 In millions at December 31 8.7% note – due 2038 9 3/8% note – due 2019 7.95% debenture – due 2018 7.5% note – due 2021 7.3% note – due 2039 6 7/8% notes – due 2023 – 2029 6.65% note – due 2037 6.4% to 7.75% debentures due 2025 – 2027 6 5/8% note – due 2018 6.0% note – due 2041 5.25% note – due 2016 4.8% note - due 2044 4.75% note – due 2022 3.00% to 4.40% notes – due 2024 – 2047 Floating rate notes – due 2016 – 2025 (a) Environmental and industrial development bonds – due 2016 – 2035 (b) Short-term notes (c) Other (d) Total (e) Less: current maturities Long-term debt 2016 2015 $ 264 $ 295 382 598 721 131 4 142 72 585 — 796 810 3,786 763 681 — 4 11,314 239 264 295 648 603 721 131 4 142 185 585 261 796 817 1,490 438 594 5 11 9,270 426 $ 11,075 $ 8,844 5.00% to 5.15% notes – due 2035 – 2046 1,280 1,280 (a) The weighted average interest rate on these notes was 2.2% (b) The weighted average interest rate on these bonds was 5.9% in 2016 and 2.9% in 2015. in 2016 and 5.8% in 2015. (c) The weighted average interest rate was 2.2% in 2015. Includes $5 million at December 31, 2015 related to non-U.S. denominated borrowings with a weighted average interest rate of 2.2% in 2015. (d) Includes $2 million at December 31, 2016 and $8 million at December 31, 2015 related to the unamortized gain on interest rate swap unwinds (see Note 14 Derivatives and Hedging Instruments). (e) The fair market value was approximately $12.0 billion at December 31, 2016 and $9.9 billion at December 31, 2015. Total maturities of long-term debt over the next five years are 2017 – $239 million; 2018 – $690 million; 2019 – $433 million; 2020 – $179 million; and 2021 – $612 million. At December 31, 2016, International Paper’s credit facilities (the Agreements) totaled $2.1 billion. The Agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The The Extension Loans are nonrecourse to the Company, deferred tax liability in connection with the 2007 sales, and are secured by approximately $4.8 billion of Timber which will be settled with the maturity of the notes in Notes, the irrevocable letters of credit supporting the 2027. Timber Notes and approximately $150 million of International Paper debt obligations. The $150 million In October 2007, Temple-Inland sold 1.55 million acres of International Paper debt obligations are eliminated of timberland for $2.4 billion. The total consideration in the consolidation of the 2015 Financing Entities and consisted almost entirely of notes due in 2027 issued are not reflected in the Company’s consolidated by the buyer of the timberland, which Temple-Inland balance sheet. contributed to two wholly-owned, bankruptcy-remote special purpose entities. The notes are shown in The purchase of the Class A interests and subsequent Financial assets of special purpose entities in the restructuring described above facilitated the accompanying consolidated balance sheet and are refinancing and extensions of the third party bank loans supported by $2.4 billion of irrevocable letters of credit on nonrecourse terms. The transactions described in issued by three banks, which are required to maintain these paragraphs result in continued long-term minimum credit ratings on their long-term debt. In the classification of the $1.4 billion deferred tax liability third quarter of 2012, International Paper completed its recognized in connection with the 2006 forestlands preliminary analysis of the acquisition date fair value of sale. the notes and determined it to be $2.1 billion. As of December 31, 2016 and 2015, the fair value of the notes As of December 31, 2016 and 2015, the fair value of was $2.2 billion and $2.1 billion, respectively. These the Timber Notes was $4.7 billion for both the years notes are classified as Level 2 within the fair value ended 2016 and 2015, and the fair value of the hierarchy, which is further defined in Note 14. Extension Loans was $4.3 billion for both the years ended 2016 and 2015. The Timber Notes and Extension In December 2007, Temple-Inland's two wholly-owned Loans are classified as Level 2 within the fair value special purpose entities borrowed $2.1 billion shown in hierarchy, which is further defined in Note 14. Nonrecourse financial liabilities of special purpose entities. The loans are repayable in 2027 and are Activity between the Company and the 2015 Financing secured only by the $2.4 billion of notes and the Entities (the Entities prior to the purchase of the Class irrevocable letters of credit securing the notes and are A interest discussed above) was as follows: In millions Revenue (a) Expense (a) Cash receipts (b) Cash payments (c) 2016 2015 2014 $ 95 $ 43 $ 38 128 77 98 81 21 71 72 22 73 (a) The net expense related to the Company’s interest in the Entities is included in the accompanying consolidated statement of operations, as International Paper has and intends to effect its legal right to offset as discussed above. After formation of the 2015 Financing Entities, the revenue and expense are included in Interest expense, net in the accompanying consolidated statement of operations. (b) The cash receipts are equity distributions from the Entities to International Paper prior to the formation of the 2015 Financing Entities. After formation of the 2015 Financing Entities, cash receipts are interest received on the Financial assets of special purpose entities. (c) The cash payments are interest payments on the associated debt obligations discussed above. After formation of the 2015 Financing Entities, the payments represent interest paid on Nonrecourse financial liabilities of special purpose entities. In connection with the acquisition of Temple-Inland in February 2012, two special purpose entities became wholly-owned subsidiaries of International Paper. The use of the two wholly-owned special purpose entities discussed below preserved the tax deferral that resulted from the 2007 Temple-Inland timberlands sales. The Company recognized an $831 million nonrecourse to us. The loan agreements provide that if a credit rating of any of the banks issuing the letters of credit is downgraded below the specified threshold, the letters of credit issued by that bank must be replaced within 30 days with letters of credit from another qualifying financial institution. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the borrowings and determined it to be $2.0 billion. As of December 31, 2016 and 2015, the fair value of this debt was $2.1 billion and $2.0 billion, respectively. This debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 14. Activity between the Company and the 2007 financing entities was as follows: In millions Revenue (a) Expense (b) Cash receipts (c) Cash payments (d) 2016 2015 2014 $ 37 $ 27 $ 26 37 15 27 27 7 18 25 7 18 (a) The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $19 million for the years ended December 31, 2016, 2015 and 2014, respectively, of accretion income for the amortization of the purchase accounting adjustment on the Financial assets of special purpose entities. (b) The expense is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $7 million for the years ended December 31, 2016, 2015 and 2014, respectively, of accretion expense for the amortization of the purchase accounting adjustment on the Nonrecourse financial liabilities of special purpose entities. (c) The cash receipts are interest received on the Financial assets of special purpose entities. (d) The cash payments are interest paid on Nonrecourse financial liabilities of special purpose entities. (a) Reductions related to notes with interest rates ranging from 2.00% to 9.38% with original maturities from 2015 to 2030 for the years ended December 31, 2016, 2015 and 2014. Includes the $630 million payment for a portion of the Special Purpose Entity Liability for the year ended December 31, 2015 (see Note 12 Variable Interest Entities). (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. NOTE 13 DEBT AND LINES OF CREDIT A summary of long-term debt follows: In 2016, International Paper issued $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027, and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047. In addition, the Company repaid approximately $266 million of notes with an interest rate of 7.95% and an original maturity of 2018. Pre-tax early debt retirement costs of $29 million related to the debt repayments, including $31 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2016. In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of December 31, 2016, the Company had $165 million outstanding under this program. In 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to these debt repayments, the $211 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2015. including Amounts related to early debt extinguishment during the years ended December 31, 2016, 2015 and 2014 were as follows: In millions Debt reductions (a) 2016 2015 2014 $ 266 $ 2,151 $ 1,625 Pre-tax early debt extinguishment costs (b) 29 207 276 In millions at December 31 8.7% note – due 2038 9 3/8% note – due 2019 7.95% debenture – due 2018 7.5% note – due 2021 7.3% note – due 2039 6 7/8% notes – due 2023 – 2029 6.65% note – due 2037 6.4% to 7.75% debentures due 2025 – 2027 6 5/8% note – due 2018 6.0% note – due 2041 5.25% note – due 2016 2016 2015 $ 264 $ 295 382 598 721 131 4 142 72 585 — 264 295 648 603 721 131 4 142 185 585 261 5.00% to 5.15% notes – due 2035 – 2046 1,280 1,280 4.8% note - due 2044 4.75% note – due 2022 3.00% to 4.40% notes – due 2024 – 2047 Floating rate notes – due 2016 – 2025 (a) Environmental and industrial development bonds – due 2016 – 2035 (b) Short-term notes (c) Other (d) Total (e) Less: current maturities Long-term debt 796 810 3,786 763 681 — 4 11,314 239 796 817 1,490 438 594 5 11 9,270 426 $ 11,075 $ 8,844 (a) The weighted average interest rate on these notes was 2.2% in 2016 and 2.9% in 2015. (b) The weighted average interest rate on these bonds was 5.9% in 2016 and 5.8% in 2015. (c) The weighted average interest rate was 2.2% in 2015. Includes $5 million at December 31, 2015 related to non-U.S. denominated borrowings with a weighted average interest rate of 2.2% in 2015. Includes $2 million at December 31, 2016 and $8 million at December 31, 2015 related to the unamortized gain on interest rate swap unwinds (see Note 14 Derivatives and Hedging Instruments). (d) (e) The fair market value was approximately $12.0 billion at December 31, 2016 and $9.9 billion at December 31, 2015. Total maturities of long-term debt over the next five years are 2017 – $239 million; 2018 – $690 million; 2019 – $433 million; 2020 – $179 million; and 2021 – $612 million. At December 31, 2016, International Paper’s credit facilities (the Agreements) totaled $2.1 billion. The Agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The 65 66 Agreements include a $1.5 billion contractually committed bank facility that expires in December 2021 and has a facility fee of 0.15% payable annually. The liquidity facilities also include up to $600 million of uncommitted financings based on eligible receivables balances (approximately $600 million available as of December 31, 2016) under a receivables securitization program that expires in December 2017. At December 31, 2016, there were no borrowings under either the bank facility or receivables securitization program. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2016, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. NOTE 14 DERIVATIVES AND HEDGING ACTIVITIES International Paper periodically uses derivatives and other financial instruments to hedge exposures to interest risks. rate, commodity and currency International Paper does not hold or issue financial instruments for trading purposes. For hedges that meet the hedge accounting criteria, International Paper, at inception, formally designates and documents the instrument as a fair value hedge, a cash flow hedge or a net investment hedge of a specific underlying exposure. INTEREST RATE RISK MANAGEMENT Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount. Interest rate swaps that meet specific accounting criteria are accounted for as fair value or cash flow hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in interest expense. For cash flow hedges, the effective portion of the changes in the fair value of the hedging instrument in Accumulated other comprehensive income (“AOCI”) and reclassified into interest expense over the life of the underlying debt. The ineffective portion for both cash flow and fair value hedges, which is not material for any year presented, is immediately recognized in earnings. reported is FOREIGN CURRENCY RISK MANAGEMENT We manufacture and sell our products and finance operations in a number of countries throughout the 67 world and, as a result, are exposed to movements in foreign currency exchange rates. The purpose of our foreign currency hedging program is to manage the volatility associated with the changes in exchange rates. To manage this exchange rate risk, we have historically utilized a combination of forward contracts, options and currency swaps. Contracts that qualify are designated as cash flow hedges of certain forecasted transactions denominated in foreign currencies. The effective portion of the changes in fair value of these instruments is reported in AOCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings. in value of certain non-qualifying The change instruments used foreign exchange to manage exposure of intercompany financing transactions and certain balance sheet items subject to revaluation is immediately recognized in earnings, substantially offsetting the foreign currency mark-to-market impact of the related exposure. COMMODITY RISK MANAGEMENT Certain raw materials used in our production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility in earnings due to price fluctuations, we may utilize swap contracts or forward purchase contracts. Derivative instruments are reported in the consolidated balance sheets at their fair values, unless the derivative instruments qualify for the normal purchase normal sale ("NPNS") exception under GAAP and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized on the balance sheet. Contracts that qualify are designated as cash flow hedges of forecasted commodity purchases. The effective portion of the changes in fair value for these instruments is reported in AOCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transactions affect earnings. The ineffective and non- qualifying portions, which are not material for any year presented, are immediately recognized in earnings. The change in the fair value of certain non-qualifying instruments used to reduce commodity price volatility is immediately recognized in earnings. The notional amounts of qualifying and non-qualifying The following table shows gains or losses recognized instruments used in hedging transactions were as in AOCI, net of tax, related to derivative instruments: follows: In millions Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts (a) Derivatives in Fair Value Hedging Relationships: Interest rate contracts Derivatives Not Designated as Hedging Instruments: Electricity contract Foreign exchange contracts Interest rate contracts December 31, December 31, 2016 2015 275 290 In millions Foreign exchange contracts Interest rate contracts Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) 2016 2015 2014 $ $ 4 $ (10) (6) $ (3) $ — (3) $ 10 — 10 — 6 24 — Total loss. 17 16 35 38 During the next 12 months, the amount of the December 31, 2016 AOCI balance, after tax, that is expected to be reclassified to earnings is an immaterial (a) These contracts had maturities of two years or less as of December 31, 2016. The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non- qualifying financial instruments used in hedging transactions were as follows: In millions Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts Total In millions Derivatives in Fair Value Hedging Relationships: Interest rate contracts Derivatives Not Designated as Hedging Instruments: Debt Total Total Electricity Contracts Foreign exchange contracts Interest rate contracts Gain (Loss) Reclassified from AOCI into Income (Effective Portion) 2016 2015 2014 Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) $ $ 7 $ 7 $ (12) $ (12) $ 4 4 Cost of products sold Gain (Loss) Recognized in Income 2016 2015 2014 Location of Gain (Loss) in Consolidated Statement of Operations $ — $ 3 $ 1 Interest expense, net — (3) (1) Interest expense, net $ — $ — $ — $ — $ — 5 (a) (7) (4) $ (2) (1) Cost of products sold Cost of products sold 13 (b) 12 (c) Interest expense, net $ 5 $ 2 $ 9 (a) Excluding gain of $2 million related to debt reduction recorded to Restructuring and other charges. (b) Excluding gain of $3 million related to debt reduction recorded to Restructuring and other charges. (c) Excluding gain of $7 million, net related to debt issuance and debt reduction recorded to Restructuring and other charges. 68 Agreements include a $1.5 billion contractually world and, as a result, are exposed to movements in committed bank facility that expires in December 2021 foreign currency exchange rates. The purpose of our and has a facility fee of 0.15% payable annually. The foreign currency hedging program is to manage the liquidity facilities also include up to $600 million of volatility associated with the changes in exchange uncommitted financings based on eligible receivables rates. balances (approximately $600 million available as of December 31, 2016) under a receivables securitization To manage this exchange rate risk, we have historically program that expires in December 2017. At December utilized a combination of forward contracts, options and 31, 2016, there were no borrowings under either the currency swaps. Contracts that qualify are designated bank facility or receivables securitization program. as cash flow hedges of certain forecasted transactions denominated in foreign currencies. The effective Maintaining an investment grade credit rating is an portion of the changes in fair value of these instruments important element of International Paper’s financing is reported in AOCI and reclassified into earnings in the strategy. At December 31, 2016, the Company held same financial statement line item and in the same long-term credit ratings of BBB (stable outlook) and period or periods during which the related hedged Baa2 (stable outlook) by S&P and Moody’s, transactions affect earnings. The ineffective portion, respectively. ACTIVITIES NOTE 14 DERIVATIVES AND HEDGING which is not material for any year presented, is immediately recognized in earnings. The change in value of certain non-qualifying instruments used to manage foreign exchange International Paper periodically uses derivatives and exposure of intercompany financing transactions and other financial instruments to hedge exposures to certain balance sheet items subject to revaluation is interest rate, commodity and currency risks. immediately recognized in earnings, substantially International Paper does not hold or issue financial offsetting the foreign currency mark-to-market impact instruments for trading purposes. For hedges that meet of the related exposure. the hedge accounting criteria, International Paper, at inception, formally designates and documents the instrument as a fair value hedge, a cash flow hedge or a net investment hedge of a specific underlying exposure. INTEREST RATE RISK MANAGEMENT Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount. Interest rate swaps that meet specific accounting criteria are accounted for as fair value or cash flow hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in interest expense. For cash flow hedges, the effective portion of the changes in the fair value of the hedging instrument is reported in Accumulated other comprehensive income (“AOCI”) and reclassified into interest expense over the life of the underlying debt. The ineffective portion for both cash flow and fair value hedges, which is not material for any year presented, is immediately recognized in earnings. FOREIGN CURRENCY RISK MANAGEMENT We manufacture and sell our products and finance operations in a number of countries throughout the COMMODITY RISK MANAGEMENT Certain raw materials used in our production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility in earnings due to price fluctuations, we may utilize swap contracts or forward purchase contracts. Derivative instruments are reported in the consolidated balance sheets at their fair values, unless the derivative instruments qualify for the normal purchase normal sale ("NPNS") exception under GAAP and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized on the balance sheet. Contracts that qualify are designated as cash flow hedges of forecasted commodity purchases. The effective portion of the changes in fair value for these instruments is reported in AOCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transactions affect earnings. The ineffective and non- qualifying portions, which are not material for any year presented, are immediately recognized in earnings. The change in the fair value of certain non-qualifying instruments used to reduce commodity price volatility is immediately recognized in earnings. The notional amounts of qualifying and non-qualifying instruments used in hedging transactions were as follows: In millions Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts (a) Derivatives in Fair Value Hedging Relationships: Interest rate contracts Derivatives Not Designated as Hedging Instruments: Electricity contract Foreign exchange contracts Interest rate contracts December 31, 2016 December 31, 2015 275 290 — 6 24 — 17 16 35 38 (a) These contracts had maturities of two years or less as of December 31, 2016. The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments: In millions Foreign exchange contracts Interest rate contracts Total Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) 2016 2015 2014 $ $ 4 $ (10) (6) $ (3) $ — (3) $ 10 — 10 During the next 12 months, the amount of the December 31, 2016 AOCI balance, after tax, that is expected to be reclassified to earnings is an immaterial loss. The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non- qualifying financial instruments used in hedging transactions were as follows: In millions Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts Total In millions Derivatives in Fair Value Hedging Relationships: Interest rate contracts Debt Total Derivatives Not Designated as Hedging Instruments: Electricity Contracts Foreign exchange contracts Interest rate contracts Total Gain (Loss) Reclassified from AOCI into Income (Effective Portion) 2016 2015 2014 Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) $ $ 7 $ 7 $ (12) $ (12) $ 4 4 Cost of products sold Gain (Loss) Recognized in Income 2016 2015 2014 Location of Gain (Loss) in Consolidated Statement of Operations $ — $ 3 $ 1 Interest expense, net — (3) (1) Interest expense, net $ — $ — $ — $ — $ — 5 (a) (7) (4) $ (2) (1) Cost of products sold Cost of products sold 13 (b) 12 (c) Interest expense, net $ 5 $ 2 $ 9 (a) Excluding gain of $2 million related to debt reduction recorded to Restructuring and other charges. (b) Excluding gain of $3 million related to debt reduction recorded to Restructuring and other charges. (c) Excluding gain of $7 million, net related to debt issuance and debt reduction recorded to Restructuring and other charges. 67 68 The following activity is related to fully effective interest rate swaps designated as fair value hedges: The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet: 2016 2015 Issued Terminated Undesignated Issued Terminated Undesignated Fair Value Measurements Level 2 – Significant Other Observable Inputs In millions Second Quarter First Quarter Total $ $ — — — $ $ — $ 55 55 $ — — — $ $ — — — $ $ 175 — 175 $ $ 38 — 38 Note: There was no activity in the third and fourth quarters in either 2016 or 2015. Fair Value Measurements International Paper’s financial assets and liabilities that are recorded at fair value consist of derivative contracts, including interest rate swaps, foreign currency forward contracts, options and other financial instruments that are used interest rate, commodity and currency risks. For these financial instruments, fair value is determined at each balance sheet date using an income approach. to hedge exposures to The guidance for fair value measurements and disclosures sets out a fair value hierarchy that groups fair value measurement inputs into the following three classifications: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability reflecting the reporting entity’s own assumptions or external inputs from inactive markets. Transfers between levels are recognized at the end of the reporting period. All of International Paper’s derivative fair value measurements use Level 2 inputs. Below is a description of the valuation calculation and the inputs used for each class of contract: Interest Rate Contracts Interest rate contracts are valued using swap curves obtained from an independent market data provider. The market value of each contract is the sum of the fair value of all future interest payments between the contract counterparties, discounted to present value. The fair value of the future interest payments is determined by comparing the contract rate to the derived forward interest rate and present valued using the appropriate derived interest rate curve. Foreign Exchange Contracts Foreign currency forward and option contracts are valued using standard valuation models. Significant inputs used in these standard valuation models are foreign currency forward and interest rate curves and a volatility measurement. The fair value of each contract is present valued using the applicable interest rate. All significant inputs are readily available in public markets, or can be derived from observable market transactions. Electricity Contract The electricity contract is valued using the Mid-C index forward curve obtained from the Intercontinental Exchange. The market value of the contract is the sum of the fair value of all future purchase payments between the contract counterparties, discounted to present value. The fair value of the future purchase payments is determined by comparing the contract price to the forward price and present valued using International Paper's cost of capital. Since the volume and level of activity of the markets that each of the above contracts are traded in has been normal, the fair value calculations have not been adjusted for inactive markets or disorderly transactions. 69 70 Assets Liabilities December 31, December 31, December 31, December 31, 2016 2015 2016 2015 $ $ $ $ $ 3 (a) $ 5 (a) $ 4 (b) $ 3 — — 3 $ $ $ $ 5 — — 5 $ $ $ $ 4 $ 2 (b) $ 2 6 $ $ 1 (b) 1 7 (c) 7 8 In millions Derivatives designated as hedging instruments Foreign exchange contracts – cash flow Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments Total derivatives not designated as hedging Electricity contract instruments Total derivatives (a) (b) (c) sheet. Included in Other current assets in the accompanying consolidated balance sheet. Included in Other accrued liabilities in the accompanying consolidated balance sheet. Includes $4 million recorded in Other accrued liabilities and $3 million recorded in Other liabilities in the accompanying consolidated balance The above contracts are subject to enforceable master not required to post any collateral as of December 31, netting arrangements that provide rights of offset with 2016 or 2015. each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an NOTE 15 CAPITAL STOCK accounting policy election to not offset the fair value of The authorized capital stock at both December 31, recognized derivative assets and derivative liabilities in 2016 and 2015, consisted of 990,850,000 shares of the consolidated balance sheet. The amounts owed to common stock, $1 par value; 400,000 shares of the counterparties and owed to the Company are cumulative $4 preferred stock, without par value (stated considered immaterial with respect to each value $100 per share); and 8,750,000 shares of serial counterparty and in the aggregate with all preferred stock, $1 par value. The serial preferred stock counterparties. Credit-Risk-Related Contingent Features is issuable in one or more series by the Board of Directors without further shareholder action. The following is a rollforward of shares of common stock International Paper evaluates credit risk by monitoring for the three years ended December 31, 2016, 2015 its exposure with each counterparty to ensure that and 2014: exposure stays within acceptable policy limits. Credit risk is also mitigated by contractual provisions with the majority of our banks. Certain of the contracts include a credit support annex that requires the posting of collateral by the counterparty or International Paper based on each party’s rating and level of exposure. Based on the Company’s current credit rating, the collateral threshold is generally $15 million. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would terminate. The fair values of derivative instruments containing credit-risk-related contingent features in a net liability position were $3 In thousands Balance at January 1, 2014 Common Stock Issued Treasury 447,222 10,868 Issuance of stock for various plans, net 1,632 (4,668) Repurchase of stock — 22,534 Balance at December 31, 2014 448,854 28,734 Balance at December 31, 2015 448,916 36,776 Issuance of stock for various plans, net Repurchase of stock Issuance of stock for various plans, net Repurchase of stock 62 (4,230) — 12,272 — — (2,745) 3,640 Balance at December 31, 2016 448,916 37,671 NOTE 16 RETIREMENT PLANS million and $1 million as of December 31, 2016 and International Paper sponsors and maintains the December 31, 2015, respectively. The Company was Retirement Plan of International Paper Company (the “Pension Plan”), a tax-qualified defined benefit pension 2016 2015 In millions Second Quarter First Quarter Total Issued Terminated Undesignated Issued Terminated Undesignated $ $ — — — $ $ — $ 55 55 $ — — — $ $ — — — $ $ 175 — 175 $ $ 38 38 — Note: There was no activity in the third and fourth quarters in either 2016 or 2015. Fair Value Measurements The market value of each contract is the sum of the fair value of all future interest payments between the International Paper’s financial assets and liabilities that contract counterparties, discounted to present value. are recorded at fair value consist of derivative contracts, The fair value of the future interest payments is including interest rate swaps, foreign currency forward determined by comparing the contract rate to the contracts, options and other financial instruments that derived forward interest rate and present valued using are used to hedge exposures to interest rate, the appropriate derived interest rate curve. commodity and currency risks. For these financial instruments, fair value is determined at each balance sheet date using an income approach. Foreign Exchange Contracts The guidance for fair value measurements and valued using standard valuation models. Significant disclosures sets out a fair value hierarchy that groups inputs used in these standard valuation models are fair value measurement inputs into the following three foreign currency forward and interest rate curves and Foreign currency forward and option contracts are classifications: a volatility measurement. The fair value of each contract is present valued using the applicable interest Level 1: Quoted market prices in active markets for rate. All significant inputs are readily available in public identical assets or liabilities. markets, or can be derived from observable market Level 2: Observable market-based inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. transactions. Electricity Contract The electricity contract is valued using the Mid-C index forward curve obtained from the Intercontinental Level 3: Unobservable inputs for the asset or liability Exchange. The market value of the contract is the sum reflecting the reporting entity’s own assumptions or of the fair value of all future purchase payments external inputs from inactive markets. between the contract counterparties, discounted to present value. The fair value of the future purchase Transfers between levels are recognized at the end of payments is determined by comparing the contract the reporting period. All of International Paper’s price to the forward price and present valued using derivative fair value measurements use Level 2 inputs. International Paper's cost of capital. Below is a description of the valuation calculation and the inputs used for each class of contract: Interest Rate Contracts Interest rate contracts are valued using swap curves obtained from an independent market data provider. Since the volume and level of activity of the markets that each of the above contracts are traded in has been normal, the fair value calculations have not been adjusted for inactive markets or disorderly transactions. The following activity is related to fully effective interest rate swaps designated as fair value hedges: The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet: Fair Value Measurements Level 2 – Significant Other Observable Inputs In millions Assets Liabilities December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 Derivatives designated as hedging instruments Foreign exchange contracts – cash flow Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments Electricity contract Total derivatives not designated as hedging instruments Total derivatives $ $ $ $ $ 3 (a) $ 5 (a) $ 4 (b) $ 3 — — 3 $ $ $ $ 5 — — 5 $ $ $ $ 4 $ 2 (b) $ 2 6 $ $ 1 (b) 1 7 (c) 7 8 (a) (b) (c) Included in Other current assets in the accompanying consolidated balance sheet. Included in Other accrued liabilities in the accompanying consolidated balance sheet. Includes $4 million recorded in Other accrued liabilities and $3 million recorded in Other liabilities in the accompanying consolidated balance sheet. The above contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an accounting policy election to not offset the fair value of recognized derivative assets and derivative liabilities in the consolidated balance sheet. The amounts owed to the counterparties and owed to the Company are considered to each counterparty and the aggregate with all counterparties. immaterial with in respect Credit-Risk-Related Contingent Features International Paper evaluates credit risk by monitoring its exposure with each counterparty to ensure that exposure stays within acceptable policy limits. Credit risk is also mitigated by contractual provisions with the majority of our banks. Certain of the contracts include a credit support annex that requires the posting of collateral by the counterparty or International Paper based on each party’s rating and level of exposure. Based on the Company’s current credit rating, the collateral threshold is generally $15 million. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would fair values of derivative instruments containing credit-risk-related contingent features in a net liability position were $3 million and $1 million as of December 31, 2016 and December 31, 2015, respectively. The Company was terminate. The 69 70 not required to post any collateral as of December 31, 2016 or 2015. NOTE 15 CAPITAL STOCK The authorized capital stock at both December 31, 2016 and 2015, consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 preferred stock, without par value (stated value $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. The following is a rollforward of shares of common stock for the three years ended December 31, 2016, 2015 and 2014: Common Stock In thousands Balance at January 1, 2014 Issuance of stock for various plans, net Repurchase of stock Balance at December 31, 2014 Issued 447,222 1,632 Treasury 10,868 (4,668) — 22,534 28,734 448,854 Issuance of stock for various plans, net Repurchase of stock Balance at December 31, 2015 Issuance of stock for various plans, net Repurchase of stock (4,230) 62 — 12,272 36,776 448,916 — — (2,745) 3,640 Balance at December 31, 2016 448,916 37,671 NOTE 16 RETIREMENT PLANS International Paper sponsors and maintains the Retirement Plan of International Paper Company (the “Pension Plan”), a tax-qualified defined benefit pension plan that provides retirement benefits to substantially all U.S. salaried employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly and union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004 are not eligible to participate in the Pension Plan, but receive a company contribution to their individual savings plan accounts (see Other U.S. Plans); however, salaried employees hired by Temple Inland prior to March 1, 2007 or Weyerhaeuser Company's Cellulose Fibers division prior to December 1, 2011 also participate in the Pension Plan. The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees). The Company also has three unfunded nonqualified defined benefit pension plans: a Pension Restoration Plan available to employees hired prior to July 1, 2004 that provides retirement benefits based on eligible compensation in excess of limits set by the Internal Revenue Service, and two supplemental retirement plans for senior managers (SERP), which is an alternative retirement plan for salaried employees who are senior vice presidents and above or who are designated by the chief executive officer as participants. These nonqualified plans are only funded to the extent of benefits paid, which totaled $21 million, $62 million and $38 million in 2016, 2015 and 2014, respectively, and which are expected to be $38 million in 2017. The Company will freeze participation, including credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the two SERP plans for all service on or after January 1, 2019. This change will not affect benefits accrued through December 31, 2018. For service after this date, employees affected by the freeze will receive Retirement Savings Account contributions as described later in this Note 16. Many non-U.S. employees are covered by various retirement benefit arrangements, some of which are considered to be defined benefit pension plans for accounting purposes. OBLIGATIONS AND FUNDED STATUS The following table shows the changes in the benefit obligation and plan assets for 2016 and 2015, and the plans’ funded status. 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $14,438 $ 204 $14,741 $ 233 158 580 (1,222) 495 1 — (767) 4 9 (2) 35 — (1) (9) 161 597 (43) (254) — — (764) 6 10 (12) (1) — — (7) — (21) — (25) $13,683 $ 219 $14,438 $ 204 $10,923 $ 155 $10,918 $ 180 607 771 (767) (1,222) 17 8 (9) (2) (1) 813 (764) (43) 4 9 (7) (12) — (16) — (19) $10,312 $ 153 $10,923 $ 155 $ (3,371) $ (66) $ (3,515) $ (49) In millions Change in projected benefit obligation: Benefit obligation, January 1 Service cost Interest cost Settlements Actuarial loss (gain) Acquisitions Plan amendments Benefits paid Effect of foreign currency exchange rate movements Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Actual return on plan assets Company contributions Benefits paid Settlements Effect of foreign currency exchange rate movements Fair value of plan assets, December 31 Funded status, December 31 Amounts recognized in the consolidated balance sheet: Non-current asset Current liability $ — $ 6 $ — $ (40) (3) (22) Non-current liability (3,331) (69) (3,493) $ (3,371) $ (66) $ (3,515) $ 7 (2) (54) (49) Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Prior service cost Net actuarial loss $ 125 $ — $ 166 $ — 4,757 61 4,899 $ 4,882 $ 61 $ 5,065 $ 42 42 $ (183) $ comprised the following: The components of the $183 million and $19 million change related to U.S. plans and non-U.S. plans, respectively, in the amounts recognized in OCI during 2016 consisted of: In millions Current year actuarial (gain) loss $ 703 $ U.S. Plans Non- U.S. Plans Amortization of actuarial loss Current year prior service cost Amortization of prior service cost Settlements Effect of foreign currency exchange rate movements (400) — (41) (445) — 27 (1) (1) — — (6) 19 The accumulated benefit obligation at December 31, 2016 and 2015 was $13.5 billion and $14.3 billion, respectively, for our U.S. defined benefit plans and $205 million and $189 million, respectively, at December 31, 2016 and 2015 for our non-U.S. defined benefit plans. The following table summarizes information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2016 and 2015: 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 13,683 $ 190 $ 14,438 $ 182 13,535 10,312 177 118 14,282 10,923 168 126 In millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets ASC 715, “Compensation – Retirement Benefits” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains NET PERIODIC PENSION EXPENSE Service cost is the actuarial present value of benefits attributed by the plans’ benefit formula to services rendered by employees during the year. Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current-year earnings from the investment of plan assets using an estimated long-term rate of return. Net periodic pension expense for qualified and nonqualified U.S. and non-U.S. defined benefit plans 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 158 $ 4 $ 161 $ 6 $ 145 $ 580 9 597 10 600 (815) (10) (783) (11) (762) (14) 400 1 428 1 374 — 41 — 445 — — — 43 — 15 — — — 30 — — 5 13 — (4) — In millions Service cost Interest cost Expected return on plan assets Actuarial loss / (gain) Amortization of prior service cost Curtailment loss / (gain) Settlement loss Net periodic pension expense (a) $ 809 $ 4 $ 461 $ 6 $ 387 $ — (a) Excludes $1 million in curtailments in 2014 related to the pension freeze remeasurement that were recorded in restructuring and other charges. The increase in 2016 pension expense reflects a decrease in the discount rate from 4.10% in 2015 to a weighted average of 4.05% in 2016 (4.40% from January 1, 2016 to June 30, 2016, 3.80% from July 1, 2016 to September 30, 2016 and 3.60% from October 1, 2016 to December 31, 2016 for the qualified plan) and a $445 million settlement charge in 2016 related to the previously announced optional lump sum payout partially offset by higher asset returns and lower actuarial losses. Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. The amount of total payments under this program was approximately $1.2 billion, and were made from Plan trust assets on June 30, 2016. Based on the level of payments made, settlement accounting rules applied and resulted in a in subsequent years. The estimated net loss and prior As previously disclosed, in the first quarter of 2016 service cost that will be amortized from AOCI into net International Paper announced a voluntary, limited- periodic pension cost for the U.S. plans during the next time opportunity for former employees who are fiscal year are expected to be $341 million and $28 participants in the Retirement Plan of International million, respectively. 71 72 plan that provides retirement benefits to substantially all U.S. salaried employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly and union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004 are not eligible to participate in the Pension Plan, but receive a company contribution to their individual savings plan accounts (see Other U.S. Plans); however, salaried employees hired by Temple Inland prior to March 1, 2007 or Weyerhaeuser Company's Cellulose Fibers division prior to December 1, 2011 also participate in the Pension Plan. The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees). The Company also has three unfunded nonqualified defined benefit pension plans: a Pension Restoration Plan available to employees hired prior to July 1, 2004 that provides retirement benefits based on eligible compensation in excess of limits set by the Internal Revenue Service, and two supplemental retirement plans for senior managers (SERP), which is an alternative retirement plan for salaried employees who are senior vice presidents and above or who are designated by the chief executive officer as participants. These nonqualified plans are only funded to the extent of benefits paid, which totaled $21 million, $62 million and $38 million in 2016, 2015 and 2014, respectively, and which are expected to be $38 million in 2017. credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the two SERP plans for all service on or after January 1, 2019. This change will not affect benefits accrued through December 31, 2018. For service after this date, employees affected by the freeze will receive Retirement Savings Account contributions as described later in this Note 16. Many non-U.S. employees are covered by various retirement benefit arrangements, some of which are considered to be defined benefit pension plans for accounting purposes. OBLIGATIONS AND FUNDED STATUS The following table shows the changes in the benefit obligation and plan assets for 2016 and 2015, and the plans’ funded status. 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $14,438 $ 204 $14,741 $ 233 (1,222) 158 580 495 1 — (767) 4 9 (2) 35 — (1) (9) 161 597 (43) (254) — — (764) 6 10 (12) (1) — — (7) — (21) — (25) $13,683 $ 219 $14,438 $ 204 $10,923 $ 155 $10,918 $ 180 607 771 (767) (1,222) 17 8 (9) (2) (1) 813 (764) (43) 4 9 (7) (12) — (16) — (19) $10,312 $ 153 $10,923 $ 155 $ (3,371) $ (66) $ (3,515) $ (49) In millions obligation: Change in projected benefit Benefit obligation, January 1 Service cost Interest cost Settlements Actuarial loss (gain) Acquisitions Plan amendments Benefits paid Effect of foreign currency exchange rate movements Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Actual return on plan assets Company contributions Benefits paid Settlements Effect of foreign currency exchange rate movements Fair value of plan assets, December 31 Funded status, December 31 Amounts recognized in the consolidated balance Non-current asset Current liability $ — $ 6 $ — $ (40) (3) (22) Non-current liability (3,331) (69) (3,493) $ (3,371) $ (66) $ (3,515) $ 7 (2) (54) (49) Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Prior service cost Net actuarial loss $ 125 $ — $ 166 $ — 4,757 61 4,899 $ 4,882 $ 61 $ 5,065 $ 42 42 The Company will freeze participation, including sheet: The components of the $183 million and $19 million change related to U.S. plans and non-U.S. plans, respectively, in the amounts recognized in OCI during 2016 consisted of: In millions Current year actuarial (gain) loss $ Amortization of actuarial loss Current year prior service cost Amortization of prior service cost Settlements Effect of foreign currency exchange rate movements U.S. Plans Non- U.S. Plans 703 $ (400) — (41) (445) — $ (183) $ 27 (1) (1) — — (6) 19 The accumulated benefit obligation at December 31, 2016 and 2015 was $13.5 billion and $14.3 billion, respectively, for our U.S. defined benefit plans and $205 million and $189 million, respectively, at December 31, 2016 and 2015 for our non-U.S. defined benefit plans. The following table summarizes information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2016 and 2015: 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 13,683 $ 190 $ 14,438 $ 182 13,535 10,312 177 118 14,282 10,923 168 126 In millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets ASC 715, “Compensation – Retirement Benefits” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains in subsequent years. The estimated net loss and prior service cost that will be amortized from AOCI into net periodic pension cost for the U.S. plans during the next fiscal year are expected to be $341 million and $28 million, respectively. NET PERIODIC PENSION EXPENSE Service cost is the actuarial present value of benefits attributed by the plans’ benefit formula to services rendered by employees during the year. Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current-year earnings from the investment of plan assets using an estimated long-term rate of return. Net periodic pension expense for qualified and nonqualified U.S. and non-U.S. defined benefit plans comprised the following: 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 158 $ 4 $ 161 $ 6 $ 145 $ 580 9 597 10 600 5 13 (815) (10) (783) (11) (762) (14) 400 1 428 1 374 — 41 — 445 — — — 43 — 15 — — — 30 — — — (4) — $ 809 $ 4 $ 461 $ 6 $ 387 $ — In millions Service cost Interest cost Expected return on plan assets Actuarial loss / (gain) Amortization of prior service cost Curtailment loss / (gain) Settlement loss Net periodic pension expense (a) (a) Excludes $1 million in curtailments in 2014 related to the pension freeze remeasurement that were recorded in restructuring and other charges. The increase in 2016 pension expense reflects a decrease in the discount rate from 4.10% in 2015 to a weighted average of 4.05% in 2016 (4.40% from January 1, 2016 to June 30, 2016, 3.80% from July 1, 2016 to September 30, 2016 and 3.60% from October 1, 2016 to December 31, 2016 for the qualified plan) and a $445 million settlement charge in 2016 related to the previously announced optional lump sum payout partially offset by higher asset returns and lower actuarial losses. As previously disclosed, in the first quarter of 2016 International Paper announced a voluntary, limited- time opportunity for former employees who are participants in the Retirement Plan of International Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. The amount of total payments under this program was approximately $1.2 billion, and were made from Plan trust assets on June 30, 2016. Based on the level of payments made, settlement accounting rules applied and resulted in a 71 72 for accounting ASSUMPTIONS PLAN ASSETS Fair Value Measurement at December 31, 2016 plan remeasurement as of the June 30, 2016 payment the date. As a result of settlement accounting, Company recognized a pro-rata portion of the unamortized net actuarial loss, after remeasurement, resulting in a $439 million non-cash charge to the Company's earnings in the second quarter of 2016. Additional payments of $8 million and $9 million were made during the third and fourth quarters, respectively, due to mandatory cash payouts and a small lump sum payout, and the Pension Plan was subsequently remeasured at September 30, 2016 and December 31, 2016. As a result of settlement accounting, the Company recognized non-cash settlement charges of $3 million in both the third and fourth quarters of 2016. International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements for pensions. These employers’ assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded in the following year (i.e., the discount rate used to determine the benefit obligation as of December 31, 2016 was also the discount rate used to determine net pension expense for the 2017 year). International Paper’s Board of Directors has appointed a Fiduciary Review Committee that is responsible for fiduciary oversight of the U.S. Pension Plan, approving investment policy and reviewing the management and control of plan assets. Pension Plan assets are invested to maximize returns within prudent levels of risk. The Pension Plan maintains a strategic asset allocation policy that designates target allocations by asset class. Investments are diversified across classes and within each class to minimize the risk of large losses. Derivatives, including swaps, forward and futures contracts, may be used as asset class substitutes or for hedging or other risk management purposes. Periodic reviews are made of investment policy objectives and investment manager performance. For non-U.S. plans, assets consist principally of common stock and fixed income securities. International Paper’s U.S. pension allocations by type of fund at December 31, and target allocations were as follows: Asset Class Equity accounts Fixed income accounts Real estate accounts Other Total 2016 2015 Target Allocations 43% - 54% 25% - 35% 7% - 13% 8% - 17% 48% 33% 10% 9% 51% 27% 10% 12% 100% 100% The fair values of International Paper’s pension plan assets at December 31, 2016 and 2015 by asset class are shown below. Plan assets included an immaterial amount of International Paper common stock at December 31, 2016 and 2015. Hedge funds disclosed in the following table are allocated equally between equity and fixed income accounts for target allocation purposes. Quoted Prices in Active Markets For Identical Assets (Level 1) Total Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 2,208 $ 1,380 $ 828 $ 1,806 2,575 1,018 769 1,018 — — — — 1 11 — — — — (71) — — — — — — 10 — — — — (20) — 870 40 234 324 — — — — — 518 217 265 118 — — — 1 — — — — — — — — — — 322 — — — — — — — — — 870 41 245 324 — — — (71) 322 891 472 1,015 402 518 217 275 118 — — — (19) 894 492 1,094 360 Asset Class In millions Equities – domestic Equities – international Corporate bonds Government securities Mortgage backed securities Other fixed income Commodities Hedge funds Private equity Real estate Derivatives Cash and cash equivalents Other investments: (a) Hedge funds Private equity Real estate Risk parity funds Total Investments Asset Class In millions Equities – international Corporate bonds Government securities Mortgage backed securities Other fixed income Commodities Hedge funds Private equity Real estate Derivatives Other investments: (a) Hedge funds Private equity Real estate Risk parity funds Total Investments $10,312 $ 3,508 $ 4,083 $ (59) Fair Value Measurement at December 31, 2015 Quoted Prices in Active Markets For Identical Assets (Level 1) Total Significant Observable Significant Unobservable Inputs (Level 2) Inputs (Level 3) Equities – domestic $ 2,150 $ 1,382 $ 768 $ 1,818 2,563 1,286 745 1,286 Cash and cash equivalents 975 975 $10,923 $ 4,175 $ 3,918 $ (10) (a) In accordance with accounting guidance ASU 2015-07, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables for these investments are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of changes in the plan's benefit obligations and fair value of plan assets above. This has been restated from prior year. Major actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined benefit plans are presented in the following table: Actuarial assumptions used to determine benefit obligations as of December 31: Discount rate Rate of compensation increase Actuarial assumptions used to determine net periodic pension cost for years ended December 31: 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans 4.10% 3.88% 4.40% 4.64% 4.10% 4.72% 3.75% 4.20% 3.75% 4.12% 3.75% 4.03% Discount rate (a) Expected long-term rate of return on plan assets (b) Rate of compensation increase 4.05% 4.72% 4.10% 4.72% 4.65% 5.07% 7.75% 6.55% 7.75% 6.64% 7.75% 7.53% 3.75% 4.03% 3.75% 4.03% 3.75% 4.13% (a) Represents the weighted average rate for the U.S. qualified plans in 2016 and 2014 due to the remeasurement in the second, third and fourth quarters of 2016 and the first quarter of 2014. (b) Represents the expected rate of return for International Paper's qualified pension plan for 2014. The weighted average rate for the Temple- Inland Retirement Plan was 7.00% for 2014. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. Projected rates of return are developed through an asset/liability study in which projected returns for each of the plan’s asset classes are determined after analyzing historical experience and future expectations of returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio management and expenses paid from plan assets. The discount rate assumption was determined from a universe of high quality corporate bonds. A settlement portfolio is selected and matched to the present value of the plan’s projected benefit payments. To calculate pension expense for 2017, the Company will use an expected long-term rate of return on plan assets of 7.50% for the Retirement Plan of International Paper, a discount rate of 4.10% and an assumed rate of compensation increase of 3.75%. The Company estimates that it will record net pension expense of approximately $310 million for its U.S. defined benefit plans in 2017, with the decrease from expense of $809 million in 2016 mainly related to no expected settlement charges in 2017 and an increase in the discount rate to 4.10% in 2017 from 4.05% in 2016, partially offset by a reduction in the return on asset assumption to 7.50% in 2017 from 7.75% in 2016. For non-U.S. pension plans, assumptions reflect economic assumptions applicable to each country. The following illustrates the effect on pension expense for 2017 of a 25 basis point decrease in the above assumptions: In millions Expense/(Income): Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 2017 $ 33 26 (1) 73 74 plan remeasurement as of the June 30, 2016 payment ASSUMPTIONS PLAN ASSETS Fair Value Measurement at December 31, 2016 date. As a result of settlement accounting, Company recognized a pro-rata portion of the the unamortized net actuarial loss, after remeasurement, resulting in a $439 million non-cash charge to the Company's earnings in the second quarter of 2016. Additional payments of $8 million and $9 million were made during the third and fourth quarters, respectively, due to mandatory cash payouts and a small lump sum payout, and the Pension Plan was subsequently remeasured at September 30, 2016 and December 31, 2016. As a result of settlement accounting, the Company recognized non-cash settlement charges of $3 million in both the third and fourth quarters of 2016. International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements for employers’ accounting for pensions. These assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded in the following year (i.e., the discount rate used to determine the benefit obligation as of December 31, 2016 was also the discount rate used to determine net pension expense for the 2017 year). Major actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined benefit plans are presented in the following table: Actuarial assumptions used to determine benefit obligations as of December 31: Actuarial assumptions used to determine net periodic pension cost for years Discount rate Rate of compensation increase ended December 31: Discount rate (a) Expected long-term rate of return on plan assets (b) Rate of compensation increase 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans 4.10% 3.88% 4.40% 4.64% 4.10% 4.72% 3.75% 4.20% 3.75% 4.12% 3.75% 4.03% 4.05% 4.72% 4.10% 4.72% 4.65% 5.07% 7.75% 6.55% 7.75% 6.64% 7.75% 7.53% 3.75% 4.03% 3.75% 4.03% 3.75% 4.13% (a) Represents the weighted average rate for the U.S. qualified plans in 2016 and 2014 due to the remeasurement in the second, third and fourth (b) Represents the expected rate of return for International Paper's qualified pension plan for 2014. The weighted average rate for the Temple- quarters of 2016 and the first quarter of 2014. Inland Retirement Plan was 7.00% for 2014. The expected long-term rate of return on plan assets is approximately $310 million for its U.S. defined benefit based on projected rates of return for current and plans in 2017, with the decrease from expense of $809 planned asset classes in the plan’s investment portfolio. million in 2016 mainly related to no expected settlement Projected rates of return are developed through an charges in 2017 and an increase in the discount rate to asset/liability study in which projected returns for each 4.10% in 2017 from 4.05% in 2016, partially offset by a of the plan’s asset classes are determined after reduction in the return on asset assumption to 7.50% analyzing historical experience and future expectations in 2017 from 7.75% in 2016. of returns and volatility of the various asset classes. Based on the target asset allocation for each asset economic assumptions applicable to each country. class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio The following illustrates the effect on pension expense management and expenses paid from plan assets. The for 2017 of a 25 basis point decrease in the above discount rate assumption was determined from a assumptions: For non-U.S. pension plans, assumptions reflect universe of high quality corporate bonds. A settlement portfolio is selected and matched to the present value of the plan’s projected benefit payments. To calculate pension expense for 2017, the Company will use an expected long-term rate of return on plan assets of 7.50% for the Retirement Plan of International Paper, a discount rate of 4.10% and an assumed rate of compensation increase of 3.75%. The Company estimates that it will record net pension expense of In millions Expense/(Income): Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 2017 $ 33 26 (1) International Paper’s Board of Directors has appointed a Fiduciary Review Committee that is responsible for fiduciary oversight of the U.S. Pension Plan, approving investment policy and reviewing the management and control of plan assets. Pension Plan assets are invested to maximize returns within prudent levels of risk. The Pension Plan maintains a strategic asset allocation policy that designates target allocations by asset class. Investments are diversified across classes and within each class to minimize the risk of large losses. Derivatives, including swaps, forward and futures contracts, may be used as asset class substitutes or for hedging or other risk management purposes. Periodic reviews are made of investment policy objectives and investment manager performance. For non-U.S. plans, assets consist principally of common stock and fixed income securities. International Paper’s U.S. pension allocations by type of fund at December 31, and target allocations were as follows: Asset Class Equity accounts Fixed income accounts Real estate accounts Other Total 2016 2015 51% 27% 10% 12% 100% 48% 33% 10% 9% 100% Target Allocations 43% - 54% 25% - 35% 7% - 13% 8% - 17% The fair values of International Paper’s pension plan assets at December 31, 2016 and 2015 by asset class are shown below. Plan assets included an immaterial amount of International Paper common stock at December 31, 2016 and 2015. Hedge funds disclosed in the following table are allocated equally between equity and fixed income accounts for target allocation purposes. Quoted Prices in Active Markets For Identical Assets (Level 1) Total Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) — — — — 1 11 — — — — (71) — $ 2,208 $ 1,380 $ 828 $ 1,806 — — — — — — — — — 322 769 1,018 870 40 234 324 — — — — — 2,575 1,018 870 41 245 324 — — — (71) 322 891 472 1,015 402 $10,312 $ 3,508 $ 4,083 $ (59) Asset Class In millions Equities – domestic Equities – international Corporate bonds Government securities Mortgage backed securities Other fixed income Commodities Hedge funds Private equity Real estate Derivatives Cash and cash equivalents Other investments: (a) Hedge funds Private equity Real estate Risk parity funds Total Investments Fair Value Measurement at December 31, 2015 Quoted Prices in Active Markets For Identical Assets (Level 1) Total Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Asset Class In millions Equities – domestic $ 2,150 $ 1,382 $ 768 $ Equities – international Corporate bonds Government securities Mortgage backed securities Other fixed income Commodities Hedge funds Private equity Real estate Derivatives 2,563 1,286 518 217 275 118 — — — (19) 1,818 — — — — — — — — — Cash and cash equivalents 975 975 745 1,286 518 217 265 118 — — — 1 — — — — — — 10 — — — — (20) — Other investments: (a) Hedge funds Private equity Real estate Risk parity funds Total Investments 894 492 1,094 360 $10,923 $ 4,175 $ 3,918 $ (10) (a) In accordance with accounting guidance ASU 2015-07, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables for these investments are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of changes in the plan's benefit obligations and fair value of plan assets above. This has been restated from prior year. 73 74 (commingled, multi-manager Hedge funds are investment structures for managing private, loosely-regulated investment pools that can pursue a diverse array of investment strategies with a wide range of different securities and derivative instruments. These investments are made through fund funds-of-funds structures) and through direct investments in individual hedge funds. Hedge funds are primarily valued by each fund’s the valuation of the underlying securities and instruments and primarily by applying a market or income valuation methodology as appropriate depending on the specific type of security or instrument held. Funds-of-funds are valued based upon the net asset values of the underlying investments in hedge funds. third-party administrator based upon Private equity consists of interests in partnerships that invest in U.S. and non-U.S. debt and equity securities. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interest cash flows. Real estate includes commercial properties, land and timberland, and generally includes, but is not limited to, retail, office, industrial, multifamily and hotel properties. Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments which include inputs such as cost, discounted cash flows, independent appraisals and market based comparable data. Risk Parity Funds are defined as engineered beta exposure to a wide range of asset classes and risk premia, including equity, interest rates, credit, and commodities. Risk parity funds seek to provide high risk-adjusted returns while providing a high level of diversification relative to a traditional equity/fixed income portfolio. These funds seek to achieve this objective with the use of modest leverage applied to lower-risk, more diverse asset classes. Investments in Risk parity funds are valued using monthly reported net asset values. Also included in these funds are related derivative instruments which are generally employed as asset class substitutes for managing asset/liability mismatches, or bona fide hedging or other appropriate risk management purposes. Derivative instruments are generally valued by the investment managers or in certain instances by third-party pricing sources. In accordance with accounting standards, the following investments are measured at NAV and are not classified in the fair value hierarchy. Some of the investments have redemption limitations, restrictions, and notice requirements which are further explained below. Other Investments at December 31, 2016 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period Hedge funds Private equity Real estate Risk parity funds $ 891 $ 472 1,015 402 Total $ 2,780 $ — 226 224 — 450 Daily to annually None 1 - 100 days None Quarterly 45 - 60 days Monthly 5 - 15 days Other Investments at December 31, 2015 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period Hedge funds Private equity Real estate Risk parity funds $ 894 $ 492 1,094 360 Total $ 2,840 $ — 102 59 — 161 Daily to annually None 1 - 100 days None Quarterly 45 - 60 days Monthly 5 - 15 days Equity securities consist primarily of publicly traded U.S. companies and international companies. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. Fixed income consists of government securities, mortgage-backed securities, corporate bonds and common collective funds. Government securities are valued by third-party pricing sources. Mortgage-backed security holdings consist primarily of agency-rated holdings. The fair value estimates for mortgage securities are calculated by third-party pricing sources chosen by the custodian’s price matrix. Corporate bonds are valued using either the yields currently available on comparable securities of issuers with similar credit ratings or using a discounted cash flows approach that utilizes observable inputs, such as current yields of similar instruments, but includes adjustments that may not be observable, such as credit and liquidity risks. Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. for certain risks Commodities consist of commodity-linked notes and commodity-linked derivatives. Commodities are valued at closing prices determined by calculation agents for outstanding transactions. 75 The following is a reconciliation of the assets that are classified using significant unobservable inputs (Level 3) at December 31, 2016. Fair Value Measurements Using Significant Unobservable Inputs (Level 3) In millions Beginning balance at December 31, 2015 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales and settlements Transfers in and/or out of Level 3 Ending balance at December 31, 2016 FUNDING AND CASH FLOWS The Company’s funding policy for the Pension Plan is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, cash flow generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions. Contributions to the qualified plan totaling $750 million, $750 million and $353 million were made by the Company in 2016, 2015 and 2014, respectively. Generally, International Paper’s non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. At December 31, 2016, projected future pension benefit payments, excluding any termination benefits, were as follows: In millions 2017 2018 2019 2020 2021 2022 – 2026 OTHER U.S. PLANS $ 800 788 796 804 812 4,137 Mortgage backed securities Other fixed income Derivatives Total $ — $ 10 $ (20) $ (10) — — 1 — 1 — — — (66) (24) 39 — (65) (24) 40 — $ 1 $ 11 $ (71) $ (59) 2004, the Company makes Retirement Savings Account contributions equal to a percentage of an eligible employee’s pay. The Company also sponsors the International Paper Company Deferred Compensation Savings Plan, which is an unfunded nonqualified defined contribution plan. This plan permits eligible employees to continue to make deferrals and receive company matching contributions when their contributions to the International Paper Salaried Savings Plan are stopped due to limitations under U.S. tax law. Participant deferrals and company matching contributions are not invested in a separate trust, but are paid directly from International Paper’s general assets at the time benefits become due and payable. Company matching contributions to the plans totaled approximately $106 million, $100 million and $112 million for the plan years ending in 2016, 2015 and 2014, respectively. NOTE 17 POSTRETIREMENT BENEFITS U.S. POSTRETIREMENT BENEFITS International Paper provides certain retiree health care and life insurance benefits covering certain U.S. salaried and hourly employees. These employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable International Paper sponsors the International Paper service. International Paper does not fund these Company Salaried Savings Plan and the International benefits prior to payment and has the right to modify or Paper Company Hourly Savings Plan, both of which are terminate certain of these plans in the future. tax-qualified defined contribution 401(k) savings plans. Substantially all U.S. salaried and certain hourly In addition to the U.S. plan, certain Brazilian and employees are eligible to participate and may make Moroccan employees are eligible for retiree health care elective deferrals to such plans to save for retirement. and life insurance benefits. International Paper makes matching contributions to participant accounts on a specified percentage of employee deferrals as determined by the provisions of each plan. For eligible employees hired after June 30, 76 In accordance with accounting standards, the following Hedge funds are investment structures for managing investments are measured at NAV and are not classified private, loosely-regulated investment pools that can in the fair value hierarchy. Some of the investments pursue a diverse array of investment strategies with a have redemption limitations, restrictions, and notice wide range of different securities and derivative The following is a reconciliation of the assets that are classified using significant unobservable inputs (Level 3) at December 31, 2016. Fair Value Measurements Using Significant Unobservable Inputs (Level 3) — 226 224 — 450 — 102 59 — 161 requirements which are further explained below. Other Investments at December 31, 2016 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period $ 891 $ Daily to annually None 1 - 100 days None Quarterly 45 - 60 days Monthly 5 - 15 days Total $ 2,780 $ Hedge funds Private equity Real estate Risk parity funds Hedge funds Private equity Real estate Risk parity funds 472 1,015 402 492 1,094 360 Other Investments at December 31, 2015 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period $ 894 $ Daily to annually None 1 - 100 days None Quarterly 45 - 60 days Monthly 5 - 15 days Total $ 2,840 $ Equity securities consist primarily of publicly traded U.S. companies and international companies. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. Fixed income consists of government securities, mortgage-backed securities, corporate bonds and common collective funds. Government securities are valued by third-party pricing sources. Mortgage-backed security holdings consist primarily of agency-rated holdings. The fair value estimates for mortgage securities are calculated by third-party pricing sources chosen by the custodian’s price matrix. Corporate bonds are valued using either the yields currently available on comparable securities of issuers with similar credit ratings or using a discounted cash flows approach that utilizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. Commodities consist of commodity-linked notes and commodity-linked derivatives. Commodities are valued at closing prices determined by calculation agents for outstanding transactions. instruments. These investments are made through funds-of-funds (commingled, multi-manager fund structures) and through direct investments in individual hedge funds. Hedge funds are primarily valued by each fund’s third-party administrator based upon the valuation of the underlying securities and instruments and primarily by applying a market or income valuation methodology as appropriate depending on the specific type of security or instrument held. Funds-of-funds are valued based upon the net asset values of the underlying investments in hedge funds. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. debt and equity securities. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interest cash flows. Real estate includes commercial properties, land and timberland, and generally includes, but is not limited to, retail, office, industrial, multifamily and hotel properties. Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments which include inputs such as cost, discounted cash flows, independent appraisals and market based comparable data. Risk Parity Funds are defined as engineered beta exposure to a wide range of asset classes and risk premia, including equity, interest rates, credit, and commodities. Risk parity funds seek to provide high risk-adjusted returns while providing a high level of diversification relative to a traditional equity/fixed income portfolio. These funds seek to achieve this objective with the use of modest leverage applied to lower-risk, more diverse asset classes. Investments in Risk parity funds are valued using monthly reported net asset values. Also included in these funds are related derivative instruments which are generally employed as asset class substitutes for managing asset/liability mismatches, or bona fide hedging or other appropriate risk management purposes. Derivative instruments are generally valued by the investment managers or in certain instances by third-party pricing sources. In millions Beginning balance at December 31, 2015 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales and settlements Transfers in and/or out of Level 3 Ending balance at December 31, 2016 FUNDING AND CASH FLOWS The Company’s funding policy for the Pension Plan is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, cash flow generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions. Contributions to the qualified plan totaling $750 million, $750 million and $353 million were made by the Company in 2016, 2015 and 2014, respectively. Generally, International Paper’s non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. At December 31, 2016, projected future pension benefit payments, excluding any termination benefits, were as follows: In millions 2017 2018 2019 2020 2021 2022 – 2026 OTHER U.S. PLANS $ 800 788 796 804 812 4,137 International Paper sponsors the International Paper Company Salaried Savings Plan and the International Paper Company Hourly Savings Plan, both of which are tax-qualified defined contribution 401(k) savings plans. Substantially all U.S. salaried and certain hourly employees are eligible to participate and may make elective deferrals to such plans to save for retirement. International Paper makes matching contributions to participant accounts on a specified percentage of employee deferrals as determined by the provisions of each plan. For eligible employees hired after June 30, 75 76 Mortgage backed securities Other fixed income Derivatives Total $ — $ 10 $ (20) $ (10) — — 1 — 1 — — — (66) (24) 39 — (65) (24) 40 — $ 1 $ 11 $ (71) $ (59) the Company makes Retirement Savings 2004, Account contributions equal to a percentage of an eligible employee’s pay. The Company also sponsors the International Paper Company Deferred Compensation Savings Plan, which is an unfunded nonqualified defined contribution plan. This plan permits eligible employees to continue to make deferrals and receive company matching the contributions when International Paper Salaried Savings Plan are stopped due to limitations under U.S. tax law. Participant deferrals and company matching contributions are not invested in a separate trust, but are paid directly from International Paper’s general assets at the time benefits become due and payable. their contributions to Company matching contributions to the plans totaled approximately $106 million, $100 million and $112 million for the plan years ending in 2016, 2015 and 2014, respectively. NOTE 17 POSTRETIREMENT BENEFITS U.S. POSTRETIREMENT BENEFITS International Paper provides certain retiree health care and life insurance benefits covering certain U.S. salaried and hourly employees. These employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. International Paper does not fund these benefits prior to payment and has the right to modify or terminate certain of these plans in the future. In addition to the U.S. plan, certain Brazilian and Moroccan employees are eligible for retiree health care and life insurance benefits. (4) (4) (10) (2) (13) (1) Change in projected benefit obligation: The components of postretirement benefit expense in 2016, 2015 and 2014 were as follows: approximately $1 million for both U.S. and non-U.S. plans. In millions 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 1 $ — $ 1 $ 1 $ 1 $ 11 5 3 2 11 6 5 1 14 5 1 6 1 Service cost Interest cost Actuarial loss Amortization of prior service credits Net postretirement (benefit) expense $ 13 $ 1 $ 8 $ 5 $ 7 $ 7 International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of employers’ accounting for postretirement benefits other than pensions. The discount rates used to determine net U.S. and non- U.S. postretirement benefit cost for the years ended December 31, 2016, 2015 and 2014 were as follows: 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Discount rate 4.20% 12.23% 3.90% 11.52% 4.50% 11.94% The weighted average assumptions used to determine the benefit obligation at December 31, 2016 and 2015 were as follows: 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Discount rate 4.00% 10.53% 4.20% 12.23% Health care cost trend rate assumed for next year Rate that the cost trend rate gradually declines to Year that the rate reaches the rate it is assumed to remain 6.50% 10.90% 7.00% 11.41% 5.00% 5.81% 5.00% 5.94% 2022 2027 2022 2026 A 1% increase in the assumed annual health care cost trend rate would have increased the U.S. and non-U.S. accumulated postretirement benefit obligations at December 31, 2016 by approximately $13 million and $5 million, respectively. A 1% decrease in the annual trend rate would have decreased the U.S. and non-U.S. accumulated postretirement benefit obligation at December 31, 2016 by approximately $11 million and $4 million, respectively. The effect on net postretirement benefit cost from a 1% increase or decrease would be The plans are only funded in an amount equal to benefits paid. The following table presents the changes in benefit obligation and plan assets for 2016 and 2015: In millions 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans The components of the $30 million and ($26) million of the Management Development and Compensation increase and decrease in the amounts recognized in Committee of the Board of Directors (the Committee) OCI during 2016 for U.S. and non-U.S. plans, that administers the ICP. Additionally, restricted stock, respectively, consisted of: In millions Current year actuarial loss Amortization of actuarial (loss) gain Current year prior service cost Amortization of prior service credit Currency impact U.S. Plans Non- U.S. Plans $ 31 $ 5 (2) (34) 4 1 (5) — 4 — $ 30 $ (26) The portion of the change in the funded status that was recognized in either net periodic benefit cost or OCI for the U.S. plans was $42 million, $17 million and $33 million in 2016, 2015 and 2014, respectively. The portion of the change in funded status for the non-U.S. plans was $(25) million, $0 million, and $14 million in 2016, 2015 and 2014, respectively. The estimated amounts of net loss and prior service credit that will be amortized from OCI into net U.S. postretirement benefit cost in 2017 are expected to be $8 million and $(2) million, respectively. The estimated amounts for non-U.S. plans in 2017 are expected to be $3 million and $(4) million, respectively. At December 31, 2016, estimated total future postretirement benefit payments, net of participant contributions and estimated future Medicare Part D subsidy receipts, were as follows: In millions 2017 2018 2019 2020 2021 2022 – 2026 Benefit Payments Subsidy Receipts Benefit Payments U.S. Plans U.S. Plans $ 31 $ 2 $ Non- U.S. Plans 29 27 26 24 99 1 1 1 1 6 2 2 1 1 — 3 NOTE 18 INCENTIVE PLANS International Paper currently has an Incentive Compensation Plan (ICP) which, upon the approval by the Company’s shareholders in May 2009, replaced the Company’s Long-Term Incentive Compensation Plan (LTICP). The ICP authorizes grants of restricted stock, restricted or deferred stock units, performance awards payable in cash or stock upon the attainment of specified performance goals, dividend equivalents, stock options, stock appreciation rights, other stock- based awards, and cash-based awards at the discretion which may be deferred into RSU’s, may be awarded under a Restricted Stock and Deferred Compensation Plan for Non-Employee Directors. STOCK OPTION PROGRAM The Company has discontinued the issuance of stock options for all eligible U.S. and non-U.S. employees. In the United States, the stock option program was replaced with a performance-based restricted share program to more closely tie long-term incentive compensation to Company performance on two key performance drivers: return on invested capital (ROIC) and total shareholder return (TSR). All outstanding options expired on March 15, 2015. The following summarizes the status of the Stock Option Program and the changes during the three years ending December 31, 2016: Weighted Average Exercise Price Weighted Average Remaining Life (years) Aggregate Intrinsic Value (thousands) Options (a) Outstanding at December 31, 2013 1,752,789 $39.80 0.67 $16,175 Granted Exercised Expired Granted Exercised Expired Granted Exercised Expired Outstanding at December 31, 2014 71,892 39.03 0.18 1,046 Outstanding at December 31, 2015 0.00 — 3,247 (1,634,858) 49.13 39.80 (49,286) 41.50 — — (62,477) 39.05 (9,415) 38.92 — — — — — — — — — Outstanding at December 31, 2016 $— 0.00 $— (a) The table includes options outstanding under an acquired company plan under which options may no longer be granted. PERFORMANCE SHARE PLAN Under the Performance Share Plan (PSP), contingent awards of International Paper common stock are granted by the Committee. The PSP awards are earned evenly over a three-year period. PSP awards are earned based on the achievement of defined performance rankings of ROIC and TSR compared to ROIC and TSR peer groups of companies. Awards are weighted 75% for ROIC and 25% for TSR for all participants except for officers for whom the awards are weighted 50% for ROIC and 50% for TSR. The ROIC component of the PSP awards is valued at the closing stock price on the day prior to the grant date. As the ROIC component contains a performance condition, compensation expense, net of estimated forfeitures, is Benefit obligation, January 1 $ 275 $ 45 $ 306 $ 59 Service cost Interest cost Participants’ contributions Actuarial (gain) loss Plan amendments Benefits paid Less: Federal subsidy Currency Impact Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Company contributions Participants’ contributions Benefits paid Fair value of plan assets, December 31 1 11 5 31 — (44) 1 — — 3 — 5 (35) (1) — 6 1 11 12 — — (57) 2 — 1 5 — (1) 1 (1) — (19) $ 280 $ 23 $ 275 $ 45 $ — $ — $ — $ — 39 5 (44) 1 — (1) 45 12 (57) 1 — (1) $ — $ — $ — $ — Funded status, December 31 $ (280) $ (23) $ (275) $ (45) Amounts recognized in the consolidated balance sheet under ASC 715: Current liability Non-current liability Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Net actuarial loss (gain) Prior service credit $ (29) $ (2) $ (29) $ (251) (21) (246) (2) (43) $ (280) $ (23) $ (275) $ (45) $ $ 68 $ 21 $ 42 $ (8) (34) (12) 60 $ (13) $ 30 $ 15 (2) 13 The non-current portion of the liability is included with the postemployment liability in the accompanying consolidated balance sheet under Postretirement and postemployment benefit obligation. 77 78 The components of postretirement benefit expense in approximately $1 million for both U.S. and non-U.S. 2016, 2015 and 2014 were as follows: plans. In millions 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 1 $ — $ 1 $ 1 $ 1 $ 11 5 3 2 11 6 5 1 14 5 1 6 1 The plans are only funded in an amount equal to benefits paid. The following table presents the changes in benefit obligation and plan assets for 2016 and 2015: In millions 2016 2015 (4) (4) (10) (2) (13) (1) Change in projected benefit Service cost Interest cost Actuarial loss Amortization of prior service credits Net postretirement (benefit) expense The components of the $30 million and ($26) million increase and decrease in the amounts recognized in OCI during 2016 for U.S. and non-U.S. plans, respectively, consisted of: In millions U.S. Plans Non- U.S. Plans Current year actuarial loss $ 31 $ Amortization of actuarial (loss) gain Current year prior service cost Amortization of prior service credit Currency impact (5) — 4 — 5 (2) (34) 4 1 Benefit obligation, January 1 $ 275 $ 45 $ 306 $ 59 $ 30 $ (26) The portion of the change in the funded status that was recognized in either net periodic benefit cost or OCI for the U.S. plans was $42 million, $17 million and $33 million in 2016, 2015 and 2014, respectively. The portion of the change in funded status for the non-U.S. plans was $(25) million, $0 million, and $14 million in 2016, 2015 and 2014, respectively. The estimated amounts of net loss and prior service credit that will be amortized from OCI into net U.S. postretirement benefit cost in 2017 are expected to be $8 million and $(2) million, respectively. The estimated amounts for non-U.S. plans in 2017 are expected to be $3 million and $(4) million, respectively. At December 31, 2016, estimated future postretirement benefit payments, net of participant contributions and estimated future Medicare Part D subsidy receipts, were as follows: total In millions Benefit Payments Subsidy Receipts Benefit Payments 2017 2018 2019 2020 2021 2022 – 2026 U.S. Plans U.S. Plans $ 31 $ 2 $ Non- U.S. Plans 29 27 26 24 99 1 1 1 1 6 2 2 1 1 — 3 NOTE 18 INCENTIVE PLANS International Paper currently has an Incentive Compensation Plan (ICP) which, upon the approval by the Company’s shareholders in May 2009, replaced the Company’s Long-Term Incentive Compensation Plan (LTICP). The ICP authorizes grants of restricted stock, restricted or deferred stock units, performance awards payable in cash or stock upon the attainment of specified performance goals, dividend equivalents, stock options, stock appreciation rights, other stock- based awards, and cash-based awards at the discretion 77 78 obligation: Service cost Interest cost Participants’ contributions Actuarial (gain) loss Plan amendments Benefits paid Less: Federal subsidy Currency Impact Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Company contributions Participants’ contributions Benefits paid Fair value of plan assets, December 31 Amounts recognized in the consolidated balance sheet under ASC 715: Current liability Non-current liability Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Prior service credit U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans 1 11 5 31 — 1 — — 3 — 5 (35) (1) — 6 1 11 12 — — 2 — (44) (57) 1 5 — (1) 1 (1) — (19) $ 280 $ 23 $ 275 $ 45 $ — $ — $ — $ — 39 5 (44) 1 — (1) 45 12 (57) 1 — (1) $ — $ — $ — $ — $ (29) $ (2) $ (29) $ (251) (21) (246) (2) (43) $ (280) $ (23) $ (275) $ (45) $ $ (8) (34) (12) 60 $ (13) $ 30 $ 15 (2) 13 Funded status, December 31 $ (280) $ (23) $ (275) $ (45) The non-current portion of the liability is included with the postemployment liability in the accompanying consolidated balance sheet under Postretirement and postemployment benefit obligation. $ 13 $ 1 $ 8 $ 5 $ 7 $ 7 International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of employers’ accounting for postretirement benefits other than pensions. The discount rates used to determine net U.S. and non- U.S. postretirement benefit cost for the years ended December 31, 2016, 2015 and 2014 were as follows: 2016 2015 2014 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Discount rate 4.20% 12.23% 3.90% 11.52% 4.50% 11.94% The weighted average assumptions used to determine the benefit obligation at December 31, 2016 and 2015 were as follows: 2016 2015 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Discount rate 4.00% 10.53% 4.20% 12.23% Health care cost trend rate assumed for next year Rate that the cost trend rate gradually declines to Year that the rate reaches the rate it is assumed to remain 5.00% 5.81% 5.00% 5.94% 2022 2027 2022 2026 A 1% increase in the assumed annual health care cost trend rate would have increased the U.S. and non-U.S. accumulated postretirement benefit obligations at December 31, 2016 by approximately $13 million and $5 million, respectively. A 1% decrease in the annual trend rate would have decreased the U.S. and non-U.S. accumulated postretirement benefit obligation at December 31, 2016 by approximately $11 million and $4 million, respectively. The effect on net postretirement benefit cost from a 1% increase or decrease would be 6.50% 10.90% 7.00% 11.41% Net actuarial loss (gain) 68 $ 21 $ 42 $ of the Management Development and Compensation Committee of the Board of Directors (the Committee) that administers the ICP. Additionally, restricted stock, which may be deferred into RSU’s, may be awarded under a Restricted Stock and Deferred Compensation Plan for Non-Employee Directors. STOCK OPTION PROGRAM The Company has discontinued the issuance of stock options for all eligible U.S. and non-U.S. employees. In the United States, the stock option program was replaced with a performance-based restricted share program to more closely tie long-term incentive compensation to Company performance on two key performance drivers: return on invested capital (ROIC) and total shareholder return (TSR). All outstanding options expired on March 15, 2015. The following summarizes the status of the Stock Option Program and the changes during the three years ending December 31, 2016: Weighted Average Exercise Price Weighted Average Remaining Life (years) Aggregate Intrinsic Value (thousands) Options (a) Outstanding at December 31, 2013 1,752,789 $39.80 0.67 $16,175 Granted Exercised Expired 3,247 (1,634,858) 49.13 39.80 (49,286) 41.50 Outstanding at December 31, 2014 71,892 39.03 0.18 1,046 Granted Exercised Expired Outstanding at December 31, 2015 Granted Exercised Expired Outstanding at December 31, 2016 — — (62,477) 39.05 (9,415) 38.92 — — — — — 0.00 — — — — — $— 0.00 $— (a) The table includes options outstanding under an acquired company plan under which options may no longer be granted. PERFORMANCE SHARE PLAN Under the Performance Share Plan (PSP), contingent awards of International Paper common stock are granted by the Committee. The PSP awards are earned evenly over a three-year period. PSP awards are earned based on the achievement of defined performance rankings of ROIC and TSR compared to ROIC and TSR peer groups of companies. Awards are weighted 75% for ROIC and 25% for TSR for all participants except for officers for whom the awards are weighted 50% for ROIC and 50% for TSR. The ROIC component of the PSP awards is valued at the closing stock price on the day prior to the grant date. As the ROIC component contains a performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of the PSP awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, a risk-free rate, expected dividends, and the expected volatility for the Company and its competitors. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the Company’s historical volatility over the expected term. PSP grants are made in performance-based restricted stock units. The 2012 PSP awards issued to certain members of senior management were accounted for as liability awards, which were remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards was computed based on the same methodology as the PSP equity awards. On December 8, 2014, IP eliminated the election for executives to withhold more than the minimum tax withholding for the 2013 and 2014 grants making them equity awards. The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP plan: Expected volatility Risk-free interest rate Twelve Months Ended December 31, 2016 22.36%-30.84% 0.67%-1.31% The following summarizes PSP activity for the three years ending December 31, 2016: Outstanding at December 31, 2013 Granted Shares issued Forfeited Outstanding at December 31, 2014 Granted Shares issued Forfeited Outstanding at December 31, 2015 Granted Shares issued Forfeited Weighted Average Grant Date Fair Value $31.20 46.82 37.18 43.10 34.98 53.25 37.09 53.97 38.69 37.26 43.82 43.61 Share/Units 8,117,489 3,682,663 (4,025,111) (499,107) 7,275,934 1,863,623 (2,959,160) (322,664) 5,857,733 2,617,982 (2,316,085) (209,500) Outstanding at December 31, 2016 5,950,130 $35.89 RESTRICTED STOCK AWARD PROGRAMS The service-based Restricted Stock Award program (RSA), designed for recruitment, retention and special 79 recognition purposes, provides for awards of restricted stock to key employees. The following summarizes the activity of the RSA program for the three years ending December 31, 2016: business segment due to the increased materiality of Summarized financial information for Ilim which is the results of this business. This segment includes the accounted for under the equity method is presented in Company's legacy pulp business and the newly the following table. The audited U.S. GAAP financial acquired pulp business. As such, amounts related to statements for Ilim are included in Exhibit 99.1 to this the legacy pulp business have been reclassified out of Form 10-K. Outstanding at December 31, 2013 Granted Shares issued Forfeited Outstanding at December 31, 2014 Granted Shares issued Forfeited Outstanding at December 31, 2015 Granted Shares issued Forfeited Outstanding at December 31, 2016 Weighted Average Grant Date Fair Value $36.24 48.19 33.78 45.88 47.03 50.06 45.35 50.04 48.24 42.81 47.14 39.36 $45.34 Shares 112,374 89,500 (83,275) (4,000) 114,599 36,300 (27,365) (3,166) 120,368 117,881 (59,418) (9,500) 169,331 At December 31, 2016, 2015 and 2014 a total of 14.3 million, 16.2 million and 16.3 million shares, respectively, were available for grant under the ICP. Stock-based compensation expense and related income tax benefits were as follows: In millions 2016 2015 2014 Total stock-based compensation expense (included in selling and administrative expense) Income tax benefits related to stock- based compensation $ 129 $ 114 $ 118 34 88 92 At December 31, 2016, $94 million of compensation cost, net of estimated forfeitures, related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.6 years. NOTE 19 FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA International Paper’s business segments, Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging, are consistent with the internal structure used to manage these businesses. See the Description of Industry Segments in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of the types of products and services from which each reportable segment derives its revenues. Subsequent to the acquisition of the Weyerhaeuser pulp business in December 2016, the Company began reporting the Global Cellulose Fibers business as a separate the Printing Papers business segment and into the new Global Cellulose Fibers business segment for all prior periods. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry. Business 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. Business segment operating profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of equity earnings and noncontrolling interests, excluding corporate items and corporate special items. Business 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. External sales by major product is determined by aggregating sales from each segment based on similar products or services. External sales are defined as those that are made to parties outside International Paper’s consolidated group, whereas sales by segment in the Net Sales table are determined using a management approach and include intersegment sales. recorded equity earnings (losses), net of taxes, of $199 million, $131 million and $(194) million in 2016, 2015, and 2014, respectively, for Ilim. Equity earnings (losses) includes an after-tax foreign exchange gain (loss) of $25 million, $(75) million and $(269) million in 2016, 2015 and 2014, respectively, primarily on the remeasurement of U.S. dollar-denominated net debt. 2016 2015 $ 774 $ 455 1,351 406 1,422 22 968 665 715 21 Balance Sheet In millions Current assets Noncurrent assets Current liabilities Noncurrent liabilities Noncontrolling interests Income Statement In millions Net sales Gross profit Income from continuing operations Net income attributable to Ilim 2016 2015 2014 $1,927 $1,931 $2,138 957 419 391 971 254 237 772 (387) (360) At December 31, 2016 and 2015, the Company's investment in Ilim was $302 million and $172 million, respectively, which was $164 million and $161 million, respectively, more than the Company's proportionate share of the joint venture's underlying net assets. The differences primarily relate to purchase price fair value adjustments and currency translation adjustments. The Company is party to a joint marketing agreement with Ilim, under which the Company purchases, markets and sells paper produced by Ilim. Purchases under this agreement were $170 million, $170 million and $200 million for the years ended December 31, 2016, 2015 and 2014, respectively. Net Sales In millions Industrial Packaging $ 14,191 $ 14,484 $ 14,944 2016 2015 2014 Global Cellulose Fibers Printing Papers Consumer Packaging Corporate and Intersegment Sales Net Sales 1,092 4,058 1,954 975 4,056 2,940 1,046 4,674 3,403 (216) (90) (450) $ 21,079 $ 22,365 $ 23,617 The Company also holds a 50% interest in Ilim that is a separate reportable industry segment. The Company INFORMATION BY BUSINESS SEGMENT 80 recorded over the requisite service period based on the recognition purposes, provides for awards of restricted most probable number of awards expected to vest. The stock to key employees. TSR component of the PSP awards is valued using a Monte Carlo simulation as the TSR component contains The following summarizes the activity of the RSA a market condition. The Monte Carlo simulation program for the three years ending December 31, 2016: estimates the fair value of the TSR component based on the expected term of the award, a risk-free rate, expected dividends, and the expected volatility for the Company and its competitors. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the Company’s historical volatility over the expected term. PSP grants are made in performance-based restricted stock units. The 2012 PSP awards issued to certain members of senior management were accounted for as liability awards, which were remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards was computed based on the same methodology as the PSP equity awards. On December 8, 2014, IP eliminated the election for executives to withhold more than the minimum tax withholding for the 2013 and 2014 grants making them equity awards. The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP plan: Expected volatility Risk-free interest rate Twelve Months Ended December 31, 2016 22.36%-30.84% 0.67%-1.31% The following summarizes PSP activity for the three years ending December 31, 2016: Outstanding at December 31, 2013 Outstanding at December 31, 2014 Outstanding at December 31, 2015 Granted Shares issued Forfeited Granted Shares issued Forfeited Granted Shares issued Forfeited Weighted Average Grant Date Fair Value $31.20 46.82 37.18 43.10 34.98 53.25 37.09 53.97 38.69 37.26 43.82 43.61 Share/Units 8,117,489 3,682,663 (4,025,111) (499,107) 7,275,934 1,863,623 (2,959,160) (322,664) 5,857,733 2,617,982 (2,316,085) (209,500) Outstanding at December 31, 2016 5,950,130 $35.89 RESTRICTED STOCK AWARD PROGRAMS The service-based Restricted Stock Award program (RSA), designed for recruitment, retention and special 79 Outstanding at December 31, 2013 Outstanding at December 31, 2014 Outstanding at December 31, 2015 Granted Shares issued Forfeited Granted Shares issued Forfeited Granted Shares issued Forfeited Weighted Average Grant Date Fair Value $36.24 48.19 33.78 45.88 47.03 50.06 45.35 50.04 48.24 42.81 47.14 39.36 Shares 112,374 89,500 (83,275) (4,000) 114,599 36,300 (27,365) (3,166) 120,368 117,881 (59,418) (9,500) 169,331 Outstanding at December 31, 2016 $45.34 At December 31, 2016, 2015 and 2014 a total of 14.3 million, 16.2 million and 16.3 million shares, respectively, were available for grant under the ICP. Stock-based compensation expense and related income tax benefits were as follows: In millions 2016 2015 2014 Total stock-based compensation expense (included in selling and administrative expense) Income tax benefits related to stock- based compensation $ 129 $ 114 $ 118 34 88 92 At December 31, 2016, $94 million of compensation cost, net of estimated forfeitures, related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.6 years. NOTE 19 FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA International Paper’s business segments, Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging, are consistent with the internal structure used to manage these businesses. See the Description of Industry Segments in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of the types of products and services from which each reportable segment derives its revenues. Subsequent to the acquisition of the Weyerhaeuser pulp business in December 2016, the Company began reporting the Global Cellulose Fibers business as a separate business segment due to the increased materiality of the results of this business. This segment includes the Company's legacy pulp business and the newly acquired pulp business. As such, amounts related to the legacy pulp business have been reclassified out of the Printing Papers business segment and into the new Global Cellulose Fibers business segment for all prior periods. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry. that Business segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses. Management believes this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Business segment operating profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of equity earnings and noncontrolling interests, excluding corporate items and corporate special items. Business 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. External sales by major product is determined by aggregating sales from each segment based on similar products or services. External sales are defined as those that are made to parties outside International Paper’s consolidated group, whereas sales by segment in the Net Sales table are determined using a management approach and include intersegment sales. Summarized financial information for Ilim which is accounted for under the equity method is presented in the following table. The audited U.S. GAAP financial statements for Ilim are included in Exhibit 99.1 to this Form 10-K. Balance Sheet In millions Current assets Noncurrent assets Current liabilities Noncurrent liabilities Noncontrolling interests Income Statement In millions Net sales Gross profit Income from continuing operations Net income attributable to Ilim 2016 $ 774 1,351 406 1,422 22 2015 $ 455 968 665 715 21 2016 $1,927 957 2015 $ 1,931 971 419 391 254 237 2014 $ 2,138 772 (387) (360) At December 31, 2016 and 2015, the Company's investment in Ilim was $302 million and $172 million, respectively, which was $164 million and $161 million, respectively, more than the Company's proportionate share of the joint venture's underlying net assets. The differences primarily relate to purchase price fair value adjustments and currency translation adjustments. The Company is party to a joint marketing agreement with Ilim, under which the Company purchases, markets and sells paper produced by Ilim. Purchases under this agreement were $170 million, $170 million and $200 million for the years ended December 31, 2016, 2015 and 2014, respectively. INFORMATION BY BUSINESS SEGMENT The Company also holds a 50% interest in Ilim that is a separate reportable industry segment. The Company recorded equity earnings (losses), net of taxes, of $199 million, $131 million and $(194) million in 2016, 2015, and 2014, respectively, for Ilim. Equity earnings (losses) includes an after-tax foreign exchange gain (loss) of $25 million, $(75) million and $(269) million in 2016, 2015 and 2014, respectively, primarily on the remeasurement of U.S. dollar-denominated net debt. Global Cellulose Fibers Printing Papers Consumer Packaging Industrial Packaging Net Sales In millions $ 14,191 1,954 1,092 4,058 2016 Corporate and Intersegment Sales (216) 2015 $ 14,484 975 4,056 2,940 2014 $ 14,944 1,046 4,674 3,403 (90) (450) Net Sales $ 21,079 $ 22,365 $ 23,617 80 Operating Profit In millions 2016 2015 2014 Depreciation, Amortization and Cost of Timber Harvested (c) Industrial Packaging $ 1,651 $ 1,853 $ 1,896 In millions 2016 2015 2014 Global Cellulose Fibers Printing Papers Consumer Packaging Operating Profit (180) 540 191 68 465 (25) 61 (77) 178 2,202 2,361 2,058 Earnings (loss) from continuing operations before income taxes and equity earnings Interest expense, net Noncontrolling interests / equity earnings adjustment (a) Corporate items, net Corporate special items, net Non-operating pension expense 956 520 1 69 46 610 1,266 555 8 36 238 258 872 601 2 51 320 212 Adjusted Operating Profit $ 2,202 $ 2,361 $ 2,058 Industrial Packaging $ Global Cellulose Fibers Printing Papers Consumer Packaging Corporate Depreciation and Amortization 715 108 232 121 51 $ 725 $ 73 234 215 47 775 76 291 223 41 $ 1,227 $ 1,294 $ 1,406 External Sales By Major Product In millions 2016 2015 Industrial Packaging $ 14,095 $ 14,421 Global Cellulose Fibers Printing Papers Consumer Packaging Other Net Sales 934 4,028 1,934 88 873 4,046 2,907 118 $ 21,079 $ 22,365 2014 $ 14,837 947 4,413 3,307 113 $ 23,617 Restructuring and Other Charges In millions 2016 2015 2014 INFORMATION BY GEOGRAPHIC AREA Net Sales (d) NOTE 20 SUBSEQUENT EVENT On January 22, 2017, International Paper Company experienced significant structural damage to the largest pulp digester as well as the power house at its Pensacola pulp and paper mill in Cantonment, Florida. We estimate that repairing the damaged digester may take approximately three months. While we have property damage and business interruption insurance for these types of events, we expect the costs associated with this event to be in excess of deductibles. The timing of these costs and potential insurance recoveries is unknown. Industrial Packaging $ Global Cellulose Fibers Printing Papers Consumer Packaging Corporate Restructuring and Other Charges Assets In millions Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Corporate and other (b) Assets Capital Spending 7 — — 9 38 $ — $ — — 10 242 7 — 554 8 277 In millions United States (e) EMEA Pacific Rim and Asia Americas, other than U.S. Net Sales 2016 2015 $ 15,918 2,862 718 1,581 $ 16,554 2,770 1,501 1,540 $ 21,079 $ 22,365 2014 $ 16,645 3,273 1,951 1,748 $ 23,617 $ 54 $ 252 $ 846 2016 $ 14,565 3,789 3,958 1,736 9,297 $ 33,345 2015 $ 14,483 983 3,713 2,115 9,237 $ 30,531 Long-Lived Assets (f) In millions United States EMEA Pacific Rim and Asia Americas, other than U.S. Corporate Long-Lived Assets 2016 2015 $ 11,158 1,004 246 1,663 375 $ 14,446 $ 9,683 827 353 1,085 398 $ 12,346 In millions 2016 2015 2014 Industrial Packaging $ Global Cellulose Fibers Printing Papers Consumer Packaging Subtotal Corporate and other (b) 816 174 215 124 1,329 19 $ $ 858 129 232 216 1,435 52 754 75 243 233 1,305 61 Capital Spending $ 1,348 $ 1,487 $ 1,366 (a) Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly-owned. The pre-tax noncontrolling interests and equity earnings for these subsidiaries is added here to present consolidated earnings from continuing operations before income taxes and equity earnings. Includes corporate assets and assets of businesses held for sale. (b) (c) Excludes accelerated depreciation related to the closure and/ or repurposing of mills. (d) Net sales are attributed to countries based on the location of the seller. (e) Export sales to unaffiliated customers were $2.0 billion in 2016, $2.0 billion in 2015 and $2.3 billion in 2014. (f) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. 81 82 Operating Profit Depreciation, Amortization and Cost of Timber NOTE 20 SUBSEQUENT EVENT On January 22, 2017, International Paper Company experienced significant structural damage to the largest pulp digester as well as the power house at its Pensacola pulp and paper mill in Cantonment, Florida. We estimate that repairing the damaged digester may take approximately three months. While we have property damage and business interruption insurance for these types of events, we expect the costs associated with this event to be in excess of deductibles. The timing of these costs and potential insurance recoveries is unknown. In millions 2016 2015 2014 Harvested (c) Industrial Packaging $ 1,651 $ 1,853 $ 1,896 In millions 2016 2015 2014 Global Cellulose Fibers Printing Papers Consumer Packaging Operating Profit (180) 540 191 68 465 (25) 61 (77) 178 2,202 2,361 2,058 Restructuring and Other Charges INFORMATION BY GEOGRAPHIC AREA Adjusted Operating Profit $ 2,202 $ 2,361 $ 2,058 In millions 2016 2015 2014 Industrial Packaging $ $ — $ $ 54 $ 252 $ 846 Net Sales $ 21,079 $ 22,365 $ 23,617 Earnings (loss) from continuing operations before income taxes and equity earnings Interest expense, net Noncontrolling interests / equity earnings adjustment (a) Corporate items, net Corporate special items, net Non-operating pension expense Global Cellulose Fibers Printing Papers Consumer Packaging Corporate Restructuring and Other Charges Assets In millions Industrial Packaging Global Cellulose Fibers Printing Papers Consumer Packaging Corporate and other (b) Assets Capital Spending 956 520 1 69 46 610 7 — — 9 38 1,266 555 8 36 238 258 — — 10 242 872 601 2 51 320 212 7 — 554 8 277 2016 2015 $ 14,565 $ 14,483 3,789 3,958 1,736 9,297 983 3,713 2,115 9,237 $ 33,345 $ 30,531 In millions 2016 2015 2014 Industrial Packaging $ $ $ Global Cellulose Fibers Printing Papers Consumer Packaging Subtotal Corporate and other (b) 816 174 215 124 1,329 19 858 129 232 216 1,435 52 754 75 243 233 1,305 61 Capital Spending $ 1,348 $ 1,487 $ 1,366 Industrial Packaging $ $ 725 $ Global Cellulose Fibers Printing Papers Consumer Packaging Corporate Depreciation and Amortization 715 108 232 121 51 73 234 215 47 775 76 291 223 41 $ 1,227 $ 1,294 $ 1,406 External Sales By Major Product In millions 2016 2015 2014 Industrial Packaging $ 14,095 $ 14,421 $ 14,837 Global Cellulose Fibers Printing Papers Consumer Packaging Other Net Sales 934 4,028 1,934 88 873 4,046 2,907 118 947 4,413 3,307 113 $ 21,079 $ 22,365 $ 23,617 Net Sales (d) In millions United States (e) EMEA Pacific Rim and Asia Americas, other than U.S. Long-Lived Assets (f) In millions United States EMEA Pacific Rim and Asia Americas, other than U.S. Corporate Long-Lived Assets 2016 2015 2014 $ 15,918 $ 16,554 $ 16,645 2,862 718 1,581 2,770 1,501 1,540 3,273 1,951 1,748 2016 2015 $ 11,158 $ 9,683 1,004 246 1,663 375 827 353 1,085 398 $ 14,446 $ 12,346 (a) Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly-owned. The pre-tax noncontrolling interests and equity earnings for these subsidiaries is added here to present consolidated earnings from continuing operations before income taxes and equity (b) Includes corporate assets and assets of businesses held for (c) Excludes accelerated depreciation related to the closure and/ or repurposing of mills. (d) Net sales are attributed to countries based on the location of (e) Export sales to unaffiliated customers were $2.0 billion in 2016, $2.0 billion in 2015 and $2.3 billion in 2014. (f) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. earnings. sale. the seller. 81 82 INTERIM FINANCIAL RESULTS (UNAUDITED) In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year 2016 Net sales Earnings (loss) from continuing operations before income taxes and equity earnings Gain (loss) from discontinued operations Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Gain (loss) from discontinued operations $ 5,110 $ 5,322 $ 5,266 $ 5,381 $ 21,079 317 (a) (14) (a) 373 (a) 280 (a) 956 (a) (5) (b) — — — (5) (b) 334 (a-c) 40 (a,c) 312 (a,c) 218 (a,c) 904 (a-c) $ 0.82 (a) $ 0.10 (a) $ 0.76 (a) $ 0.53 (a) $ 2.21 (a) (0.01) (b) — — — (0.01) (b) Net earnings (loss) 0.81 (a-c) 0.10 (a,c) 0.76 (a,c) 0.53 (a,c) 2.20 (a-c) Diluted earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Gain (loss) from discontinued operations 0.82 (a) 0.10 (a) 0.75 (a) 0.53 (a) 2.19 (a) (0.01) (b) — — — (0.01) (b) Net earnings (loss) 0.81 (a-c) 0.10 (a,c) 0.75 (a,c) 0.53 (a,c) 2.18 (a-c) Dividends per share of common stock 0.4400 0.4400 0.4400 0.4625 1.7825 Common stock prices High Low 2015 Net sales Earnings (loss) from continuing operations before income taxes and equity earnings Gain (loss) from discontinued operations Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Gain (loss) from discontinued operations Net earnings (loss) Diluted earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Gain (loss) from discontinued operations Net earnings (loss) $ 42.09 $ 44.60 $ 49.90 $ 54.68 $ 54.68 32.50 39.24 41.08 43.55 32.50 $ 5,517 $ 5,714 $ 5,691 $ 5,443 $ 22,365 406 — 313 266 (d) 329 (d) 265 (d) 1,266 (d) — — — — 227 (d,e) 220 (d,e) 178 (d,e) 938 (d,e) $ 0.74 $ 0.54 (d) $ 0.53 (d) $ 0.43 (d) $ 2.25 (d) — 0.74 0.74 — 0.74 — — — — 0.54 (d,e) 0.53 (d,e) 0.43 (d,e) 2.25 (d,e) 0.54 (d) 0.53 (d) 0.43 (d) 2.23 (d) — — — — 0.54 (d,e) 0.53 (d,e) 0.43 (d,e) 2.23 (d,e) Dividends per share of common stock 0.4000 0.4000 0.4000 0.4400 1.6400 Common stock prices High Low $ 57.90 $ 56.49 $ 49.49 $ 44.83 $ 57.90 51.35 47.39 37.11 36.76 36.76 In millions Q1 Q2 Q3 Q4 Refund and state tax 2016 $ 9 $ — $ — $ — IP-Sun JV impairment — 186 (d) Includes the following pre-tax charges (gains): In millions Q1 Q2 Q3 Q4 2015 Riegelwood mill conversion costs, net of proceeds from sale of the Carolina Coated Bristols brand Timber monetization restructuring Early debt extinguishment costs credits Legal reserve adjustment Impairment of Orsa goodwill and trade name intangible Other items Total $ — $ (14) $ 7 $ 15 — — — 207 17 — — — (1) — — (12) 15 — 137 1 4 (4) — — 1 $ — $ 190 $ 211 $ 158 (e) Includes the following tax expenses (benefits): Tax expense for cash pension Tax benefit related to IP- Sun JV Other items items Total 2015 Q1 Q2 Q3 Q4 $ — $ 23 $ — $ — — 5 (67) — — 2 (67) (3) (13) $ — $ (39) $ (70) $ (11) — — — — — — — — Note: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amounts may not equal the sum of the four quarters. In addition, the unaudited selected consolidated financial data are derived from our audited consolidated financial statements and have been revised to reflect discontinued operations. Footnotes to Interim Financial Results (a) Includes the following pre-tax charges (gains): Riegelwood mill conversion India Packaging evaluation Early debt extinguishment costs write-off costs Write-off of certain regulatory pre-engineering costs Costs associated with the newly acquired pulp business Asia Box impairment / restructuring Gain on sale of investment in Arizona Chemical Turkey mill closure Amortization of Weyerhaeuser inventory fair value step-up — — — — — 37 (8) — — — 5 28 — — 17 29 8 7 5 — — — (b) Includes a pre-tax charge of $8 million for a legal settlement associated with the xpedx business. (c) Includes the following tax expenses (benefits): 2016 Q1 Q2 Q3 Q4 Cash pension contribution $ — $ 23 $ — $ — U.S. Federal audit Brazil goodwill International legal entity restructuring Luxembourg tax rate Tax impact of other special change items Total (14) (57) — — — — (6) — — — — — (3) (10) (24) (14) $ (74) $ 7 $ (24) $ 17 — — — 19 — — 7 19 — — — 31 Total $ 38 $ 33 $ 66 $ 45 Tax impact of other special — — 83 84 (d) Includes the following pre-tax charges (gains): In millions Q1 Q2 Q3 Q4 2015 Riegelwood mill conversion costs, net of proceeds from sale of the Carolina Coated Bristols brand Timber monetization restructuring Early debt extinguishment costs Refund and state tax credits IP-Sun JV impairment Legal reserve adjustment Impairment of Orsa goodwill and trade name intangible Other items $ — $ (14) $ 7 $ 15 — — — 207 — — — — — (4) — — 1 17 — — — (1) — — (12) 15 — 137 1 4 — 186 Total $ — $ 190 $ 211 $ 158 (e) Includes the following tax expenses (benefits): Tax expense for cash pension Tax benefit related to IP- Sun JV Other items Tax impact of other special items 2015 Q1 Q2 Q3 Q4 $ — $ 23 $ — $ — — — — — 5 (67) — — 2 (67) (3) (13) Total $ — $ (39) $ (70) $ (11) INTERIM FINANCIAL RESULTS (UNAUDITED) In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year $ 5,110 $ 5,322 $ 5,266 $ 5,381 $ 21,079 317 (a) (14) (a) 373 (a) 280 (a) 956 (a) (5) (b) — — — (5) (b) 334 (a-c) 40 (a,c) 312 (a,c) 218 (a,c) 904 (a-c) 2016 Net sales Earnings (loss) from continuing operations before income taxes and equity earnings Gain (loss) from discontinued operations Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations operations Gain (loss) from discontinued Diluted earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations operations Gain (loss) from discontinued Common stock prices High Low 2015 Net sales Earnings (loss) from continuing operations before income taxes and equity earnings Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Net earnings (loss) Diluted earnings (loss) per share attributable to International Paper Company common shareholders: Earnings (loss) from continuing operations Net earnings (loss) Common stock prices High Low $ 0.82 (a) $ 0.10 (a) $ 0.76 (a) $ 0.53 (a) $ 2.21 (a) Net earnings (loss) 0.81 (a-c) 0.10 (a,c) 0.76 (a,c) 0.53 (a,c) 2.20 (a-c) (0.01) (b) — — — (0.01) (b) 0.82 (a) 0.10 (a) 0.75 (a) 0.53 (a) 2.19 (a) Net earnings (loss) 0.81 (a-c) 0.10 (a,c) 0.75 (a,c) 0.53 (a,c) 2.18 (a-c) Dividends per share of common stock 0.4400 0.4400 0.4400 0.4625 1.7825 (0.01) (b) — — — (0.01) (b) $ 42.09 $ 44.60 $ 49.90 $ 54.68 $ 54.68 32.50 39.24 41.08 43.55 32.50 $ 5,517 $ 5,714 $ 5,691 $ 5,443 $ 22,365 Gain (loss) from discontinued operations — — — — 266 (d) 329 (d) 265 (d) 1,266 (d) 227 (d,e) 220 (d,e) 178 (d,e) 938 (d,e) Gain (loss) from discontinued operations — — — — $ 0.74 $ 0.54 (d) $ 0.53 (d) $ 0.43 (d) $ 2.25 (d) 0.54 (d,e) 0.53 (d,e) 0.43 (d,e) 2.25 (d,e) Gain (loss) from discontinued operations — — — — 0.54 (d) 0.53 (d) 0.43 (d) 2.23 (d) Dividends per share of common stock 0.4000 0.4000 0.4000 0.4400 1.6400 0.54 (d,e) 0.53 (d,e) 0.43 (d,e) 2.23 (d,e) $ 57.90 $ 56.49 $ 49.49 $ 44.83 $ 57.90 51.35 47.39 37.11 36.76 36.76 406 — 313 — 0.74 0.74 — 0.74 Note: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amounts may not equal the sum of the four quarters. In addition, the unaudited selected consolidated financial data are derived from our audited consolidated financial statements and have been revised to reflect discontinued operations. Footnotes to Interim Financial Results (a) Includes the following pre-tax charges (gains): In millions Q1 Q2 Q3 Q4 2016 Riegelwood mill conversion costs India Packaging evaluation write-off Early debt extinguishment costs Write-off of certain regulatory pre-engineering costs Costs associated with the newly acquired pulp business Asia Box impairment / restructuring Gain on sale of investment in Arizona Chemical Turkey mill closure Amortization of Weyerhaeuser inventory fair value step-up $ 9 $ — $ — $ — — — — — — — — 37 (8) — 5 28 — — — — 17 29 8 7 5 — — — — — — 19 — — 7 19 Total $ 38 $ 33 $ 66 $ 45 (b) Includes a pre-tax charge of $8 million for a legal settlement associated with the xpedx business. (c) Includes the following tax expenses (benefits): 2016 Q1 Q2 Q3 Q4 Cash pension contribution $ — $ 23 $ — $ — U.S. Federal audit Brazil goodwill International legal entity restructuring Luxembourg tax rate change Tax impact of other special items Total (14) (57) — — — — (6) — — — — — — — — 31 (3) (10) (24) (14) $ (74) $ 7 $ (24) $ 17 83 84 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES “Exchange Act”), We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities and Exchange Act of 1934, as amended recorded, processed, is (the summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2016, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 under the Exchange Act. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2016. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that: financial statements • • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to allow for the preparation of financial statements in accordance with GAAP, and that our receipts and expenditures in accordance with are being made only authorizations of our management and directors; • • assurance reasonable provide reasonable assurance as to the detection of fraud. provide regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements; and financial statements and attestation report are included in Part II, Item 8 of this Annual Report under the heading “Financial Statements and Supplementary Data.” PART III. MANAGEMENT’S PROCESS TO ASSESS THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we followed a comprehensive compliance process across the enterprise to evaluate our internal control over financial reporting, engaging employees at all levels of the organization. Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of our business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may report suspected violations of law or our policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. Our Board of Directors, assisted by the Audit and Finance Committee, monitors the integrity of our financial statements and financial reporting procedures, the performance of our internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists of independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information concerning our directors is hereby incorporated by reference to our definitive proxy statement that will be filed with the Securities and Exchange Commission (SEC) within 120 days of the close of our fiscal year. The Audit and Finance Committee of the Board of Directors has at least one member who is a financial expert, as that term is defined in Item 401(d)(5) of Regulation S-K. Further information concerning the composition of the Audit and Finance Committee and our audit committee financial experts is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. Information with respect to our executive officers is set forth on pages 5 and 6 in Part I of this Form 10-K under the caption, “Executive Officers of the Registrant.” Executive officers of International Paper are elected to hold office until the next annual meeting of the Board of Directors following the annual meeting of shareholders and, until the election of successors, subject to removal by the Board. The Company’s Code of Business Ethics (Code) is applicable to all employees of the Company, including the chief executive officer and senior financial officers, as well as the Board of Directors. We disclose any amendments to our Code and any waivers from a provision of our Code granted to our directors, chief executive officer and senior financial officers on our Internet Web site within four business days following such amendment or waiver. To date, no waivers of the Code have been granted. We make available free of charge on our Internet Web site at www.internationalpaper.com, and in print to any shareholder who requests them, our Corporate Governance Principles, our Code of Business Ethics headquarters. Information with respect to compliance with Section 16 (a) of the Securities and Exchange Act and our corporate governance is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. There have been no changes in our internal control over and the Charters of our Audit and Finance Committee, financial reporting during the quarter ended Management Development and Compensation December 31, 2016, that have materially affected, or Committee, Governance Committee and Public Policy are reasonably likely to materially affect, our internal and Environment Committee. Requests for copies may control over financial reporting. be directed to the corporate secretary at our corporate ITEM 9B. OTHER INFORMATION None. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control system is supported by written policies and procedures, contains self- monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. As of December 31, 2016, management has assessed the effectiveness of the Company’s internal control over financial reporting. In a report included on pages 39 and 40, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. In making this assessment, we used the criteria described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company completed the acquisition of Holmen Paper’s newsprint mill in Madrid, Spain as well as the associated recycling operations and a 50% ownership in a cogeneration facility in June 2016. Due to the timing of the acquisition we have excluded the Holmen operations from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Holmen operations represented approximately 0.4% of net sales and 0.3% of total assets. The Company completed the acquisition of Weyerhaeuser’s pulp business in December 2016. Due to the timing of the acquisition we have excluded the former Weyerhaeuser pulp business from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Weyerhaeuser pulp business represented approximately 0.5% of net sales and 6.5% of total assets. Our independent registered public accounting firm, Deloitte & Touche LLP, with direct access to our Board of Directors through our Audit and Finance Committee, has audited the consolidated financial statements prepared by us. Deloitte & Touche LLP has also issued an attestation report on our internal control over financial reporting. Their report on the consolidated 85 86 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements; and ITEM 9A. CONTROLS AND PROCEDURES • provide reasonable assurance as to the detection EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2016, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 under the Exchange Act. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2016. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; • provide reasonable assurance that transactions are recorded as necessary to allow for the preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; of fraud. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control system is supported by written policies and procedures, contains self- monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. As of December 31, 2016, management has assessed the effectiveness of the Company’s internal control over financial reporting. In a report included on pages 39 and 40, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. In making this assessment, we used the criteria described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company completed the acquisition of Holmen Paper’s newsprint mill in Madrid, Spain as well as the associated recycling operations and a 50% ownership in a cogeneration facility in June 2016. Due to the timing of the acquisition we have excluded the Holmen operations from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Holmen operations represented approximately 0.4% of net sales and 0.3% of total assets. The Company completed the acquisition of Weyerhaeuser’s pulp business in December 2016. Due to the timing of the acquisition we have excluded the former Weyerhaeuser pulp business from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2016, sales and assets for the former Weyerhaeuser pulp business represented approximately 0.5% of net sales and 6.5% of total assets. Our independent registered public accounting firm, Deloitte & Touche LLP, with direct access to our Board of Directors through our Audit and Finance Committee, has audited the consolidated financial statements prepared by us. Deloitte & Touche LLP has also issued an attestation report on our internal control over financial reporting. Their report on the consolidated financial statements and attestation report are included in Part II, Item 8 of this Annual Report under the heading “Financial Statements and Supplementary Data.” PART III. MANAGEMENT’S PROCESS TO ASSESS THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING To comply with the requirements of Section 404 of the followed a Sarbanes-Oxley Act of 2002, we comprehensive compliance process across the enterprise to evaluate our internal control over financial reporting, engaging employees at all levels of the organization. Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of our business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may report suspected violations of law or our policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. Our Board of Directors, assisted by the Audit and Finance Committee, monitors the integrity of our financial reporting and procedures, the performance of our internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists regularly with of representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. independent directors, meets statements financial CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING reporting during There have been no changes in our internal control over financial the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 85 86 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE is hereby Information concerning our directors incorporated by reference to our definitive proxy statement that will be filed with the Securities and Exchange Commission (SEC) within 120 days of the close of our fiscal year. The Audit and Finance Committee of the Board of Directors has at least one member who is a financial expert, as that term is defined in Item 401(d)(5) of Regulation S-K. Further information concerning the composition of the Audit and Finance Committee and our audit committee financial experts is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. Information with respect to our executive officers is set forth on pages 5 and 6 in Part I of this Form 10-K under the caption, “Executive Officers of the Registrant.” Executive officers of International Paper are elected to hold office until the next annual meeting of the Board of Directors the annual meeting of shareholders and, until the election of successors, subject to removal by the Board. following The Company’s Code of Business Ethics (Code) is applicable to all employees of the Company, including the chief executive officer and senior financial officers, as well as the Board of Directors. We disclose any amendments to our Code and any waivers from a provision of our Code granted to our directors, chief executive officer and senior financial officers on our Internet Web site within four business days following such amendment or waiver. To date, no waivers of the Code have been granted. We make available free of charge on our Internet Web site at www.internationalpaper.com, and in print to any shareholder who requests them, our Corporate Governance Principles, our Code of Business Ethics and the Charters of our Audit and Finance Committee, Management Development and Compensation Committee, Governance Committee and Public Policy and Environment Committee. Requests for copies may be directed to the corporate secretary at our corporate headquarters. Information with respect to compliance with Section 16 (a) of the Securities and Exchange Act and our corporate governance is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information with respect to the compensation of executives and directors of the Company is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS A description of the security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE A description of certain relationships and related transactions is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information with respect to fees paid to, and services rendered by, our principal accountant, and our policies and procedures for pre-approving those services, is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (1) Financial Statements – See Item 8. Financial Statements and Supplementary Data. the consolidated (2) Financial Statement Schedules – The following additional financial data should be read in conjunction with financial statements in Item 8. Schedules not included with this additional financial data have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or the notes thereto. Additional Financial Data 2016, 2015 and 2014 Consolidated Schedule: II-Valuation and Qualifying Accounts. 90 (3.1) Restated Certificate of Paper Incorporation of International Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8- K dated May 13, 2013). (3.2) By-laws of International Paper Company, as amended through February 9, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8- K dated February 8, 2016). (4.1) Indenture, dated as of April 12, 1999, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2000). (4.2) Supplemental Indenture (including the form of Notes), dated as of June 4, 2008, between International Paper Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2008). (4.3) Supplemental Indenture (including the form of Notes), dated as of May 11, 2009, between International Paper Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated May 11, 2009). (4.4) Supplemental Indenture (including the form of Notes), dated as of August 10, 2009, between International Paper Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated August 10, 2009). (4.5) Supplemental Indenture (including the form of Notes), dated as of December 7, 2009, between International Paper Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 7, 2009). (4.6) Supplemental Indenture (including the form of Notes), dated as of November 16, 2011, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated November 16, 2011). (4.7) Supplemental Indenture (including the form (10.8) Form of Restricted Stock Unit Award of Notes), dated as of June 10, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated June 10, 2014). (4.8) Supplemental Indenture (including the form of Notes), dated as of May 26, 2015, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated May 26, 2015). (4.9) Supplemental Indenture (including the form of Notes), dated as of August 11, 2016, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated August 11, 2016). (4.10) In accordance with Item 601 (b) (4) (iii) (A) of Regulation S-K, certain instruments respecting long-term debt of the Company have been omitted but will be furnished to the Commission upon request. (10.1) Amended and Restated 2009 Incentive Compensation Plan (ICP) (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated February 10, 2014). + (10.2) 2016 Management Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8- K dated February 8, 2016). + (10.3) 2017 Management Incentive Plan. * + (10.4) Amended and Restated 2009 Executive Management Incentive Plan, including 2015 Exhibits thereto (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014). + (10.5) 2017 Exhibits to the Amended and Restated 2009 Executive Management Incentive Plan. * + (10.6) Restricted Stock and Deferred Compensation Plan for Non-Employee Directors, Amended and Restated as of May 10, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010). + (10.7) Form of Restricted Stock Award Agreement. (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2013). + Agreement (cash settled). (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). + (10.9) Form of Restricted Stock Unit Award Agreement (stock settled). (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). + (10.10) Form of Performance Share Plan award certificate. * + (10.11) Pension Restoration Plan for Salaried Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009). + (10.12) Unfunded Supplemental Retirement Plan for Senior Managers, as amended and restated effective January 1, 2008 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007). + (10.13) Amendment No. 1 to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, effective October 13, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated October 17, 2008). + (10.14) Amendment No. 2 to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, effective October 14, 2008 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated October 17, 2008). + (10.15) Amendment No. 3 to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, effective December 8, 2008 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). + (10.16) Amendment No. 4 to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, effective January 1, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). + (10.17) Amendment No. 5 to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, effective October 31, 2009 (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). + 87 88 ITEM 11. EXECUTIVE COMPENSATION Information with respect to the compensation of executives and directors of the Company is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS A description of the security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE A description of certain relationships and related transactions is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information with respect to fees paid to, and services rendered by, our principal accountant, and our policies and procedures for pre-approving those services, is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. PART IV. SCHEDULES ITEM 15. EXHIBITS AND FINANCIAL STATEMENT (1) Financial Statements – See Item 8. Financial Statements and Supplementary Data. (2) Financial Statement Schedules – The following additional financial data should be read in conjunction with the consolidated financial statements in Item 8. Schedules not included with this additional financial data have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or the notes thereto. Additional Financial Data 2016, 2015 and 2014 Consolidated Schedule: II-Valuation and Qualifying Accounts. 90 (3.1) Restated Certificate of Incorporation of International Paper Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8- K dated May 13, 2013). (3.2) By-laws of International Paper Company, as amended through February 9, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8- K dated February 8, 2016). (4.1) Indenture, dated as of April 12, 1999, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2000). (4.2) Supplemental Indenture (including the form of Notes), dated as of June 4, 2008, between International Paper Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2008). (4.3) Supplemental Indenture (including the form of Notes), dated as of May 11, 2009, between International Paper Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated May 11, 2009). (4.4) Supplemental Indenture (including the form of Notes), dated as of August 10, 2009, between International Paper Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated August 10, 2009). (4.5) Supplemental Indenture (including the form of Notes), dated as of December 7, 2009, between International Paper Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 7, 2009). (4.6) Supplemental Indenture (including the form of Notes), dated as of November 16, 2011, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated November 16, 2011). (4.7) Supplemental Indenture (including the form of Notes), dated as of June 10, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated June 10, 2014). (4.8) Supplemental Indenture (including the form of Notes), dated as of May 26, 2015, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated May 26, 2015). (4.9) Supplemental Indenture (including the form of Notes), dated as of August 11, 2016, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8- K dated August 11, 2016). (4.10) In with accordance Item 601 (b) (4) (iii) (A) of Regulation S-K, certain instruments respecting long-term debt of the Company have been omitted but will be furnished to the Commission upon request. (10.1) Amended and Restated 2009 Incentive Compensation Plan (ICP) (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated February 10, 2014). + (10.2) 2016 Management Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8- K dated February 8, 2016). + Incentive (10.3) 2017 Management Incentive Plan. * + (10.4) Amended and Restated 2009 Executive Management Incentive Plan, including 2015 Exhibits thereto (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014). + (10.5) 2017 Exhibits to the Amended and Restated Incentive 2009 Executive Management Plan. * + (10.6) Restricted and Deferred Stock Compensation Plan for Non-Employee Directors, Amended and Restated as of May 10, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010). + (10.7) Form of Restricted Stock Award Agreement. (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2013). + 87 88 (10.8) Form of Restricted Stock Unit Award Agreement (cash settled). (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). + (10.9) Form of Restricted Stock Unit Award Agreement (stock settled). (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). + (10.10) Form of Performance Share Plan award certificate. * + (10.11) Pension Restoration Plan for Salaried Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009). + (10.12) Unfunded Supplemental Retirement Plan for Senior Managers, as amended and restated effective January 1, 2008 (incorporated by reference to Exhibit 10.21 the Company’s Annual Report on to fiscal year ended Form 10-K December 31, 2007). + the for Unfunded (10.13) Amendment No. 1 to the International Paper Company Supplemental Retirement Plan for Senior Managers, effective October 13, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated October 17, 2008). + Unfunded (10.14) Amendment No. 2 to the International Paper Company Supplemental Retirement Plan for Senior Managers, effective October 14, 2008 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated October 17, 2008). + Unfunded (10.15) Amendment No. 3 to the International Paper Company Supplemental Retirement Plan for Senior Managers, effective December 8, 2008 (incorporated by reference the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). + to Exhibit 10.20 to Unfunded (10.16) Amendment No. 4 to the International Paper Company Supplemental Retirement Plan for Senior Managers, effective January 1, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). + Unfunded (10.17) Amendment No. 5 to the International Paper Company Supplemental Retirement Plan for Senior Managers, effective October 31, 2009 (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). + Unfunded (10.18) Amendment No. 6 to the International Paper Supplemental Company Retirement Plan for Senior Managers, effective January 1, 2012 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011). + (10.19) Form of Non-Competition Agreement, entered into by certain Company employees (including named executive officers) who have received restricted stock (incorporated by reference the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). + to Exhibit 10.22 to (10.20) Form of Non-Solicitation Agreement, entered into by certain Company employees (including named executive officers) who have received restricted stock (incorporated by the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). + to Exhibit 10.5 reference to (10.21) Form of Change-in-Control Agreement - Tier I, for the Chief Executive Officer and all "grandfathered" senior vice presidents elected prior to 2012 (all named executive officers) - approved September 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013). + (10.22) Form of Change-in-Control Agreement - Tier II, for all future senior vice presidents and all "grandfathered" vice presidents elected prior - approved September 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013). + to February 2008 (10.23) Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003). + (10.24) Board Policy on Severance Agreements with Senior Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 18, 2005). + (10.25) Board Policy on Change of Control Agreements (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 18, 2005). + (10.26) Time Sharing Agreement, dated October 17, 2014 (and effective November 1, 2014), by and between Mark S. Sutton and International Paper Company (incorporated by the Company’s Current Report on Form 8-K dated October 14, 2014). + to Exhibit 99.1 reference to SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS (In millions) For the Year Ended December 31, 2016 Balance at Beginning of Period Additions Charged to Earnings Additions Charged to Other Accounts Deductions Balance at from Reserves End of Period Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts – current $ Restructuring reserves 70 $ 10 9 $ 3 — — (9)(a) $ (7)(b) 70 6 For the Year Ended December 31, 2015 Balance at Beginning of Period Additions Charged to Earnings Additions Charged to Other Accounts Deductions Balance at from Reserves End of Period Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts – current $ Restructuring reserves 82 $ 16 11 $ 5 — — (23)(a) $ (11)(b) 70 10 For the Year Ended December 31, 2014 Balance at Beginning of Period Additions Charged to Earnings Additions Charged to Other Accounts Deductions from Reserves Balance at End of Period Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts – current $ 109 $ Restructuring reserves 51 11 $ 41 — — (38)(a) $ (76)(b) 82 16 (a) (b) Includes write-offs, less recoveries, of accounts determined to be uncollectible and other adjustments. Includes payments and deductions for reversals of previously established reserves that were no longer required. (10.27) Five-Year Credit Agreement dated as of August 5, 2014, among International Paper Company, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). (11) Statement of Computation of Per Share Earnings. * (12) Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. * (21) List of Subsidiaries of Registrant. * (23.1) Consent of Independent Registered Public Accounting Firm. * (23.2) Consent of Independent Auditors. * (24) Power of Attorney (contained on the signature page to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). * (31.1) Certification by Mark S. Sutton, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. * (31.2) Certification by Carol L. Roberts, Chief Financial to Officer, Section 302 of the Sarbanes-Oxley Act of 2002. * pursuant (32) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* (99.1) Audited Financial Statements for Ilim Holding S.A. and its subsidiaries as of and for the year ended December 31, 2016 and 2015. * (101.INS) XBRL Instance Document * (101.SCH) XBRL Taxonomy Extension Schema * (101.CAL) XBRL Taxonomy Extension Calculation Linkbase * (101.DEF) XBRL Taxonomy Extension Definition Linkbase * (101.LAB) XBRL Taxonomy Extension Label Linkbase * (101.PRE) XBRL Extension Presentation Linkbase * + Management contract or compensatory plan or arrangement. * Filed herewith 89 90 Balance at End of Period Balance at Beginning of Period Additions Charged to Earnings Deductions from Reserves For the Year Ended December 31, 2016 Additions Charged to Other Accounts (10.18) Amendment No. 6 to the International Paper (10.27) Five-Year Credit Agreement dated as of SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS (In millions) Company Unfunded Supplemental Retirement Plan for Senior Managers, effective January 1, 2012 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011). + (10.19) Form of Non-Competition Agreement, entered into by certain Company employees (including named executive officers) who have received restricted stock (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). + (10.20) Form of Non-Solicitation Agreement, entered into by certain Company employees (including named executive officers) who have received restricted stock (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). + (10.21) Form of Change-in-Control Agreement - Tier I, for the Chief Executive Officer and all "grandfathered" senior vice presidents elected prior to 2012 (all named executive officers) - approved September 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013). + (10.22) Form of Change-in-Control Agreement - Tier II, for all future senior vice presidents and all "grandfathered" vice presidents elected prior to February 2008 - approved September 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013). + (10.23) Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003). + (10.24) Board Policy on Severance Agreements with Senior Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 18, 2005). + (10.25) Board Policy on Change of Control Agreements (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 18, 2005). + (10.26) Time Sharing Agreement, dated October 17, 2014 (and effective November 1, 2014), by and between Mark S. Sutton and International Paper Company (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 14, 2014). + August 5, 2014, among International Paper Company, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). (11) Statement of Computation of Per Share Earnings. * (12) Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. * (21) List of Subsidiaries of Registrant. * (23.1) Consent of Independent Registered Public Accounting Firm. * (23.2) Consent of Independent Auditors. * (24) Power of Attorney (contained on the signature page to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). * (31.1) Certification by Mark S. Sutton, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. * (31.2) Certification by Carol L. Roberts, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * (32) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* (99.1) Audited Financial Statements for Ilim Holding S.A. and its subsidiaries as of and for the year ended December 31, 2016 and 2015. * (101.INS) XBRL Instance Document * (101.SCH) XBRL Taxonomy Extension Schema * (101.CAL) XBRL Taxonomy Extension Calculation (101.DEF) XBRL Taxonomy Extension Definition (101.LAB) XBRL Taxonomy Extension Label (101.PRE) XBRL Extension Presentation Linkbase Linkbase * Linkbase * Linkbase * * + Management contract or compensatory plan or arrangement. * Filed herewith Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts – current Restructuring reserves Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts – current Restructuring reserves Description Reserves Applied Against Specific Assets Shown on Balance Sheet: $ 70 $ 10 9 $ 3 — — (9)(a) $ (7)(b) 70 6 For the Year Ended December 31, 2015 Additions Charged to Other Accounts Deductions from Reserves Additions Charged to Earnings Balance at End of Period Balance at Beginning of Period $ 82 $ 16 11 $ 5 — — (23)(a) $ (11)(b) 70 10 For the Year Ended December 31, 2014 Balance at Beginning of Period Additions Charged to Earnings Additions Charged to Other Accounts Deductions from Reserves Balance at End of Period Doubtful accounts – current $ 109 $ Restructuring reserves 51 11 $ 41 — — (38)(a) $ (76)(b) 82 16 (a) (b) Includes write-offs, less recoveries, of accounts determined to be uncollectible and other adjustments. Includes payments and deductions for reversals of previously established reserves that were no longer required. 89 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY By: /S/ SHARON R. RYAN Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary POWER OF ATTORNEY February 22, 2017 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sharon R. Ryan and Deon Vaughan as his or her true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney- in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorney-in-fact and agent, or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date Chairman of the Board & Chief Executive Officer and Director February 22, 2017 /S/ WILLIAM J. BURNS Director February 22, 2017 /S/ JAY L. JOHNSON Director February 22, 2017 /S/ MARK S. SUTTON Mark S. Sutton /S/ DAVID J. BRONCZEK Director David J. Bronczek Willliam J. Burns /S/ AHMET C. DORDUNCU Director Ahmet C. Dorduncu /S/ ILENE S. GORDON Director Ilene S. Gordon Jay L. Johnson /S/ STACEY J. MOBLEY Director Stacey J. Mobley /S/ JOHN L. TOWNSEND III Director John L. Townsend III /S/ WILLIAM G. WALTER Director William G. Walter /S/ J. STEVEN WHISLER Director J. Steven Whisler /S/ RAY G. YOUNG Director Ray G. Young Carol L. Roberts Vincent P. Bonnot February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 /S/ CAROL L. ROBERTS Senior Vice President and Chief Financial Officer February 22, 2017 /S/ VINCENT P. BONNOT Vice President – Finance and Controller February 22, 2017 91 92 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY By: /S/ SHARON R. RYAN Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sharon R. Ryan and Deon Vaughan as his or her true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney- in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorney-in-fact and agent, or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date February 22, 2017 /S/ MARK S. SUTTON Mark S. Sutton Chairman of the Board & Chief Executive Officer and Director February 22, 2017 /S/ DAVID J. BRONCZEK Director David J. Bronczek February 22, 2017 /S/ WILLIAM J. BURNS Director February 22, 2017 Willliam J. Burns /S/ AHMET C. DORDUNCU Director Ahmet C. Dorduncu /S/ ILENE S. GORDON Director Ilene S. Gordon February 22, 2017 February 22, 2017 /S/ JAY L. JOHNSON Director February 22, 2017 Jay L. Johnson /S/ STACEY J. MOBLEY Director Stacey J. Mobley /S/ JOHN L. TOWNSEND III Director John L. Townsend III /S/ WILLIAM G. WALTER Director William G. Walter /S/ J. STEVEN WHISLER Director J. Steven Whisler /S/ RAY G. YOUNG Director Ray G. Young February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 /S/ CAROL L. ROBERTS Senior Vice President and Chief Financial Officer February 22, 2017 Carol L. Roberts /S/ VINCENT P. BONNOT Vice President – Finance and Controller February 22, 2017 Vincent P. Bonnot 91 92 2016 LISTING OF FACILITIES (all facilities are owned except noted otherwise) PRINTING PAPERS U.S.: Selma, Alabama (Riverdale Mill) Ticonderoga, New York Eastover, South Carolina Georgetown, South Carolina Sumter, South Carolina International: Luiz Antônio, São Paulo, Brazil Mogi Guacu, São Paulo, Brazil Cedar Rapids, Iowa Henderson, Kentucky Maysville, Kentucky Bogalusa, Louisiana Campti, Louisiana Mansfield, Louisiana Vicksburg, Mississippi Valliant, Oklahoma Springfield, Oregon Orange, Texas Três Lagoas, Mato Grosso do Sul, Brazil International: APPENDIX I Tracy, California Golden, Colorado Wheat Ridge, Colorado Putnam, Connecticut Orlando, Florida Plant City, Florida Tampa, Florida leased Columbus, Georgia Forest Park, Georgia Griffin, Georgia Kennesaw, Georgia leased Lithonia, Georgia Franco da Rocha, São Paulo, Brazil Savannah, Georgia Nova Campina, São Paulo, Brazil Stone Mountain, Georgia leased Paulinia, São Paulo, Brazil Tucker, Georgia Cantonment, Florida (Pensacola Mill) Corrugated Container Veracruz, Mexico Kenitra, Morocco Madrid, Spain Edirne, Turkey (2) U.S.: Bay Minette, Alabama Decatur, Alabama Dothan, Alabama leased Huntsville, Alabama Conway, Arkansas Tolleson, Arizona Yuma, Arizona Anaheim, California Camarillo, California Carson, California Aurora, Illinois (3 locations) Bedford Park, Illinois (2 locations) 1 leased Belleville, Illinois Carroll Stream, Illinois Des Plaines, Illinois Lincoln, Illinois Montgomery, Illinois Northlake, Illinois Rockford, Illinois Butler, Indiana Crawfordsville, Indiana Fort Wayne, Indiana Saint Anthony, Indiana Tipton, Indiana Cedar Rapids, Iowa Waterloo, Iowa Garden City, Kansas Kansas City, Kansas Fort Smith, Arkansas (2 locations) Hammond, Indiana Russellville, Arkansas (2 locations) Indianapolis, Indiana (2 locations) Grand Prairie, Alberta, Canada Buena Park, California leased Saillat, France Kadiam, India Rajahmundry, India Kwidzyn, Poland Svetogorsk, Russia GLOBAL CELLULOSE FIBERS U.S.: Augusta, Georgia Flint River, Georgia Port Wentworth, Georgia Columbus, Mississippi New Bern, North Carolina Riegelwood, North Carolina Eastover, South Carolina Georgetown, South Carolina Franklin, Virginia International: Saillat, France Gdansk, Poland Kwidzyn, Poland Svetogorsk, Russia INDUSTRIAL PACKAGING Containerboard U.S.: Pine Hill, Alabama Prattville, Alabama Cantonment, Florida (Pensacola Mill) Rome, Georgia Savannah, Georgia Cayuga, Indiana Cerritos, California leased Bowling Green, Kentucky Compton, California Elk Grove, California Exeter, California Gilroy, California (2 locations) Los Angeles, California Modesto, California Ontario, California Salinas, California Sanger, California Lexington, Kentucky Louisville, Kentucky Walton, Kentucky Bogalusa, Louisiana Lafayette, Louisiana Shreveport, Louisiana Springhill, Louisiana Auburn, Maine Three Rivers, Michigan San Leandro, California leased Arden Hills, Minnesota Santa Fe Springs, California (2 locations) Stockton, California Austin, Minnesota Fridley, Minnesota A-1 A-2 Minneapolis, Minnesota leased Hazleton, Pennsylvania Nanjing China (1) Shakopee, Minnesota Kennett Square, Pennsylvania Shanghai, China (2 locations) (1) White Bear Lake, Minnesota Lancaster, Pennsylvania Houston, Mississippi Jackson, Mississippi Magnolia, Mississippi leased Olive Branch, Mississippi Fenton, Missouri Kansas City, Missouri Mount Carmel, Pennsylvania Georgetown, South Carolina Laurens, South Carolina Lexington, South Carolina Shenyang, China (1) Suzhou, China (1) Tianjin, China (2 locations) (1) Wuhan, China (1) Arles, France Ashland City, Tennessee leased Chalon-sur-Saone, France Cleveland, Tennessee Creil, France Maryland Heights, Missouri Elizabethton, Tennessee leased LePuy, France (Espaly Box Plant) North Kansas City, Missouri leased Morristown, Tennessee Mortagne, France Murfreesboro, Tennessee Guadeloupe, French West Indies Charlotte, North Carolina (2 locations) St. Joseph, Missouri St. Louis, Missouri Omaha, Nebraska Barrington, New Jersey Bellmawr, New Jersey Milltown, New Jersey Spotswood, New Jersey Thorofare, New Jersey Binghamton, New York Buffalo, New York Rochester, New York Scotia, New York Utica, New York 1 leased Lumberton, North Carolina Manson, North Carolina Newton, North Carolina Statesville, North Carolina Byesville, Ohio Delaware, Ohio Eaton, Ohio Madison, Ohio Marion, Ohio Marysville, Ohio leased Middletown, Ohio Mt. Vernon, Ohio Newark, Ohio Streetsboro, Ohio Wooster, Ohio Oklahoma City, Oklahoma Beaverton, Oregon (3 locations) Hillsboro, Oregon Portland, Oregon Salem, Oregon leased Amarillo, Texas Carrollton, Texas (2 locations) Edinburg, Texas El Paso, Texas Ft. Worth, Texas leased Grand Prairie, Texas Hidalgo, Texas McAllen, Texas San Antonio, Texas (2 locations) Sealy, Texas Waxahachie, Texas Lynchburg, Virginia Petersburg, Virginia Richmond, Virginia Moses Lake, Washington Olympia, Washington Yakima, Washington Fond du Lac, Wisconsin Manitowoc, Wisconsin International: Manaus, Amazonas, Brazil Paulinia, São Paulo, Brazil Rio Verde, Goias, Brazil Suzano, São Paulo, Brazil Las Palmas, Canary Islands Tenerife, Canary Islands Rancagua, Chile Baoding, China (1) Beijing, China (1) Chengdu, China (1) Dalian, China (1) Dongguan, China (1) Biglerville, Pennsylvania (2 locations) Guangzhou, China (2 locations) (1) Eighty-four, Pennsylvania Hohhot, China (1) Batam, Indonesia (1) Bellusco, Italy Catania, Italy Pomezia, Italy San Felice, Italy Kuala Lumpur, Malaysia (1) Juhor, Malaysia (1) Apodaco (Monterrey), Mexico leased Ixtaczoquitlan, Mexico Juarez, Mexico leased Los Mochis, Mexico Puebla, Mexico leased Reynosa, Mexico San Jose Iturbide, Mexico Santa Catarina, Mexico Silao, Mexico Villa Nicolas Romero, Mexico Zapopan, Mexico Agadir, Morocco Casablanca, Morocco Kenitra, Morocco Singapore, Singapore (1) Almeria, Spain Barcelona, Spain Bilbao, Spain Gandia, Spain Madrid, Spain Bangkok, Thailand (1) Adana, Turkey Bursa, Turkey Corlu, Turkey Corum, Turkey Gebze, Turkey Izmir, Turkey 2016 LISTING OF FACILITIES (all facilities are owned except noted otherwise) APPENDIX I Minneapolis, Minnesota leased Hazleton, Pennsylvania Nanjing China (1) Shakopee, Minnesota Kennett Square, Pennsylvania Shanghai, China (2 locations) (1) White Bear Lake, Minnesota Lancaster, Pennsylvania Houston, Mississippi Jackson, Mississippi Magnolia, Mississippi leased Olive Branch, Mississippi Fenton, Missouri Kansas City, Missouri Mount Carmel, Pennsylvania Georgetown, South Carolina Laurens, South Carolina Lexington, South Carolina Shenyang, China (1) Suzhou, China (1) Tianjin, China (2 locations) (1) Wuhan, China (1) Arles, France Ashland City, Tennessee leased Chalon-sur-Saone, France Cleveland, Tennessee Creil, France Maryland Heights, Missouri Elizabethton, Tennessee leased LePuy, France (Espaly Box Plant) North Kansas City, Missouri leased Morristown, Tennessee Mortagne, France Murfreesboro, Tennessee Guadeloupe, French West Indies Três Lagoas, Mato Grosso do Sul, Brazil International: Franco da Rocha, São Paulo, Brazil Savannah, Georgia Nova Campina, São Paulo, Brazil Stone Mountain, Georgia leased Paulinia, São Paulo, Brazil Tucker, Georgia Aurora, Illinois (3 locations) Bedford Park, Illinois (2 locations) Cantonment, Florida (Pensacola Mill) Corrugated Container Fort Smith, Arkansas (2 locations) Hammond, Indiana Russellville, Arkansas (2 locations) Indianapolis, Indiana (2 locations) Grand Prairie, Alberta, Canada Buena Park, California leased Cerritos, California leased Bowling Green, Kentucky PRINTING PAPERS U.S.: Selma, Alabama (Riverdale Mill) Ticonderoga, New York Eastover, South Carolina Georgetown, South Carolina Sumter, South Carolina International: Luiz Antônio, São Paulo, Brazil Mogi Guacu, São Paulo, Brazil Saillat, France Kadiam, India Rajahmundry, India Kwidzyn, Poland Svetogorsk, Russia GLOBAL CELLULOSE FIBERS U.S.: Augusta, Georgia Flint River, Georgia Port Wentworth, Georgia Columbus, Mississippi New Bern, North Carolina Riegelwood, North Carolina Eastover, South Carolina Georgetown, South Carolina Franklin, Virginia International: Saillat, France Gdansk, Poland Kwidzyn, Poland Svetogorsk, Russia INDUSTRIAL PACKAGING Containerboard U.S.: Pine Hill, Alabama Prattville, Alabama Rome, Georgia Savannah, Georgia Cayuga, Indiana Cantonment, Florida (Pensacola Mill) Cedar Rapids, Iowa Henderson, Kentucky Maysville, Kentucky Bogalusa, Louisiana Campti, Louisiana Mansfield, Louisiana Vicksburg, Mississippi Valliant, Oklahoma Springfield, Oregon Orange, Texas Veracruz, Mexico Kenitra, Morocco Madrid, Spain Edirne, Turkey (2) U.S.: Bay Minette, Alabama Decatur, Alabama Dothan, Alabama leased Huntsville, Alabama Conway, Arkansas Tolleson, Arizona Yuma, Arizona Anaheim, California Camarillo, California Carson, California Compton, California Elk Grove, California Exeter, California Gilroy, California (2 locations) Los Angeles, California Modesto, California Ontario, California Salinas, California Sanger, California Tracy, California Golden, Colorado Wheat Ridge, Colorado Putnam, Connecticut Orlando, Florida Plant City, Florida Tampa, Florida leased Columbus, Georgia Forest Park, Georgia Griffin, Georgia Kennesaw, Georgia leased Lithonia, Georgia 1 leased Belleville, Illinois Carroll Stream, Illinois Des Plaines, Illinois Lincoln, Illinois Montgomery, Illinois Northlake, Illinois Rockford, Illinois Butler, Indiana Crawfordsville, Indiana Fort Wayne, Indiana Saint Anthony, Indiana Tipton, Indiana Cedar Rapids, Iowa Waterloo, Iowa Garden City, Kansas Kansas City, Kansas Lexington, Kentucky Louisville, Kentucky Walton, Kentucky Bogalusa, Louisiana Lafayette, Louisiana Shreveport, Louisiana Springhill, Louisiana Auburn, Maine Three Rivers, Michigan St. Joseph, Missouri St. Louis, Missouri Omaha, Nebraska Barrington, New Jersey Bellmawr, New Jersey Milltown, New Jersey Spotswood, New Jersey Thorofare, New Jersey Binghamton, New York Buffalo, New York Rochester, New York Scotia, New York Utica, New York Charlotte, North Carolina (2 locations) 1 leased Lumberton, North Carolina Manson, North Carolina Newton, North Carolina Statesville, North Carolina Byesville, Ohio Delaware, Ohio Eaton, Ohio Madison, Ohio Marion, Ohio Marysville, Ohio leased Middletown, Ohio Mt. Vernon, Ohio Newark, Ohio Streetsboro, Ohio Wooster, Ohio Oklahoma City, Oklahoma Beaverton, Oregon (3 locations) Hillsboro, Oregon Portland, Oregon Salem, Oregon leased Amarillo, Texas Carrollton, Texas (2 locations) Edinburg, Texas El Paso, Texas Ft. Worth, Texas leased Grand Prairie, Texas Hidalgo, Texas McAllen, Texas San Antonio, Texas (2 locations) Sealy, Texas Waxahachie, Texas Lynchburg, Virginia Petersburg, Virginia Richmond, Virginia Moses Lake, Washington Olympia, Washington Yakima, Washington Fond du Lac, Wisconsin Manitowoc, Wisconsin International: Manaus, Amazonas, Brazil Paulinia, São Paulo, Brazil Rio Verde, Goias, Brazil Suzano, São Paulo, Brazil Las Palmas, Canary Islands Tenerife, Canary Islands Rancagua, Chile Baoding, China (1) Beijing, China (1) Chengdu, China (1) Dalian, China (1) Dongguan, China (1) Batam, Indonesia (1) Bellusco, Italy Catania, Italy Pomezia, Italy San Felice, Italy Kuala Lumpur, Malaysia (1) Juhor, Malaysia (1) Apodaco (Monterrey), Mexico leased Ixtaczoquitlan, Mexico Juarez, Mexico leased Los Mochis, Mexico Puebla, Mexico leased Reynosa, Mexico San Jose Iturbide, Mexico Santa Catarina, Mexico Silao, Mexico Villa Nicolas Romero, Mexico Zapopan, Mexico Agadir, Morocco Casablanca, Morocco Kenitra, Morocco Singapore, Singapore (1) Almeria, Spain Barcelona, Spain Bilbao, Spain Gandia, Spain Madrid, Spain Bangkok, Thailand (1) Adana, Turkey Bursa, Turkey Corlu, Turkey Corum, Turkey Gebze, Turkey Izmir, Turkey San Leandro, California leased Arden Hills, Minnesota Santa Fe Springs, California (2 locations) Stockton, California Austin, Minnesota Fridley, Minnesota Biglerville, Pennsylvania (2 locations) Guangzhou, China (2 locations) (1) Eighty-four, Pennsylvania Hohhot, China (1) A-1 A-2 Recycling U.S.: Phoenix, Arizona Fremont, California Norwalk, California West Sacramento, California Itasca, Illinois Des Moines, Iowa Wichita, Kansas Roseville, Minnesota Omaha, Nebraska Charlotte, North Carolina Beaverton, Oregon Eugene, Oregon leased Carrollton, Texas Salt Lake City, Utah Richmond, Virginia Kent, Washington International: International: Kwidzyn, Poland Svetogorsk, Russia Foodservice U.S.: Visalia, California Shelbyville, Illinois Kenton, Ohio International: Shanghai, China Tianjin, China Bogota, Colombia Cheshire, England leased DISTRIBUTION IP Asia International: Monterrey, Mexico leased China (8 locations) Malaysia Taiwan Thailand Vietnam Forest Resources International: Approximately 329,400 acres in Brazil Xalapa, Veracruz, Mexico leased Bags U.S.: Buena Park, California Beaverton, Oregon Grand Prairie, Texas CONSUMER PACKAGING Coated Paperboard Augusta, Georgia Prosperity, South Carolina Texarkana, Texas (1) Closed June 2016 (2) Closed January 2017 APPENDIX II 2016 CAPACITY INFORMATION CONTINUING OPERATIONS Industrial Packaging Containerboard (a) Global Cellulose Fibers Printing Papers Uncoated Freesheet Bristols Newsprint Total Printing Papers Consumer Packaging Coated Paperboard Uncoated Papers and Bristols (in thousands of short tons except as noted) U.S. EMEA India Total Americas, other than U.S. Dried Pulp (in thousands of metric tons) 2,912 297 535 13,305 44 366 13,715 — — 266 — 266 — 266 3,744 4,362 165 4,527 285 4,812 1,153 1,135 1,808 165 1,973 — 1,973 — 1,153 285 1,438 1,135 1,135 — — — 1,206 395 — 1,601 (a) In addition to Containerboard, this also includes saturated kraft, kraft bag, and gypsum. Forest Resources We own, manage or have an interest in approximately 1.4 million acres of forestlands worldwide. These forestlands and associated acres are located in the following regions: We have harvesting rights in: Brazil Russia Poland Total (M Acres) 329 1,047 — 1,376 A-3 A-4 International: Kwidzyn, Poland Svetogorsk, Russia Foodservice U.S.: Visalia, California Shelbyville, Illinois Kenton, Ohio International: Shanghai, China Tianjin, China Bogota, Colombia Cheshire, England leased DISTRIBUTION IP Asia International: Malaysia Taiwan Thailand Vietnam Forest Resources International: Approximately 329,400 acres in Brazil International: Monterrey, Mexico leased China (8 locations) Xalapa, Veracruz, Mexico leased Recycling U.S.: Phoenix, Arizona Fremont, California Norwalk, California West Sacramento, California Itasca, Illinois Des Moines, Iowa Wichita, Kansas Roseville, Minnesota Omaha, Nebraska Charlotte, North Carolina Beaverton, Oregon Eugene, Oregon leased Carrollton, Texas Salt Lake City, Utah Richmond, Virginia Kent, Washington Bags U.S.: Buena Park, California Beaverton, Oregon Grand Prairie, Texas CONSUMER PACKAGING Coated Paperboard Augusta, Georgia Prosperity, South Carolina Texarkana, Texas (1) Closed June 2016 (2) Closed January 2017 2016 CAPACITY INFORMATION CONTINUING OPERATIONS (in thousands of short tons except as noted) U.S. EMEA Americas, other than U.S. India Total APPENDIX II Industrial Packaging Containerboard (a) Global Cellulose Fibers 13,305 44 366 Dried Pulp (in thousands of metric tons) 2,912 297 535 Printing Papers Uncoated Freesheet Bristols Uncoated Papers and Bristols Newsprint Total Printing Papers Consumer Packaging Coated Paperboard — — 266 — 266 — 266 13,715 3,744 4,362 165 4,527 285 4,812 1,808 165 1,973 — 1,973 1,153 1,135 — 1,153 285 1,438 — 1,135 — 1,135 1,206 395 — — 1,601 (a) In addition to Containerboard, this also includes saturated kraft, kraft bag, and gypsum. Forest Resources We own, manage or have an interest in approximately 1.4 million acres of forestlands worldwide. These forestlands and associated acres are located in the following regions: Brazil We have harvesting rights in: Russia Poland Total (M Acres) 329 1,047 — 1,376 A-3 A-4 INTERNATIONAL PAPER LEADERSHIP As of March 31, 2017 Mark S. Sutton Chairman of the Board and Chief Executive Officer W. Michael Amick, Jr. Senior Vice President Paper The Americas C. Cato Ealy Senior Vice President Corporate Development William P. Hoel (Retired March 31, 2017) Senior Vice President Container The Americas Tommy S. Joseph Senior Vice President Manufacturing, Technology, EHS and Global Sourcing Thomas G. Kadien (Retiring June 30, 2017) Senior Vice President Human Resources, Government Relations and Global Citizenship Glenn R. Landau Senior Vice President Chief Financial Officer Timothy S. Nicholls Senior Vice President Industrial Packaging The Americas Thomas J. Plath (Effective March 1, 2017) Senior Vice President Human Resources and Global Citizenship Jean-Michel Ribieras Senior Vice President Global Cellulose Fibers Carol L. Roberts (Retired March 31, 2017) Senior Vice President Chief Financial Officer Sharon R. Ryan Senior Vice President General Counsel and Corporate Secretary John V. Sims Senior Vice President and President International Paper Europe, Middle East, Africa, and Russia Catherine I. Slater Senior Vice President Consumer Packaging Gregory T. Wanta Senior Vice President North American Container Russell D. Anawalt Vice President Sales and Marketing Global Cellulose Fibers David W. Apollonio Vice President South Region North American Container Santiago Arbelaez Vice President Industrial Packaging International Paper Brazil Mark M. Azzarello Vice President Global Compensation and Benefits Hans M. Bjorkman Vice President European Papers September G. Blain Vice President Finance and Strategic Planning Industrial Packaging Paul J. Blanchard Vice President Supply Chain Industrial Packaging Vincent P. Bonnot Vice President Finance and Controller Eric Chartrain Vice President Europe, Middle East, Africa Packaging Thomas A. Cleves Vice President Global Citizenship Kirt Cuevas Vice President Environment, Health and Safety Rodrigo Davoli Vice President and President International Paper Latin America Printing Papers Donald P. Devlin (Effective April 30, 2017) Vice President and President International Paper India Gary M. Gavin Vice President West Region North American Container Greg C. Gibson Vice President N.A. Papers and Converting Papers John F. Grover Vice President Enterprise Converting Optimization North American Container William T. Hamic Vice President Containerboard and Recycling Errol A. Harris Vice President and Treasurer Global Treasury Russell V. Harris Vice President Manufacturing North American Paper Peter G. Heist Vice President North Region North American Container Cecilia Ho Vice President and President International Paper Asia Robert M. Hunkeler Vice President Trust and Investments Chris J. Keuleman Vice President Global Government Relations David A. Liebetreu Vice President Global Sourcing and Fiber Supply Allison B. Magness Vice President Manufacturing Containerboard Rildo Martini Vice President Manufacturing Europe, Middle East, Africa and Russia Clay R. Ellis Vice President Manufacturing Global Cellulose Fibers Brian N.G. McDonald Vice President Strategic Planning Jonathan E. Ernst Vice President Foodservice Roman B. Gallo Vice President Manufacturing Containerboard Kevin G. McWilliams Vice President Tax Brett A. Mosley Vice President Manufacturing Containerboard A-6 Chris R. Read Vice President Global Technology Jay P. Royalty Vice President Investor Relations Bathsheba T. Sams Vice President Human Resources Global Cellulose Fibers Rampraveen Swaminathan (Until April 30, 2017) Vice President and President International Paper India Fred A. Towler Vice President Supply Chain Operations N.A. Paper, Pulp and Coated Paperboard Keith R. Townsend Vice President and President International Paper Russia Marc Van Lieshout Vice President Corporate Audit Deon Vaughan Vice President and Deputy General Counsel Shiela P. Vinczeller Vice President Talent Management and Mobility Human Resources Kent L. Walker Vice President Product Development, Innovation and Customer Technical Services Global Cellulose Fibers Robert W. Wenker Vice President and Chief Information Officer Information Technology Patrick Wilczynski Vice President Coated Paperboard Ron P. Wise Vice President Commercial and National Accounts North American Container ILIM GROUP SENIOR LEADERSHIP Ksenia Sosnina Chief Executive Officer BOARD OF DIRECTORS As of March 31, 2017 Mark S. Sutton Chairman of the Board and Chief Executive Officer International Paper Company David J. Bronczek President and Chief Operating Officer FedEx Corporation William J. Burns President, The Carnegie Endowment for International Peace Ahmet C. Dorduncu Chief Executive Officer Akkök Group Ilene S. Gordon Chairman, President and Chief Executive Officer Ingredion Incorporated Jay L. Johnson Retired Chairman and Chief Executive Officer General Dynamics Corporation Stacey J. Mobley Retired Senior Vice President, Chief Administrative Officer and General Counsel DuPont Kathyrn D. Sullivan Charles A. Lindbergh Fellow of Aerospace History Smithsonian National Air and Space Museum John L. Townsend, III Retired Managing Partner and Chief Operating Officer Tiger Management, LLC William G. Walter Retired Chairman and Chief Executive Officer FMC Corporation J. Steven Whisler Presiding Director Retired Chairman and Chief Executive Officer Phelps Dodge Corporation Ray G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland Company Printed on Accent® Opaque 100lb. Cover, 100lb. Text White Smooth and Williamsburg Opaque Offset 50lb. White Smooth. Senior Lead Team and Board of Directors Photographs Toby Richards ©2017 International Paper Company. All rights reserved. Accent, Registered trademark of International Paper Company. A-7 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS International Paper Company 6400 Poplar Avenue Memphis, TN 38197 (901) 419-9000 ANNUAL MEETING The next annual meeting of shareholders will be held at International Paper’s global headquarters in Memphis, TN, at 11:00 a.m. CDT on Monday, May 8, 2017. TRANSFER AGENT AND REGISTRAR Computershare, our transfer agent, maintains the records of our registered shareholders and can help you with a variety of shareholder related services at no charge including: Change of name or address Consolidation of accounts Duplicate mailings Dividend reinvestment enrollment Lost stock certificates Transfer of stock to another person Additional administrative services Telephone: (800) 678-8715 (U.S.) (201) 680-6578 (International) MAILING ADDRESSES Shareholder correspondence should be mailed to: Computershare P.O. BOX 30170 College Station, TX 77842-3170 Overnight correspondence should be sent to: Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 SHAREHOLDER WEBSITE www.computershare.com/investor Shareholder online inquiries https://www-us.computershare.com/investor/Contact STOCK EXCHANGE LISTINGS Common shares (symbol: IP) are listed on the New York Stock Exchange. DIRECT PURCHASE PLAN Under our plan, you may invest all or a portion of your dividends, and you may purchase up to $20,000 of additional shares each year. International Paper pays most of the brokerage commissions and fees. You may also deposit your certificates with the transfer agent for safe- keeping. For a copy of the plan prospectus, call or write to Computershare. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 100 Peabody Place, Ste. 800 Memphis, TN 38103 REPORTS AND PUBLICATIONS This Annual Performance Summary is being delivered to our shareholders to comply with the annual report delivery requirements of the New York Stock Exchange and Rule 14a-3 under the Securities Exchange Act. All information required by those applicable rules is contained in this Annual Performance Summary, including certain information contained in the Form 10-K included herein, which has previously been filed with the Securities and Exchange Commission. Copies of this Annual Performance Summary (including the 10-K), SEC filings and other publications may be obtained free of charge by visiting our Web site, http://www.internationalpaper.com, by calling (800)332-8146, or by writing to our investor relations department at the corporate headquarters address listed above. INVESTOR RELATIONS Investors desiring further information about International Paper should contact the investor relations department at corporate headquarters, (901) 419-9000. International Paper Board of Directors As of March 31, 2017 B O A R D O F D I R E C T O R S (Seated left to right) J. Steven Whisler Presiding Director Retired Chairman and Chief Executive Officer Phelps Dodge Corporation Mark S. Sutton Chairman of the Board and Chief Executive Officer International Paper Company Ilene S. Gordon Chairman, President and Chief Executive Officer Ingredion Incorporated (Standing left to right) William G. Walter Retired Chairman and Chief Executive Officer FMC Corporation Ahmet C. Dorduncu Chief Executive Officer Akkök Group William J. Burns President The Carnegie Endowment for International Peace Jay L. Johnson Retired Chairman and Chief Executive Officer General Dynamics Corporation Ray G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland Company Joan E. Spero (Retired December 31, 2016) Adjunct Senior Research Scholar Columbia University’s School of International and Public Affairs David J. Bronczek President and Chief Operating Officer FedEx Corporation Stacey J. Mobley Retired Senior Vice President, Chief Administrative Officer and General Counsel DuPont John L. Townsend, III Retired Managing Partner and Chief Operating Officer Tiger Management, LLC Kathryn D. Sullivan (Effective March 1, 2017 not pictured) Charles A. Lindbergh Fellow of Aerospace History Smithsonian National Air and Space Museum G L O B A L H E A D Q U A R T E R S International Paper Company 6400 Poplar Avenue Memphis, TN 38197, U.S.A. R E G I O N A L H E A D Q U A R T E R S International Paper Europe Middle East and Africa (EMEA) Chaussée de la Hulpe 166 1170 Brussels, Belgium International Paper Brazil Avenida Engenheiro Luís Carlos Berrini, 105 - 16 andar - São Paulo - SP - Brazil International Paper Asia 17-18F, West Building Greenland Center 600 Middle Longhua Road Shanghai, China 200032 International Paper India Krishe Sapphire Building, 8th Floor Hitech City Main Road, Madhapur Hyderabad 500 081, India International Paper Russia Kropotkina Street 1, Litera I Saint Petersburg, 197101, Russia ©2017 International Paper Company. All rights reserved. Accent, Chamex, Hammermill, PRO-DESIGN and Rey are registered trademarks of International Paper Company or its affiliates. Pol is a trademark of International Paper Company or its affiliates. Forest Stewardship Council, FSC and the FSC logo are trademarks of Forest Stewardship Council. PEFC and the PEFC logo are registered trademarks of the PEFC Council. SFl marks are registered marks owned by Sustainable Forestry Initiative Inc. “World’s Most Ethical Companies” and “Ethisphere” names and marks are registered trademarks of Ethisphere LLC. From FORTUNE Magazine, March 1, 2017 ©2017 Time Inc. Used under license. FORTUNE andThe World’s Most Admired Companies are registered trademarks ofTime Inc. and are used under license. FORTUNE andTime Inc. are not affiliated with, and do not endorse products or services of, International Paper Company. Annual Performance Summary printed on Accent® Opaque Cover Smooth 100lb. andText Smooth 100lb. 10K printed on Williamsburg Offset Opaque Smooth 50lb. 

Continue reading text version or see original annual report in PDF format above