International Paper Company
Annual Report 2019

Plain-text annual report

ANNUAL PERFORMANCE SUMMARY 2 0 1 9 I N T E R N A T I O N A L P A P E R | 2 0 1 9 A N N U A L P E R F O R M A N C E S U M M A R Y ©2020 International Paper Company. All rights reserved. Accent, Ballet, by George, Chamex, Hammermill, International Paper logo, POL, PRO-DESIGN, REY and SvetoCopy are registered trademarks of International Paper Company or its affiliates. From FORTUNE Magazine, February 2020, ©2020 Fortune Media IP Limited. FORTUNE and The World’s Most Admired Companies are registered trademarks of Fortune Media IP Limited and are used under license. FORTUNE and Fortune Media IP Limited are not affiliated with, and do not endorse the products or services of, International Paper Company. “World’s Most Ethical Companies” and “Ethisphere” names and marks are registered trademarks of Ethisphere LLC. FTSE Russell (the trading name of FTSE International Limited and Frank Russell Company) confirms that International Paper has been independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to become a constituent of the FTSE4Good Index Series. Created by the global index provider FTSE Russell, the FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices. The FTSE4Good indices are used by a wide variety of market participants to create and assess responsible investment funds and other products. All product names, logos and brands are property of their respective owners. Annual Performance Summary printed on Accent Opaque Cover Smooth 100lb. and Text Smooth 100lb. 10-K printed on Accent Opaque Text Smooth 50lb. InternationalPaper.com 366159_IPA0032_03092020_APS_Covers_FINAL.indd 1-2 3/11/20 2:54 PM Our Vision is to be among the most successful, sustainable and responsible companies in the world. International Paper Board of Directors More than 25,000 Customers in 150 Countries $22 Billion Total Revenue in 2019 More than 50,000 Employees WHO WE ARE We are one of the world’s leading producers of renewable, fiber-based packaging, pulp and paper. WHAT WE DO We improve people’s lives, the planet and our company’s performance by transforming renewable resources into products people depend on every day. HOW WE DO IT We do the right things, in the right ways, for the right reasons, all of the time – this is The IP Way. Together, The IP Way and our Core Values of Safety, Ethics and Stewardship serve as our guideposts as we carry out our Mission. | 2019 ANNUAL PERFORMANCE SUMMARY The IP Way Forward is our strategic framework for pursuing our Vision and creating value for all stakeholders for generations to come. World Regional Headquarters Headquarters International Paper International Paper Asia International Paper Do Brasil International Paper Europe, International Paper Russia Company 6400 Poplar Avenue Memphis, TN 38197 8F, Building A Xuhui Vanke Center 55 Ding An Road United States of America Shanghai, 200235, China Rodovia SP 340, KM 171 Middle East and Africa Kropotkina Street 1, Litera I Mogi Guaçu/SP CEP: 13845-901 (EMEA) Saint Petersburg, 197101 Chaussée de la Hulpe 166 Russia 1170 Brussels, Belgium 366159_IPA0032_03092020_APS_Covers_FINAL.indd 3-4 3/11/20 2:54 PM Mark S. Sutton William J. Burns Christopher M. Connor Ahmet C. Dorduncu Chairman of the Board President and Chief Executive Officer The Carnegie International Paper Company Endowment for International Peace Retired Chairman, President and Chief Executive Officer The Sherwin-Williams Company Chief Executive Officer Akkök Group Ilene S. Gordon Presiding Director Retired Chairman, President and Chief Executive Officer Ingredion Incorporated Anders Gustafsson Jacqueline C. Hinman Chief Executive Officer Former Chairman, Zebra Technologies Corporation President and Chief Executive Officer Clinton A. Lewis, Jr. Former Executive Vice President and Group President International CH2M HILL Companies, Operations, Commercial Ltd. Development, Global Genetics and Aquatic Health Zoetis Inc. Kathryn D. Sullivan Senior Fellow at the Potomac Institute for Policy Studies and J. Steven Whisler Ray G. Young Retired Chairman and Executive Vice President Chief Executive Officer and Chief Financial Officer Phelps Dodge Archer Daniels Midland Ambassador-at-Large at Corporation Company the Smithsonian National Air and Space Museum Mark S. Sutton, Chairman of the Board and Chief Executive Officer Dear Shareowners, At International Paper, we transform renewable resources into recyclable products that people depend on every day. Our commitment to sustainability creates value for our shareowners while protecting the planet and improving people’s lives. Our 50,000 colleagues are the foundation of our success. Each day, we focus on ensuring the safety of employees, contractors, suppliers and visitors while operating reliably and serving more than 25,000 customers around the world. We recognize our responsibility to protect the planet and help our communities thrive. We focus on tackling the toughest challenges throughout our entire value chain. We continue to make significant progress reducing greenhouse gas emissions, improving forest stewardship within and outside of our company and advancing water stewardship. We are proud to be a force for good in our communities, providing volunteers, product donations and financial contributions to organizations that address critical needs in the communities where our InternationalPaper.com | 1 366159_IPA0032_03092020_APS_Insides_FINAL.indd 1 3/11/20 3:07 PM  “ As a leading producer of renewable fiber-based products, we provide innovative, circular solutions that enable our customers to meet consumer needs.” CAPITAL ALLOCATION FRAMEWORK Our capital allocation framework guides our strategic decision-making to bring value for shareowners and all stakeholders. INVEST TO CREATE VALUE RETURN CASH TO SHAREHOLDERS MAINTAIN STRONG BALANCE SHEET 2 | 2019 ANNUAL PERFORMANCE SUMMARY employees live and work. Over the past five years, we increased our community engagement contributions to more than $24 million annually to support four signature causes: education, hunger, health and wellness, and disaster relief. 2019 IN REVIEW In 2019, we continued to demonstrate the strength of our business portfolio and investment choices and delivered: • $3.9 billion in adjusted earnings before interest, tax, depreciation and amortization (EBITDA) • Outstanding free cash flow of $2.3 billion • 11% adjusted return on invested capital, our 10th consecutive year of value-creating returns As a leading producer of renewable fiber-based products, we provide innovative, circular solutions that enable our customers to meet consumer needs. Our innovation and design centers combined with our manufacturing and converting facilities support our strong commercial positions in attractive segments and generated an adjusted EBITDA margin of more than 17% in 2019. We continue to make strategic choices to focus our resources and strengthen our company. We invested in our U.S. corrugated packaging business to enhance our capabilities and reinforce our strong position in the fastest growing segments, and we started the conversion of a printing paper machine in our Riverdale Mill in Alabama, which will begin producing white-top linerboard in the second quarter of 2020. We also made small, targeted acquisitions in our European corrugated packaging business to expand our converting capacity near our mill in Madrid, Spain. Throughout the year, we took steps to streamline our portfolio and further focus on the businesses where we can create the most value. After determining that a significant addition to our portfolio in the North American consumer packaging segment is not a strategic priority, we began to monetize our ownership interest in Graphic Packaging in early 2020. We continue to maximize value creation by using our strong free cash flow consistent with our capital allocation framework. In 2019, we returned $1.3 billion to shareholders through dividends and share repurchases. Over the past five years, we have returned 60% of free cash flow to shareowners totaling $5.6 billion. For the 10th consecutive year, we increased our annualized dividend, demonstrating our strong and sustainable dividend policy. Also in 2019, we repaid $1 billion of debt, which is a reflection of our commitment to a strong balance sheet. In 2020, we will continue to focus on being the supplier of choice for customers, managing costs aggressively, executing capital spending effectively and generating strong free cash flow. 366159_IPA0032_03092020_APS_Insides_FINAL.indd 2 3/11/20 3:07 PM 2020 OUTLOOK Overall, our commercial and operational capabilities position us for positive momentum as we navigate through the year. The fundamentals of our corrugated packaging and fluff pulp businesses are solid, supported by demand for sustainable products that people depend on every day. Our paper business is gaining momentum in e-commerce and retail channels in response to changing consumer buying habits. International Paper has great customers, dedicated people, outstanding manufacturing facilities and a strong financial position that will enable us to meet the certain global challenges that are ahead in 2020. Finally, as part of our continued commitment to sustainability, we introduced our Vision 2030 goals earlier this year. These goals expand on our previous generation of goals and guide our commitment to building a better future for people, the planet and our company. Thank you for supporting our efforts to pursue our Vision to be among the most successful, sustainable and responsible LEADERSHIP TRANSITIONS Our performance and execution are driven by strong leadership. In 2019, several senior leaders accepted new assignments to accelerate our progress to a more customer-focused company and enable greater focus on business priorities and profitable growth: companies in the world. Sincerely, Mark S. Sutton, Chairman of the Board and Chief Executive Officer Clay R. Ellis was elected senior vice president, Enterprise Operational Excellence, to lead our efforts to simplify, streamline and focus the centralized services that support our business strategies. W. Thomas Hamic was elected senior vice president, Containerboard and Enterprise Commercial Excellence, to continue leading our North American Containerboard business as well as our efforts to increase customer focus and integrate market-based value creation initiatives across businesses and staff groups. employees live and work. Over the past five years, we increased our community engagement contributions to more than $24 million annually to support four signature causes: education, hunger, health and wellness, and disaster relief. 2019 IN REVIEW In 2019, we continued to demonstrate the strength of our business portfolio and investment choices and delivered: • $3.9 billion in adjusted earnings before interest, tax, depreciation and amortization (EBITDA) • Outstanding free cash flow of $2.3 billion • 11% adjusted return on invested capital, our 10th consecutive year of value-creating returns As a leading producer of renewable fiber-based products, we provide innovative, circular solutions that enable our customers to meet consumer needs. Our innovation and design centers combined with our manufacturing and converting facilities support our strong commercial positions in attractive segments and generated an adjusted EBITDA margin of more than 17% in 2019. We continue to make strategic choices to focus our resources and strengthen our company. We invested in our U.S. corrugated packaging business to enhance our capabilities and reinforce our strong position in the fastest growing segments, and we started the conversion of a printing paper machine in our Riverdale Mill in Alabama, which will begin producing white-top linerboard in the second quarter of 2020. We also made small, targeted acquisitions in our European corrugated packaging business to expand our converting capacity near our mill in Madrid, Spain. Throughout the year, we took steps to streamline our portfolio and further focus on the businesses where we can create the most value. After determining that a significant addition to our portfolio in the North American consumer packaging segment is not a strategic priority, we began to monetize our ownership interest in Graphic Packaging in early 2020. We continue to maximize value creation by using our strong free cash flow consistent with our capital allocation framework. In 2019, we returned $1.3 billion to shareholders through dividends and share repurchases. Over the past five years, we have returned 60% of free cash flow to shareowners totaling $5.6 billion. For the 10th consecutive year, we increased our annualized dividend, demonstrating our strong and sustainable dividend policy. Also in 2019, we repaid $1 billion of debt, which is a reflection of our commitment to a strong balance sheet. In 2020, we will continue to focus on being the supplier of choice for customers, managing costs aggressively, executing capital spending effectively and generating strong free cash flow. VISION 2030 Vision 2030 is a set of four goals and eight corresponding targets that demonstrate our commitment to building a better future for people, the planet and our company. OUR GOALS: HEALTHY & ABUNDANT FORESTS SUSTAINABLE OPERATIONS THRIVING PEOPLE & COMMUNITIES RENEWABLE SOLUTIONS See our targets at InternationalPaper.com/Vision2030 2020 OUTLOOK Overall, our commercial and operational capabilities position us for positive momentum as we navigate through the year. The fundamentals of our corrugated packaging and fluff pulp businesses are solid, supported by demand for sustainable products that people depend on every day. Our paper business is gaining momentum in e-commerce and retail channels in response to changing consumer buying habits. International Paper has great customers, dedicated people, outstanding manufacturing facilities and a strong financial position that will enable us to meet the certain global challenges that are ahead in 2020. Finally, as part of our continued commitment to sustainability, we introduced our Vision 2030 goals earlier this year. These goals expand on our previous generation of goals and guide our commitment to building a better future for people, the planet and our company. Thank you for supporting our efforts to pursue our Vision to be among the most successful, sustainable and responsible companies in the world. Sincerely, Mark S. Sutton, Chairman of the Board and Chief Executive Officer LEADERSHIP TRANSITIONS Our performance and execution are driven by strong leadership. In 2019, several senior leaders accepted new assignments to accelerate our progress to a more customer-focused company and enable greater focus on business priorities and profitable growth: Clay R. Ellis was elected senior vice president, Enterprise Operational Excellence, to lead our efforts to simplify, streamline and focus the centralized services that support our business strategies. W. Thomas Hamic was elected senior vice president, Containerboard and Enterprise Commercial Excellence, to continue leading our North American Containerboard business as well as our efforts to increase customer focus and integrate market-based value creation initiatives across businesses and staff groups. James P. Royalty, Jr. was elected senior vice president and president, IP Europe, Middle East, Africa and IP Russia to lead our paper and packaging businesses in this region. John V. Sims was named senior vice president, Corporate Development, to analyze strategic portfolio decisions that help create advantaged positions in attractive markets. 366159_IPA0032_03092020_APS_Insides_FINAL.indd 3 3/11/20 3:07 PM InternationalPaper.com | 3 Our Businesses Creating innovative products from responsibly sourced, renewable resources. We Deliver Value for Our Shareowners INDUSTRIAL PACKAGING GLOBAL CELLULOSE FIBERS PRINTING PAPERS 69% of total revenue 12% of total revenue 19% of total revenue We establish advantaged positions in attractive market segments with safe, efficient manufacturing operations near sustainable fiber sources. We create packaging products that protect and promote goods, enable worldwide commerce and keep consumers safe. We meet our customers’ most challenging sales, shipping, storage and display requirements with sustainable solutions. In addition to containerboard mills, box plants and converting operations across the globe, our North American recycling business recovers, processes and sells seven million tons of corrugated packaging and paper annually. Segments • E-commerce • Protein • Fruit and vegetable • Distribution • Processed food and beverage • Durable/non-durable goods Additionally, we provide high- quality coated paperboard for consumer packaging throughout Europe, the Middle East and Africa (EMEA). Customers rely on us for pharmaceutical, healthcare, cosmetics, food and beverage packaging solutions. We create quality cellulose fiber products suitable for a wide range of applications. Cellulose fiber is a sustainable, renewable raw material used in hundreds of products people depend on every day, including baby diapers, feminine care, adult incontinence and other personal hygiene products that promote health and wellness. Our innovative specialty pulps serve as a sustainable raw material across a variety of industries such as textiles, construction material, paints and coatings and more. Segments • Absorbent hygiene products • Papergrade • Specialty Revenue by region 94% North America 6% EMEA Although the majority of revenue for this business is generated in North America, we export about 80% of this volume, primarily to Asia and EMEA with a smaller portion going to Latin America. We create papers that facilitate education and communication. As one of the world’s largest manufacturers of uncoated freesheet, we produce a variety of papers for business and home use. Customers rely on our signature brands including Accent® Opaque, Ballet®, by George®, Chamex®, Hammermill®, POL®, PRO-DESIGN®, REY® and SvetoCopy® for a wide range of printing and converting applications. End Use • Printer and copy paper • Commercial printing • Book publishing • Advertising • Envelopes • Bills and statements • Filing • Specialty packaging • Labeling Revenue by region 46% North America 29% EMEA 22% Brazil 3% India Revenue by region 87% North America 9% EMEA 2% EMEA Coated Paperboard 2% Brazil 4 | 2019 ANNUAL PERFORMANCE SUMMARY 366159_IPA0032_03092020_APS_Insides_FINAL.indd 4 3/11/20 3:07 PM Adjusted Return on Invested Capital 5-year average: 11% ROIC 11.4% 10.0% 9.9% 13.2% 10.8% Annualized Dividend Dollars per share 2020 WACC 7.0% 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 $1.76 $1.85 $1.90 $2.00 $2.05 3.2x 3.3x 4.0x 2.8x 2.8x 2015 2016 2017 2018 2019 WACC: Weighted Average Cost of Capital 10th consecutive year of increase 10th consecutive year of greater than cost-of-capital returns Leverage Adjusted Debt to EBITDA Free Cash Flow $ Billions $1.8 $2.3 $1.7 $1.9 $2.0 $1.2 $1.5 $1.3 $0.8 $0.8 2015 2016 2017 2018 2019 Free Cash Flow Cash to Shareowners (dividends, share repurchases) Includes balance sheet debt and Moody’s adjustments for operational leases/deferred tax liability and debt issuance expense, and pension gap PRINTING PAPERS 19% of total revenue We create papers that facilitate education and communication. As one of the world’s largest manufacturers of uncoated freesheet, we produce a variety of papers for business and home use. Customers rely on our signature brands including Accent® Opaque, Ballet®, by George®, Chamex®, Hammermill®, POL®, PRO-DESIGN®, REY® and SvetoCopy® for a wide range of printing and converting applications. End Use • Printer and copy paper • Commercial printing • Book publishing • Advertising • Envelopes • Bills and statements • Filing • Specialty packaging • Labeling Revenue by region 46% North America 29% EMEA 22% Brazil 3% India We Deliver Value for Our Shareowners We establish advantaged positions in attractive market segments with safe, efficient manufacturing operations near sustainable fiber sources. Adjusted Return on Invested Capital 5-year average: 11% ROIC 11.4% 10.0% 9.9% 13.2% 10.8% Annualized Dividend Dollars per share 2015 2016 2017 2018 2019 $1.76 $1.85 $1.90 $2.00 $2.05 2020 WACC 7.0% 2015 2016 2017 2018 2019 WACC: Weighted Average Cost of Capital 10th consecutive year of increase 10th consecutive year of greater than cost-of-capital returns Free Cash Flow $ Billions $1.8 $2.3 $1.7 $1.9 $2.0 $1.2 $1.5 $1.3 $0.8 $0.8 2015 2016 2017 2018 2019 Free Cash Flow Cash to Shareowners (dividends, share repurchases) Leverage Adjusted Debt to EBITDA 2015 2016 2017 2018 2019 3.2x 3.3x 4.0x 2.8x 2.8x Includes balance sheet debt and Moody’s adjustments for operational leases/deferred tax liability and debt issuance expense, and pension gap InternationalPaper.com | 5 366159_IPA0032_03092020_APS_Insides_FINAL.indd 5 3/11/20 3:07 PM International Paper Senior Leaders Mark S. Sutton Chairman of the Board and Chief Executive Officer W. Michael Amick, Jr. Senior Vice President Paper the Americas Clay R. Ellis Senior Vice President Enterprise Operational Excellence W. Thomas Hamic Senior Vice President Containerboard and Enterprise Commercial Excellence Timothy S. Nicholls Senior Vice President and Chief Financial Officer Thomas J. Plath Senior Vice President Human Resources and Global Citizenship Jean-Michel Ribiéras Senior Vice President Industrial Packaging the Americas James P. Royalty, Jr. Senior Vice President and President, IP Europe, Middle East, Africa and IP Russia Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary John V. Sims Senior Vice President Corporate Development Catherine I. Slater Senior Vice President Global Cellulose Fibers and IP Asia Gregory T. Wanta Senior Vice President North American Container Recognition Fortune Magazine Ethisphere Institute Women’s Choice Award® FTSE4Good Index Series World’s Most Admired Companies® 2020 for 17 years World’s Most Ethical Companies® 2020 for 14 consecutive years Best Companies to Work For — Millennial Women 2018-2020 An equity index series that is designed to facilitate investment in companies that meet globally recognized corporate responsibility standards 6 | 2019 ANNUAL PERFORMANCE SUMMARY 366159_IPA0032_03092020_APS_Insides_FINAL.indd 6 3/11/20 3:07 PM FORM 10-K 2 0 1 9 F o r m 1 0 - K FTSE4Good Index Series An equity index series that is designed to facilitate investment in companies that meet globally recognized corporate responsibility standards 366159_IPA0032_03092020_APS_Insides_FINAL.indd 7 3/11/20 3:07 PM 366159_IPA0032_03092020_APS_Insides_FINAL.indd 8 366159_IPA0032_03092020_APS_Insides_FINAL.indd 8 3/11/20 3:07 PM 3/11/20 3:07 PM FINANCIAL HIGHLIGHTS In millions, except per share amounts, at December 31 2019 2018 FINANCIAL SUMMARY Net Sales Business Segment 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 Diluted Earnings Per Share Attributable to International Paper Company Common Shareholders Cash Dividends SHAREHOLDER PROFILE Shareholders of Record at December 31 Shares Outstanding at December 31 Average Common Shares Outstanding Average Common Shares Outstanding – Assuming Dilution $ 22,376 2,599 (a) 1,604 (b) 1,220 (b-c) (5) (d) 1,225 (b-d) 33,471 7,713 $ 23,306 3,082 (a) 1,781 (e) 2,017 (e-f) 5 2,012 (e-f) 33,576 7,362 $ $ 3.10 3.07 2.0125 9,801 392.1 395.3 398.8 $ $ 4.91 4.85 1.9250 11,345 400.6 409.1 414.2 (a) See the comparison of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit on (b) (c) (d) (e) (f) page 22 and the operating profit table on page 85 for details of operating profit by industry segment. Includes pre-tax restructuring and other charges, net of $57 million including a charge of $21 million for debt extinguishment costs, a charge of $21 million related to an overhead cost reduction initiative and a charge of $15 million related to the optimization of our EMEA Packaging business. Also included are a loss of $97 million related to the foreign currency cumulative translation adjustment resulting from the classification of the assets and liabilities of our India Papers business as held for sale, a loss of $62 million for the impairment of the net assets of our India Papers business, a loss of $52 million related to the impairment of goodwill in our Global Cellulose Fibers business, a charge of $50 million for the removal of abandoned property at our mills, a charge of $41 million for litigation reserves, a charge of $32 million related to an Italian antitrust fine, a charge of $25 million for environmental remediation reserve adjustments, a charge of $9 million for costs associated with a multi-employer pension plan exit liability, a gain of $9 million for the sale of a previously closed Oregon mill site, a gain of $6 million related to the sale of a box plant in our EMEA Packaging business, income of $6 million for the accrual of a foreign value-added tax refund including interest, a charge of $5 million for accelerated depreciation associated with the announced conversion of a paper machine at our Riverdale mill to containerboard production, a charge of $3 million for the fair value adjustment of our remaining investment in India, a charge of $3 million for transaction costs associated with the divestiture of our India Papers business, a charge of $2 million for the write-off of inventory related to the optimization of our EMEA Packaging business and a charge of $1 million for interest expense associated with foreign tax audits. Includes tax expense of $203 million related to a foreign deferred tax valuation allowance, a tax benefit of $53 million related to an internal investment restructuring, tax expense of $9 million related to a tax rate change in Luxembourg, tax expense of $3 million related to foreign tax audits and a tax benefit of $3 million related to state income tax legislative changes. Includes the allocation of loss to noncontrolling interest of $9 million associated with the impairment of our India Papers business. Includes pre-tax restructuring and other charges, net of $29 million including a charge of $47 million related to the optimization of our EMEA Packaging business, a gain of $31 million related to the sale of our investment in Liaison Technologies, a charge of $10 million for debt extinguishment costs and a charge of $3 million for severance associated with the conversion of a paper machine at our Riverdale mill. Also included are a charge of $424 million for a settlement accounting charge associated with an annuity purchase and transfer of pension obligations for approximately 23,000 retirees, a charge of $122 million related to the impairment of fixed assets and an intangible asset in our Brazil Packaging business, charges of $32 million for the removal of abandoned property at our mills, a charge of $12 million associated with our proposal to acquire Smurfit Kappa, a charge of $9 million for an environmental remediation reserve adjustment, a charge of $9 million for a legal settlement, a charge of $6 million for accelerated depreciation associated with the Riverdale mill conversion, and income of $5 million for a litigation settlement recovery. Includes a tax benefit of $36 million related to the Tax Cuts and Jobs Act, tax expense of $25 million related to foreign tax audits, tax expense of $19 million related to an internal investment restructuring and tax expense of $9 million related to state income tax legislative changes. Also includes net after-tax income of $364 million for the gain on the transfer of the North American Consumer Packaging business and an after-tax charge of $19 million for transaction costs to transfer the North American Consumer Packaging business. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES The non-GAAP financial measures presented have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies use identical calculations, the Company’s presentation of non-GAAP measures may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as International Paper. Management believes certain non-U.S. GAAP financial measures, when used in conjunction with information presented in accordance with U.S. GAAP, can facilitate a better understanding of the impact of various factors and trends on the Company’s financial condition and results of operations. Management also uses these non-U.S. GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. For reconciliations of Adjusted 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 pages 20 - 21. In millions, at December 31 Calculation of Free Cash Flow Cash provided by operations (Less)/Add: 2019 2018 2017 2016 2015 $ 3,610 $ 3,226 $ 1,757 $ 2,478 $ 2,580 Cash invested in capital projects Cash contribution to pension plan, net of tax refunds Kleen settlement Free Cash Flow (1,276) — — $ 2,334 (1,572) — — $ 1,654 (1,391) 1,250 354 $ 1,970 (1,348) 750 — $ 1,880 (1,487) 750 — $ 1,843 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. 2019 2018 2017 2016 2015 In millions, at December 31 Reconciliation of Adjusted Operating Earnings Before Net Interest Expense to Net Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings Add back: Net Interest Expense Add back: Special Items Before Taxes Add back: Non-Operating Pension Expense $ 1,604 491 420 $ 1,781 536 214 $ 848 572 501 484 $ 795 520 182 610 $ 1,132 555 559 258 Before Taxes 36 494 Adjusted Operating Earnings Before Net Interest Expense, Income Taxes and Equity Earnings Add back: Graphic Packaging Equity Earnings Before Taxes Adjusted Operating Earnings Before Net Interest 2,551 3,025 2,405 2,107 2,504 46 46 — — — Expense, Income Taxes and Other Equity Earnings 2,597 3,071 2,405 2,107 2,504 Tax Rate Adjusted Operating Earnings Before Net Interest 26% 24% 30% 32% 33% Expense and Equity Earnings 1,935 2,325 1,684 1,433 1,678 Equity Earnings Other than Graphic Packaging, Net of Taxes Adjusted Operating Earnings Before Net Interest Expense 204 290 177 198 117 $ 2,139 $ 2,615 $ 1,861 $ 1,631 $ 1,795 The Company considers adjusted return on invested capital (“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. ROIC, a non-GAAP financial measure, may not be defined and calculated by other companies in the same manner. The Company defines and calculates ROIC using in the numerator Adjusted Operating Earnings Before Net Interest Expense, the most directly comparable GAAP measure to which is Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings. The Company calculates Adjusted Operating Earnings Before Net Interest Expense by excluding net interest expense, the after-tax effect of non-operating pension expense and items considered by management to be unusual (special items) 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. ROIC = Adjusted Operating Earnings Before Net Interest Expense / Average Invested Capital Average Invested Capital = Equity (adjusted to remove pension-related amounts in OCI, net of tax) + interest- bearing debt 2019 In millions, at December 31 Calculation of Adjusted EBITDA Earnings (Loss) from Continuing Operations Before Income Taxes and Equity Earnings $ 1,604 491 Interest Expense, Net 420 Special items 36 Non-operating pension expense 2,551 EBIT before Special Items 1,301 Depreciation, amortization and cost of timber harvested $ 3,852 Adjusted EBITDA $ 22,376 Annualized Net Sales Adjusted EBITDA Margin 17.2% 2018 $ 1,781 536 214 494 3,025 1,322 $ 4,347 $ 23,306 18.7% Adjusted EBIT, Adjusted EBITDA and Adjusted financial EBITDA Margin are all “non-GAAP measures” presented as supplemental measures of our performance and the most directly comparable GAAP measure for Adjusted EBIT and Adjusted EBITDA are operating income and net income, respectively. They are not presented in accordance with accounting principles generally accepted in the United States, or GAAP. The Company believes these measures provide additional meaningful information in evaluating the Company’s performance over time, and that other companies use these and/or similar measures for similar purposes. However, Adjusted EBIT, Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP. In addition, in evaluating Adjusted EBIT, Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses such as those used in calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Moody’s methodology is used to calculate Adjusted Debt to EBITDA ratio. Moody’s adjusts debt to include balance sheet debt, operating leases/deferred tax liability and debt issuance expense, and pension gap. EBITDA is adjusted to include lease and pension adjustments (non-GAAP). This page intentionally left blank. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 12/31/2019 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 Shares Trading symbol(s) IP Name of each exchange on which registered New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Securities Registered Pursuant to Section 12(g) of the Act: None 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 every Interactive Data File required to be submitted 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 such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. 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, 2019) was approximately $17,018,195,033. The number of shares outstanding of the Company’s common stock as of February 14, 2020 was 392,124,684. 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 2020 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. This page intentionally left blank. INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019 PART I. ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. PART II. ITEM 5. ITEM 6. ITEM 7. BUSINESS. General Competition and Costs Marketing and Distribution Description of Principal Products Sales Volumes by Product Research and Development Environmental Protection Climate Change Employees Information About Our Executive Officers 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 Business Segments Business 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 4 4 6 6 6 12 12 12 12 12 12 12 13 13 15 19 19 23 25 26 29 32 35 35 35 35 36 INTERNATIONAL PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019 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. ITEM 16. APPENDIX I Additional Financial Data FORM 10-K SUMMARY SIGNATURES 2019 LISTING OF FACILITIES APPENDIX II 2019 CAPACITY INFORMATION 36 37 37 39 43 44 45 46 47 48 87 89 89 89 89 89 89 89 90 90 90 90 90 94 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 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. You can learn more about us by visiting our website at www.internationalpaper.com. In the United States, at December 31, 2019, the Company operated 27 pulp, paper and packaging mills, 163 converting and packaging plants, 16 recycling plants and three bag facilities. Production facilities at December 31, 2019 in Canada, Europe, North Africa and Latin America included 14 pulp, paper and packaging mills, 44 converting and packaging plants, and two recycling plants. We operate a printing and packaging products distribution business principally through six branches in Asia. At December 31, 2019, 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 three segments: businesses are separated Industrial Packaging; Global Cellulose Fibers; and Printing Papers. into A description of these business segments can be found Item 7. Management’s on pages 25 and 26 of Discussion and Analysis of Financial Condition and Results of Operations. The Company’s equity interests in Ilim S.A. (Ilim) and Graphic Packaging International Partners, LLC (GPIP) are also separate reportable industry segments. quality product From 2015 through 2019, International Paper’s capital spending approximated $7.1 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to use our capital strategically to improve environmental performance, as well as lower costs and maintain reliability of operations. Capital spending in 2019 was approximately $1.3 billion and is expected to be approximately $1.0 billion in 2020. You can find more information about capital spending on page 30 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. and Discussions of acquisitions can be found on page 30 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 24 and 25 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 website 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 website 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. COMPETITION AND COSTS The pulp, paper and packaging sectors are large and fragmented, and the areas into 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 19 through 29 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 25 and 26 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 1 SALES VOLUMES BY PRODUCT Sales volumes of major products for 2019, 2018 and 2017 were as follows: SALES VOLUMES BY PRODUCT (a) In thousands of short tons (except as noted) Industrial Packaging Corrugated Packaging (b) Containerboard Recycling Saturated Kraft Gypsum/Release Kraft Bleached Kraft EMEA Packaging (b) (c) Brazilian Packaging (b) European Coated Paperboard Industrial Packaging Global Cellulose Fibers (in thousands of metric tons) (d) Printing Papers U.S. Uncoated Papers European and Russian Uncoated Papers Brazilian Uncoated Papers Indian Uncoated Papers Printing Papers 2019 2018 2017 10,454 2,909 2,388 174 199 22 1,538 366 417 18,467 3,501 1,799 1,456 1,172 206 4,633 10,624 3,229 2,282 196 227 31 1,476 351 390 18,806 3,573 1,886 1,440 1,125 263 4,714 10,413 3,294 2,257 181 229 27 1,518 357 398 18,674 3,708 1,915 1,483 1,167 253 4,818 Includes third-party and inter-segment sales and excludes sales of equity investees. (a) (b) Volumes for corrugated box sales reflect consumed tons sold. Board sales by these businesses reflect invoiced tons. (c) Excludes newsprint sales volumes at the Madrid, Spain mill through Q3 2017. (d) Includes North American, European and Brazilian volumes and internal sales to mills. RESEARCH AND DEVELOPMENT The Company operates its primary research and development center in Loveland, Ohio, as well as several other product development facilities, including a technology center in Federal Way, Washington. chemical 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, recovery, paper making, 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 and improvement of products; and development of various new products. Our development efforts specifically innovations operations; 2 address product safety, as well as the minimization of solid waste. The cost to the Company of its research and development operations was $29 million in 2019, $30 million in 2018 and $28 million in 2017. 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 new impacting our laws or regulations environmental facilities around the world are routinely passed or include: proposed. Our continuing objectives internationally. addition, In (1) controlling emissions and discharges from our facilities to avoid adverse impacts on the environment, and (2) maintaining compliance with applicable laws and regulations. The Company spent $70 million in 2019 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend $80 million in 2020 for environmental capital projects. Capital expenditures for 2021 environmental projects are anticipated to be approximately $85 million. Capital expenditures for 2022 environmental projects are estimated to be $65 million. The Company has completed capital projects to meet the U.S. Environmental Protection Agency's (EPA) Boiler MACT (maximum achievable control technology) regulations that require owners of specified boilers to meet revised air emissions standards for certain substances. Although certain aspects of litigation the Boiler MACT challenging all or portions of regulations remain open, we have not identified any additional Boiler MACT capital project expenditures that might result from resolution of the open issues. The Company 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 on the balance sheet. For additional information regarding certain remediation actions, see Note 14 Commitments and Contingent Liabilities of Item 8. Financial Statements and Supplementary Data on pages 65 through 68. CLIMATE CHANGE International Paper plays a significant role in responding to the climate change challenge. Our entire business depends upon the sustainability of forests. We transform renewable resources into recyclable products that people depend on every day. This cycle begins with sourcing renewable fiber from responsibly managed forests, and at the end of use our products are recycled into new products at a higher rate than any other base material. We endeavor the international business community in responsible forest stewardship to ensure healthy and productive forest ecosystems for generations to come. Our efforts to advance sustainable forest management and restore to continue lead to forest landscapes are an important lever for mitigating climate change through carbon storage in forests. Furthermore, we use biomass and manufacturing residuals (rather than fossil fuels) to generate a substantial majority of the manufacturing energy at our mills. In an effort to mitigate the impact of climate change various international, national and sub-national (regional, state and local) governmental actions have been or may be 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 toward reducing The Paris Agreement, went into effect in November 2016 and continued international efforts and voluntary commitments the emissions of greenhouse gases (GHGs). Consistent with this objective, participating countries aim to balance GHG emissions generation and sequestration in the second half of this century or, in effect, achieve net-zero global GHG emissions. to withdraw As part of the Paris Agreement, many countries established non-binding emissions reduction targets. For instance, the U.S. made a non-binding commitment to hold GHG emissions 7% below 2005 GHG emissions levels by 2020 and 26% to 28% below by 2025. Other countries in which we operate made similar non-binding commitments. On August 4, 2017, the U.S. filed official notice the Paris Agreement. Notwithstanding the notice of withdrawal by the U.S., the Company’s voluntary GHG reductions, which are set out in our annual Global Citizenship report, remain roughly in line with the percentages of the U.S. prior 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 these agreements on the Company. from To assist member countries in meeting GHG reduction obligations, the EU operates 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's non-binding commitments or allocation of and market prices for GHG credits under existing rules evolve over the coming years. 3 U.S. EFFORTS, INCLUDING STATE, REGIONAL AND LOCAL MEASURES The U.S. Congress has not passed GHG legislation. The EPA manages regulations to: (i) control GHGs from mobile sources by adopting fuel efficiency standards; (ii) control GHG emissions from new Electric Generating Units (EGUs); (iii) control emissions from new oil and gas processing operations and (iv) require reporting of GHGs from sources of GHGs greater than 25,000 tons per year. transportation Several U.S. states, including states in which we operate facilities, have enacted or are considering legal measures to require the reduction of emissions of GHGs by companies and public utilities. California, New York and Virginia have already enacted such programs, although these regulations have not, and are not expected to have a material impact on the Company. We are monitoring proposed programs in other states, however it is unclear what impacts, if any, state-level GHG rules will have on the Company’s operations. SUMMARY Regulation of GHGs continues to evolve in various countries in which we do business. While it is likely that there will be increased governmental action regarding GHGs and climate change in the future, it is unclear when such actions will occur 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, causing delays and higher costs to implement capital projects. International Paper has controls and procedures in place to stay informed about developments concerning possible climate change legislation and regulation in the U.S. and in other countries where we operate. We regularly assess whether such legislation or regulation may have a material effect on the Company, its operations or financial condition, and whether we have any related disclosure obligations. report Additional information regarding climate change and International Paper is available in our 2018 Global Citizenship found on our website at www.internationalpaper.com, 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 As of December 31, 2019, we have approximately 51,000 employees, nearly 33,000 of whom are located the United States. Of our U.S. employees, in 4 approximately 23,000 are hourly, with unions representing approximately 14,000 employees. Approximately 11,000 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 master agreements cover the majority of our union represented mills and converting facilities. In addition, International Paper is party to a master agreement with District Council 2, International Brotherhood of Teamsters, covering additional converting facilities. INFORMATION ABOUT OUR EXECUTIVE OFFICERS Mark S. Sutton, 58, 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, serves on the American Forest & Paper Association board of directors, The Business Roundtable 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. He also serves on the board of directors for Memphis Tomorrow and board of governors for New Memphis Institute. Mr. Sutton has been a director since June 1, 2014. W. Michael Amick, Jr., 56, 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. Clay R. Ellis, 49, senior vice president - enterprise operational excellence since December 2019. Mr. Ellis previously served as vice president - manufacturing, global cellulose fibers from 2016 to December 2019, vice president of pulp from 2014 to 2016, and vice president manufacturing, North American papers from 2012 to 2014. Mr. Ellis joined International Paper in 1992. W. Thomas Hamic, 54, senior vice president - containerboard and enterprise commercial excellence since December 2019. Mr. Hamic previously served as vice president and general manager - containerboard & recycling, North American container from June 2015 until December 2019. Mr. Hamic became vice president and general manager of the south area in container of the Americas in 2009, and he was appointed to the role of vice president, industrial packaging group’s finance & strategy in 2010. Mr. Hamic joined International Paper in 1991. Tommy S. Joseph, 60, senior vice president until his retirement effective February 29, 2020. Mr. Joseph - previously served as senior vice president manufacturing, technology, EH&S and global sourcing from January 2010 until October 2019. Mr. Joseph has also previously served as senior vice president - manufacturing, technology, EH&S from February 2009 until December 2009, and vice president - technology from 2005 until February 2009. Mr. Joseph is a director of Ilim in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Joseph joined International Paper in 1982. Timothy S. Nicholls, 58, senior vice president & chief financial officer since June 2018. Mr. Nicholls previously served as senior vice president - industrial packaging the Americas from January 2017 through June 2018, 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 1999. Thomas J. Plath, 56, senior vice president - human resources and global citizenship since March 1, 2017. Mr. Plath previously served as vice president - human resources, global businesses from November 2014 through February 2017, and vice president - HR manufacturing, technology, EH&S and global supply 5 chain from April 2013 to November 2014. Mr. Plath joined International Paper in 1991. Jean-Michel Ribieras, 57, senior vice president - industrial packaging the Americas since June 2018. Mr. Ribieras previously served as senior vice president - global cellulose fibers from July 2016 through June 2018, 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 joined International Paper in 1993. James P. Royalty, Jr., 50, senior vice president and president, Europe, the Middle East, Africa and Russia since December 2019. Most recently, Mr. Royalty served as vice president, corporate development and disruptive technologies from September 2018 until December 2019, vice president, strategic projects from 2017 until 2018, vice president, investor relations from 2013 until 2017, vice president and general manager, container the Americas in 2008 to 2013. Mr. Royalty joined International Paper in 1991. Sharon R. Ryan, 60, 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, 57, senior vice president - corporate development since December 2019. Mr Sims previously served as senior vice president - president, IP Europe, Middle East, Africa & Russia from July 2016 until December 2019. Mr. Sims also previously served as vice president and general manager, European papers from January 2016 until June 2016, vice president & general manager, North American papers from 2014 until December 2015, and vice president, finance and strategy, industrial packaging, from 2009 until 2013. Mr. Sims is a director of Ilim in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Sims joined International Paper in 1994. Catherine I. Slater, 56, senior vice president - global cellulose fibers & IP Asia since June 2018. Ms. Slater previously served as senior vice president - consumer packaging from December 2016 through December 2017. 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 and the cellulose fibers business. Gregory T. Wanta, 54, senior vice president - North American container since December 2016. Mr. Wanta has served in a variety of roles of increasing in manufacturing and commercial responsibility in specialty papers, coated leadership roles paperboard, printing papers, foodservice and industrial packaging, including vice president, central region, Container the Americas, from January 2012 through October 2016. Mr. Wanta joined International Paper in 1991. 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. For further information supply purchase concerning agreements, see page 31. fiber FORWARD-LOOKING STATEMENTS “will,” “may,” the words, 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 “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) domestic and global economic conditions and political changes, including but not limited to changes in currency exchange rates, trade protectionist policies, downgrades in our credit ratings and/or the credit ratings of banks issuing certain letters of credit, rating organizations, (iv) the amount of our future pension funding obligations, and pension and health care costs; (v) unanticipated expenditures or other adverse developments related to the cost of compliance with existing and new environmental, labor and employment, privacy, and other U.S. and non-U.S. governmental laws and regulations; (vi) whether we experience a material disruption at one of our recognized credit issued by tax, manufacturing facilities; (vii) risks inherent in conducting business through joint ventures; (viii) our ability to achieve the benefits we expect from, and other risks associated with, acquisitions, joint ventures, divestitures and other corporate transactions, (ix) information technology risks, and (x) loss contingencies and pending, threatened or future litigation, including with respect to environmental matters. These and other factors that could cause or contribute to actual results differing materially forward-looking statements are discussed in greater detail below in “Item 1A. Risk Factors.” In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any forward-looking statements. We undertake no obligation to publicly update any forward- looking statements, whether as a result of new information, future events or otherwise. such from ITEM 1A. RISK FACTORS The Company faces risks in the normal course of business and through global, regional, and local events that could have an adverse impact on its reputation, operations, and financial performance. The Board of Directors exercises oversight of the Company’s enterprise risk management program, which includes strategic, operational and financial matters, as well as compliance and legal risks. The Audit and Finance Committee coordinates the risk oversight role exercised by the Board’s standing committees and management, and it receives updates on the risk management processes twice per year. 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. If any of the events or circumstances described in any of the following risk factors occurs, our business, results of operations and/ or financial condition could be materially and adversely affected, and our actual results may differ materially from those contemplated in any forward-looking statements we make in any public disclosures. 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 biomass, natural gas, electricity and fuel oil) and third-party companies that transport our goods. The market price of virgin wood 6 fiber varies based upon availability and source. The global supply and demand for recycled fiber may be affected by trade policies between countries, individual governments' legislation and regulations, as well as changes in the global economy. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause significant fluctuations in recycled fiber prices. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future. The availability of labor and the market price for fuel may affect our costs for third-party transportation. 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. OUR AFFECT INDUSTRIES 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 addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. Moreover, consumer preferences are constantly changing based on, among other factors, cost, convenience and health, environmental and social concerns and perceptions. These consumer preferences affect the prices of our products. Consequently, our financial results are sensitive to changes in the pricing and demand for our products. IN THE UNITED STATES AND COMPETITION 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 pursued or achieved by competitors could negatively 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 activity, white-collar printing advertising and 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. 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, 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 or rulings, nationalization or any change in social, political or labor conditions in any of these countries or regions impacting matters such as sustainability, environmental regulations and trade policies and agreements, could negatively affect our financial results. In addition, outbreak of a widespread health epidemic, such as a coronavirus, influenza and other highly communicable diseases or viruses, could also adversely impact our operating results and business prospects, including if operations of our customers are adversely impacted. In this regard, while we do not currently expect that our financial results will be significantly and adversely affected by the COVID-19 virus that was first detected in Wuhan, China in December 2019, there continue to be significant uncertainties associated with the COVID-19 virus, including with respect to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and actions that may be taken by Chinese or other governmental authorities to contain the COVID-19 virus or to treat its impact, and the extent to which the COVID-19 outbreak may impact our financial results, including as the result of its possible impact on the Chinese or global economy, is not certain. 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. Likewise, disruption in existing trade agreements or increased trade friction between countries (e.g., the U.S. and China), which can result in tariffs, could have a negative effect on our business and results of operations by restricting the free flow of goods and services across borders. In addition, our international operations are subject to regulation under U.S. law and other laws related to operations in foreign jurisdictions. For 7 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, and the U.S. Department of Treasury’s Office of Foreign Asset Control and other non-U.S. government entities maintain economic sanctions targeting various countries, persons and entities. 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. THE LEVEL OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS. As of December 31, 2019, International Paper had approximately $9.8 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 for working capital, capital equity 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 future operations, capital expenditures and business opportunities; the debt service requirements of our indebtedness could make it more difficult for us to satisfy other obligations; 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 governing our indebtedness that require us to meet and maintain certain financial ratios and covenants. A significant or prolonged downturn in general business and economic conditions, or other significant adverse developments with respect to our results of operations or financial condition, 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. Moreover, the restrictions associated with 8 these financial ratios and covenants may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute our business strategy successfully or effectively compete with companies that are not similarly restricted. Additionally, despite these restrictions, we may be able to incur substantial additional indebtedness in the future, which might subject us to additional restrictive covenants that could affect our financial and operational flexibility and otherwise increase the risks associated with our indebtedness as noted above. Moreover, certain of our variable rate debt uses the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the interest rate. The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Additionally, uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the cost of our variable rate debt. IN CREDIT RATINGS ISSUED BY CHANGES 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 will likely eliminate our ability to access the commercial paper market, 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 $1.4 billion of our debt as of December 31, 2019, 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, suspension or withdrawal 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 agreements governing the terms of any future indebtedness that we may incur. 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, including those 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 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 $485 million in deferred income taxes if replacement banks cannot be obtained. The deferred taxes are currently recorded in the Company's consolidated financial statements. See Note 15, Variable Interest Entities, on pages 68 through 70, and Note 13, Income Taxes, on pages 62 through 65, in Item 8. Financial Statements and Supplementary Data for 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 (or later for certain acquired populations, as described in Note 19. Retirement Plans, on pages 75 through 81, in Item 8. Financial Statements and Supplementary Data) and substantially all hourly union and non-union employees regardless of hire date. The Company has frozen participation under these plans for U.S. salaried employees, including credited services and compensation on or after January 1, 2019; however, the pension freeze does not affect benefits accrued through December 31, 2018. We provide retiree health care benefits to certain former U.S. 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 impact 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. Drivers for fluctuating health costs include unit cost changes, health care utilization by participants, and potential legislative impacts and government oversight. OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED ON A PROJECTED BENEFIT OBLIGATION BASIS, 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, 2019 was $1.6 billion. The amount and timing of future contributions, which could be material, will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. RISKS RELATING TO 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 operational operations could 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; disruption in the supply of raw materials or other manufacturing inputs; terrorism or threats of terrorism; information system disruptions or failures due to any number of causes, including cyber-attacks; domestic and international laws and regulations applicable to our Company and our business partners, including joint venture partners, around the world; 9 • • • • • • • • • • • 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; a widespread outbreak of an illness or any other communicable disease, such as the recent outbreak of the COVID-19 virus in China, or any other public health crisis; failure of our third party service providers and business partners to satisfactorily fulfill their commitments and responsibilities in a timely manner and in accordance with agreed upon terms; 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. 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. 10 DIVESTITURES, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS JOINT FROM STRATEGIC ACQUISITIONS, CAPITAL VENTURES, INVESTMENTS AND OTHER CORPORATE TRANSACTIONS THAT WE HAVE PURSUED OR MAY PURSUE. Our strategy for long-term growth, productivity and profitability depends, in part, on our ability joint to accomplish prudent acquisitions, ventures, divestitures, capital investments and other corporate transactions that we may pursue 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. This failure could require us to record an impairment charge for goodwill or other intangible assets, which could lead to decreased assets and reduced net earnings. 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. Corporate transactions of this nature which we may pursue involve a number of special risks, including with respect to our inability to realize our business goals with respect to such transactions as noted above, the focus of our management’s attention on these transactions and the assimilation of acquired businesses into our operations, the demands on our financial, operational and information technology systems resulting from acquired businesses, and the possibility that we may become responsible for substantial contingent or unanticipated legal liabilities as the result of acquisitions or other corporate transactions. TO AND SUBJECT EMPLOYEE WE ARE INFORMATION TECHNOLOGY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, 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, implementation, updating and independent third party verification, our information technology systems, and those of our third party providers or joint venture partners, could become subject to employee error or malfeasance, cyber attacks by common hackers, criminal groups or nation-state organizations or social activist (hacktivist) organizations, geopolitical events, natural disasters, impairments of telecommunications networks or other catastrophic events. Network, system, application and data breaches failures or limited including, but not could result in operational disruptions or information misappropriation 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 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. RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS laws, 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. regulations and other government requirements -- including, among others, those relating to the environment, health and safety, labor and employment, data privacy, tax, trade 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 regulations. Our environmental expenditures include, among other areas, those related to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater, including situations where we have been identified as a potentially responsible party. Moreover, we may be directly impacted by, and are working to manage, the risks and costs to us, our customers and our vendors of the effects of climate change, greenhouse gases, and the availability of energy and water resources. These risks include the potentially adverse impact on forestlands, which are a key resource in the production of our products, increased product costs and a change in the types of products that customers purchase. We also face risks arising from the increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters, such as packaging and waste, deforestation, and land use. These risks also include the increased pressure to make commitments, set targets, or establish additional goals and take actions to meet them. These risks could expose us to market, operational, and execution costs or risks. There can be no assurance that future remediation requirements and compliance with existing and new laws and requirements 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. Additionally, we are subject to complex and evolving U.S. and international privacy laws and regulations, including those pertaining to the handling of personal data, such as the General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 (“CCPA”). The GDPR, which became effective on May 25, 2018, with respect to all member states of the European Union, includes operational requirements for companies receiving or processing personal data of EU residents that are partially different from those that had previously been in place and includes significant penalties for noncompliance. The CCPA, which went into effect on January 1, 2020, affords California privacy residents protections. Moreover, governmental authorities around the world are considering, or are in the process of implementing, new data protection regulations. households expanded and Many of these laws and regulations are subject to uncertain application, interpretation or enforcement standards that could result in claims, changes to our business practices, data processing and security systems, penalties, increased operating costs or other impacts on our businesses. The recently enacted laws often provide for civil penalties for violations, as well as private rights of action for data breaches that may increase data breach litigation. IP proactively uses internal and external resources to monitor compliance with relevant legislation and continually evaluates and, where necessary, modifies its data processing practices and policies in order to comply with evolving privacy laws. Nevertheless, relevant regulatory authorities could determine that our data handling practices fail to address all the requirements of certain new laws, which could subject us to penalties and/or litigation. In addition, there is no assurance that our security controls over personal data, the training of employees and vendors 11 on data privacy and data security, and the policies, procedures and practices we implemented or may implement in the future will prevent the improper disclosure of personal data. Improper disclosure of personal data in violation of the GDPR, the CCPA and/ or of other personal data protection laws could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions (including fines), or result in private litigation against us, which could result in loss of revenue, increased costs, liability for monetary damages, fines and/or criminal prosecution, all of which could negatively affect our business and operating results. As a final example, the application of tax law is subject to interpretation and is subject to audit by taxing authorities. Additionally, administrative guidance can be incomplete or vary from legislative intent, and therefore the application of the tax law is uncertain. While we believe the positions reported by the Company comply with relevant tax laws and regulations, taxing authorities could interpret our application of certain laws and regulations differently. We are currently subject to tax audits in the U.S., Brazil, Poland, Russia and other taxing jurisdictions around the world. In some cases, we have appealed and may continue to appeal, assessments by taxing authorities in the court system. As such, tax controversy matters may result in previously unrecorded tax expenses, higher future tax expenses or the assessment of interest and penalties. RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL EFFECT ON OUR CONSOLIDATED FINANCIAL RESULTS. We are a party to various legal, regulatory and governmental proceedings and other related matters, including with respect to environmental matters. In addition, we are and may become subject to other loss contingencies, both known and unknown, which may relate to past, present and future facts, events, circumstances and occurrences. Should an unfavorable outcome occur in connection with our legal, regulatory or governmental proceedings or other loss contingencies, or if we become subject to any such loss contingencies in the future, there could be a material adverse impact on our financial results. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES FORESTLANDS As of December 31, 2019, the Company owned or managed approximately 329,000 acres of forestlands in forest Brazil, and had, management agreements, harvesting rights on government-owned forestlands in Russia. All owned licenses and through 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 2020 on page 30, and dispositions and restructuring activities as of December 31, 2019, on Item 7. Management’s pages 23 Discussion and Analysis of Financial Condition and Results of Operations, and on page 56 of Item 8. Financial Statements and Supplementary Data. through 25 of the ITEM 3. LEGAL PROCEEDINGS Information concerning certain legal proceedings of the Company is set forth in Note 14 Commitments and Contingent Liabilities on pages 65 through 68 of Item 8. Financial Statements and Supplementary Data which is incorporated herein by reference. Additionally, the Florida Department of Environmental Protection and the Company are currently in negotiations to enter into a settlement of violations by the Company’s Pensacola mill of its wastewater effluent discharge permit chronic toxicity limit. The settlement would include penalties totaling $1.1 million and require the mill to engage in certain corrective actions. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 12 PART II. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 (NYSE: IP). As of February 14, 2020, there were approximately 9,663 record holders of common stock of the Company. We pay regular quarterly cash dividends and expect to continue to pay regular quarterly cash dividends in the foreseeable future, though each quarterly dividend payment is subject to review and approval by our Board of Directors. Our ability to pay dividends is, and in the future may continue to be, limited by the terms of our debt documents. The table below presents information regarding the Company’s purchases of its equity securities for the time periods presented. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Period October 1, 2019 - October 31, 2019 November 1, 2019 - November 30, 2019 December 1, 2019 - December 31, 2019 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) — $ 205 5,357 5,562 — 43.68 46.34 — $ — — 1.75 1.75 1.75 (a) 5,562 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. During 2019, 10,828,416 shares were purchased under our share repurchase program, which was approved by our Board of Directors and announced on July 8, 2014 and October 9, 2018. 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 $3.5 billion aggregate amount of shares of our common stock. As of February 14, 2020, approximately $1.75 billion aggregate amount of shares of our common stock remained authorized for purchase under this program. 13 PERFORMANCE GRAPH The performance graph shall not be deemed “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C under, 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, 2014 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, 2014. The graph portrays total return, 2014–2019, assuming reinvestment of dividends. 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. WestRock was added to the Peer group beginning in 2016 after the merger of MeadWestvaco and Rock-Tenn. Fibria Celulose S.A. was excluded at the end of 2018 due to being acquired by Suzano. Note 2. Returns are calculated in $USD. 14 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 2019 2018 2017 2016 2015 $ 22,376 20,281 $ 23,306 20,989 $ 21,743 20,323 $ 19,495 18,180 $ 20,675 18,988 1,604 (b) 1,781 (e) 250 — 1,220 (b-c) (5) (d) 336 345 2,017 5 (f) (e-g) 848 177 34 2,144 (h) (i) (h-j) — (k) (l) (k-m) 795 198 102 902 (2) 1,132 (n) 117 85 917 (21) (o) (n-p) 1,225 (b-d) 2,012 (e-g) 2,144 (h-j) 904 (k-m) 938 (n-p) Current assets less current liabilities $ (2,007) $ 2,302 $ 3,175 $ 2,601 $ 2,244 Plants, properties and equipment, net Forestlands Financial assets of variable interest entities Total assets Notes payable and current maturities of long- term debt Current nonrecourse financial liabilities of variable interest entities Long-term debt Long-term nonrecourse financial liabilities of variable interest entities Total shareholders’ equity BASIC EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS 13,004 391 7,088 33,471 168 4,220 9,597 2,085 7,713 Earnings (loss) from continuing operations $ 3.10 Discontinued operations Net earnings (loss) DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS — 3.10 Earnings (loss) from continuing operations $ 3.07 Discontinued operations Net earnings (loss) Cash dividends 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 — 3.07 2.013 $ 48.24 36.45 46.05 0.8 0.56 16.2% $ 1,276 51,000 13,067 402 7,070 33,576 639 — 13,265 448 7,051 33,903 311 — 13,003 456 7,033 33,093 239 — 10,015 10,846 11,075 6,298 7,362 4.07 0.84 4.91 4.02 0.83 4.85 1.925 $ $ 6,291 6,522 5.11 0.08 5.19 5.05 0.08 5.13 1.863 $ $ 6,284 4,341 1.95 0.25 2.20 1.93 0.25 2.18 1.783 $ $ 11,000 366 7,014 30,271 426 — 8,844 6,277 3,884 $ $ 2.05 0.20 2.25 2.03 0.20 2.23 1.640 $ 66.94 $ 58.96 $ 54.68 $ 57.90 37.55 40.36 1.5 0.59 28.4% 49.60 57.94 1.6 0.63 43.9% 32.50 53.06 1.6 0.72 22.1% 36.76 37.70 1.6 0.70 20.0% $ 1,572 53,000 $ 1,391 56,000 $ 1,348 55,000 $ 1,487 56,000 15 2019: (b) Includes the following charges (gains): In millions 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 prior periods presented have been restated to reflect the North American Consumer Packaging business and the xpedx business as discontinued operations (excluding cash flow related items) and prior period amounts have been adjusted to conform with current year presentation, if applicable. In millions India impairment India divestiture transaction costs Global Cellulose Fibers goodwill impairment Litigation reserves Italian antitrust fine Environmental remediation reserve adjustment (Gain) loss on sale of EMEA Packaging box plant EMEA Packaging business optimization Multi-employer pension plan exit liability Abandoned property removal Riverdale mill conversion costs Foreign VAT refund accrual including interest Debt extinguishment costs Gain on sale of previously closed Oregon mill site Overhead cost reduction initiative Other items Total special items Non-operating pension expense Total 2019 Before Tax After Tax $ 159 $ 157 3 52 41 32 25 (6) 17 9 50 5 (6) 21 (9) 21 4 2 42 31 32 19 (5) 14 6 38 4 (4) 16 (7) 16 4 $ 418 36 $ 365 28 $ 454 $ 393 (c) Includes the following tax expenses (benefits): In millions Luxembourg statutory tax rate change State income tax legislative changes Foreign tax audits Internal investment restructuring Foreign deferred tax valuation allowance Total 2019 $ $ 9 (3) 3 (53) 203 159 (d) Includes the following allocation of loss: In millions India Impairment Total 2018: (e) Includes the following charges (gains): Smurfit-Kappa acquisition proposal costs Legal settlement $ Litigation settlement recovery Environmental remediation reserve adjustment EMEA Packaging business optimization Abandoned property removal Riverdale mill conversion costs Brazil Packaging impairment Debt extinguishment costs Gain on sale of investment in Liaison Technologies Total special items Non-operating pension expense Total (f) Includes the following charges (gains): In millions North American Consumer Packaging transaction costs North American Consumer Packaging gain on transfer Total 2019 Before Tax After Tax $ $ 9 9 $ $ 9 9 2018 Before Tax After Tax $ 12 9 (5) 9 47 32 9 122 10 9 7 (4) 7 34 24 7 81 7 (31) (23) $ 214 $ 149 494 371 $ 708 $ 520 2018 Before Tax After Tax $ 25 $ 19 (488) (364) $ (463) $ (345) (g) Includes the following tax expenses (benefits): In millions State income tax legislative changes Tax benefit of Tax Cuts and Jobs Act Internal investment restructuring Foreign tax audits Total 2018 $ $ 9 (36) 19 25 17 16 2017: (h) Includes the following charges (gains): 2016: (k) Includes the following charges (gains): In millions 2017 Before Tax After Tax In millions 2016 Before Tax After Tax Gain on sale of investment in ArborGen $ (14) $ (9) Riegelwood mill conversion costs $ 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 $ 9 17 8 29 31 70 (8) 7 6 11 5 18 21 58 (5) 6 Amortization of Weyerhaeuser inventory fair value step-up Total special items Non-operating pension expense Total 19 182 610 792 $ $ 11 131 375 506 $ $ (l) Includes the operating earnings of the North American Consumer Packaging business for the full year. Also includes the following charges (gains): In millions xpedx legal settlement Total 2016 Before Tax After Tax $ $ 8 8 $ $ 5 5 (m) Includes the following tax expenses (benefits): 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) Costs associated with the pulp business acquired in 2016 Amortization of Weyerhaeuser inventory fair value step-up Holmen bargain purchase gain Abandoned property removal Kleen Products settlement Asia Foodservice sale Brazil Packaging wood supply accelerated amortization Debt extinguishment costs Interest income on income tax refund claims Other items Total special items Non-operating pension expense Total 33 14 (6) 20 354 9 10 83 (5) (2) $ $ 496 484 980 $ $ 20 8 (6) 13 219 4 7 51 (3) (2) 302 298 600 (i) Includes the operating earnings of the North American Consumer Packaging business for the full year. Also includes the following charges (gains): In millions North American Consumer Packaging transaction costs Non-operating pension expense Total 2017 Before Tax After Tax $ $ 17 45 62 $ $ 10 28 38 (j) Includes the following tax expenses (benefits): In millions International legal entity restructuring $ Income tax refund claims Cash pension contribution International tax law change 2017 34 (113) 38 9 Tax benefit of Tax Cuts and Jobs Act Total (1,222) $ (1,254) 17 2015: (n) 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 $ 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 $ $ 8 16 207 174 15 (4) 137 6 559 258 817 $ $ $ 4 10 133 180 9 (2) 137 5 476 157 633 (o) Includes the operating earnings of the North American Consumer Packaging business for the full year. (p) Includes the following tax expenses (benefits): In millions IP-Sun JV impairment Cash pension contribution Other items Total 2015 $ (67) 23 7 $ (37) 18 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward- looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.” The following generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussion of historical items in 2017, and year-to-year comparisons between 2018 and 2017, can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 20, 2019, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. EXECUTIVE SUMMARY Full-year 2019 net earnings were $1.2 billion ($3.07 per diluted share) compared with net earnings of $2.0 billion ($4.85 per diluted share) for full-year 2018. that impacted our exports. Against International Paper delivered solid earnings and outstanding cash generation in 2019. Our performance demonstrates our ability to generate strong cash flow and the flexibility of the company to navigate well through a challenging global environment. While the U.S. economy remains healthy, during 2019 we managed through significant inventory headwinds and broader trade tensions this backdrop, we focused on optimizing our full value chain by strengthening commercial offerings in faster growing packaging segments, running our manufacturing system well and leveraging the flexibility of our mill and converting system. We continued to grow value for our shareholders with returns above our cost of capital for a tenth consecutive year. Our capital allocation choices were consistent with our framework. In 2019, we returned $1.3 billion to shareholders through dividends of about $800 million and share repurchases of about $500 million. The Company also increased its dividend for the tenth consecutive year, reinforcing our policy of a strong and sustainable dividend. We also repaid approximately $1 billion of debt during 2019 as part of our commitment to a strong balance sheet and to maintain an investment grade rating. We continued to invest strategically to strengthen our Industrial Packaging business. In our North American corrugated packaging business, we made targeted investments to enhance our capabilities and reinforce our strong position in the fastest growing segments. In our EMEA Packaging business, we to expand our completed selective acquisitions converting network around the Madrid, Spain mill. Lastly, in January 2020, we monetized approximately 19% of our investment in Graphic Packaging in exchange for $250 million. Compared to 2018, the Company’s 2019 results reflect the impact of a challenging global environment, which resulted in price and mix being a headwind, mostly due to significant price pressure in export pulp and containerboard markets, as well as the price impact of index movements in our North American Industrial Packaging business. Volume negatively impacted 2019 results due to challenging export markets. In particular, export containerboard volume was impacted by unusually high customer inventories at the start of 2019 which took most of the year to normalize. Operations and costs were impacted by significant economic downtime, particularly in the first half of 2019, due to lower export shipments and our ability to reduce inventories across our North American Industrial Packaging system due to improved supply chain operations. Input costs were favorable for the full year, primarily from lower recovered fiber and energy costs. Even though wood costs moderated in the second half of 2019, they had a negative impact on earnings in 2019. Equity earnings decreased in 2019 due to lower Ilim earnings, driven by the challenging global pulp market dynamics. Looking ahead to the first quarter 2020, as compared to the fourth quarter of 2019, in our Industrial Packaging business, we expect lower price and mix on the flow- through of prior price index movements. Volume is expected to be seasonally lower in North America. Operations and costs are expected to be negatively impacted by the non-repeat of a favorable inventory valuation adjustment recognized in the fourth quarter, as well as higher unabsorbed fixed costs associated with the Riverdale mill conversion. Maintenance outage expense is expected to be higher, and input costs are expected to be higher seasonally. In our Global Cellulose Fibers business, we expect lower price and mix on the impact of prior price index movements. Volume is expected to improve driven by higher fluff pulp shipments. Operations and costs are expected to negatively impact earnings due to the non-repeat of favorable items recognized in the fourth quarter. Maintenance outage expenses are expected to increase while input costs are expected to remain stable. In our Printing Papers business, flow-through of prior negative price movement is expected to be offset by improved geographic mix. Volume is expected to be down mostly due to seasonally lower volumes in Brazil. Operations and costs are 19 expected to have a favorable impact on earnings mostly due to the non-repeat of an unfavorable inventory valuation adjustment recognized in the fourth quarter, as well as improved fixed cost absorption in North America. Maintenance outage expenses are expected to increase while input costs should remain stable. Lastly, we expect lower equity earnings from our Ilim joint venture on the non-repeat of the fourth quarter foreign exchange gain. Looking ahead to the full-year 2020, we expect to generate solid cash flows despite earnings headwinds, by continuing to leverage the flexibility of the company to manage costs, capital spending and working capital. Earnings are expected to be negatively impacted by price carryover from 2019, as well as the impact of the January 2020 containerboard index movement. Earnings are also expected to be negatively impacted by higher planned maintenance outage expense and costs related to the Riverdale conversion, including unabsorbed fixed costs during the conversion process. We plan to offset anticipated inflation through deliberate improvement initiatives. The fundamentals of our packaging and fluff pulp businesses are solid - we believe we are well positioned to capture growth while continuing to optimize the Company’s value chain to position us with positive momentum as we navigate through 2020. Lastly, we intend to continue to make choices for the use of the Company’s strong cash generation that are consistent with our capital allocation framework in order to drive long-term value creation. Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings from continuing operations (a GAAP measure) excluding special items and non- operating pension expense. Net earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most directly comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of non- items considered by operating pension expense, management items) and to be unusual (special discontinued operations from the earnings reported under GAAP. 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 to perform meaningful because comparisons of past and present consolidated operating results. The Company believes this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. that using it enables them The following are reconciliations of Earnings (loss) to Adjusted attributable to common shareholders to common operating earnings (loss) attributable shareholders. Additional detail is provided later in this Form 10-K regarding the special items referenced in the charts below. 2019 2018 Earnings (Loss) Attributable to Shareholders $ 1,225 $ 2,012 Less - Discontinued operations (gain) loss — (345) Earnings (Loss) from Continuing Operations 1,225 1,667 Add back - Non-operating pension expense (income) Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense 36 409 494 214 98 (171) Adjusted Operating Earnings (Loss) Attributable to Shareholders $ 1,768 $ 2,204 Diluted Earnings (Loss) Per Share Attributable to Shareholders Less - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non-operating pension expense (income) per share Add back - Net special items expense (income) per share Income tax effect per share - Non-operating pension and special items expense 2019 2018 $ 3.07 $ 4.85 — (0.83) 3.07 4.02 0.09 1.19 1.02 0.52 0.25 (0.41) Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders $ 4.43 $ 5.32 Three Months Ended December 31, 2019 Three Months Ended September 30, 2019 Three Months Ended December 31, 2018 $ 165 $ 344 $ 316 — 165 9 136 120 — 344 9 94 — 316 429 (15) (16) (60) $ 430 $ 431 $ 670 Earnings (Loss) Attributable to Shareholders Less - Discontinued operations (gain) loss Earnings (Loss) from Continuing Operations Add back - Non- operating pension expense (income) Add back - Net special items expense (income) Income tax effect - Non-operating pension and special items expense Adjusted Operating Earnings (Loss) Attributable to Shareholders 20 Three Months Ended December 31, 2019 Three Months Ended September 30, 2019 Three Months Ended December 31, 2018 $ 0.42 $ 0.87 $ 0.78 — — — 0.42 0.02 0.34 0.87 0.78 0.02 1.05 0.24 (0.04) 0.31 (0.04) (0.14) In millions Cash provided by operations Adjustments: Cash invested in capital projects Free Cash Flow Three Months Ended December 31, 2019 Three Months Ended September 30, 2019 Three Months Ended December 31, 2018 $ $ 928 $ 882 $ 821 (363) 565 $ (285) 597 $ (286) 535 The non-GAAP financial measures presented in this Form 10-K as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company’s presentation of non-GAAP measures in this Form 10-K may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company. $ 1.09 $ 1.09 $ 1.65 RESULTS OF OPERATIONS Diluted Earnings (Loss) Per Share Attributable to Shareholders Less - Discontinued operations (gain) loss per share Diluted Earnings (Loss) Per Share from Continuing Operations Add back - Non- operating pension expense (income) 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 Cash provided by operations totaled $3.6 billion and $3.2 billion for 2019 and 2018, respectively. The Company generated Free Cash Flow of approximately $2.3 billion and $1.7 billion in 2019 and 2018, respectively. 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 underlying operational performance, we believe that free cash flow also enables investors to perform meaningful comparisons between past and present periods. The following are reconciliations of free cash flow to cash provided by operations: In millions 2019 2018 Cash provided by operations $ 3,610 $ 3,226 Adjustments: Cash invested in capital projects (1,276) (1,572) Free Cash Flow $ 2,334 $ 1,654 Business Segment Operating Profits are used by International Paper’s management to measure the earnings performance of its businesses. 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. International Paper believes that using this information, along with net earnings, provides a more complete analysis of the results of operations by year. 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 interest expense, net, corporate items, net, special items, net, and non-operating pension expense. Business Segment Operating Profits is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statement footnotes in accordance with ASC 280. International Paper operates three segments: Industrial Packaging, Global Cellulose Fibers and Printing Papers. in 21 The following table presents a comparison of net earnings (loss) from continuing operations attributable to International Paper Company to its total Business Segment Operating Profit: In millions 2019 2018 Net Earnings (Loss) From Continuing Operations Attributable to International Paper Company $ 1,225 $ 1,667 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 items, net Corporate special items, net (income) expense Business special items, net (income) expense Non-operating pension expense 634 445 (250) (336) (5) 5 1,604 1,781 491 536 3 54 104 307 36 (10) 67 9 205 494 $ 2,599 $ 3,082 The principal changes in operating profit by business segment were as follows: • Industrial Packaging’s operating profit of $2.1 billion was $201 million lower than in 2018 as the benefits of lower input costs and lower maintenance outage costs were more than offset by lower average sales price, unfavorable mix, lower sales volumes and higher operating costs. • Global Cellulose Fibers' operating loss of $(6) million was $268 million lower than in 2018 as the benefits of higher lower maintenance outage costs and lower input costs were more than offset by lower average sales price, an unfavorable mix and higher operating costs. volumes, sales • Printing Papers’ operating profit of $529 million represented a $14 million decrease in operating profit from 2018. The benefits from higher average sales price, net of mix, were offset by lower sales volumes, higher input costs, higher maintenance outage costs and higher operating costs. $ 2,076 $ 2,277 LIQUIDITY AND CAPITAL RESOURCES Business Segment Operating Profit Industrial Packaging Global Cellulose Fibers Printing Papers (6) 529 262 543 Business Segment Operating Profit $ 2,599 $ 3,082 Business Segment Operating Profit in 2019 was $483 million lower than in 2018 as the benefits from lower input costs ($78 million) and lower maintenance outage costs ($30 million) were more than offset by lower average sales price realizations and mix ($161 million), lower sales volumes ($118 million) and higher operating costs ($312 million). For the year ended December 31, 2019, International Paper generated $3.6 billion of cash flow from operations compared with $3.2 billion in 2018. Capital spending for 2019 totaled $1.3 billion, or 98% of depreciation and amortization expense. Our liquidity position remains strong, supported by approximately $2.1 billion of credit facilities. We expect another year of solid cash generation in 2020. Furthermore, we intend to continue to make choices for the use cash that are consistent with our capital allocation framework to drive long-term value creation. These include maintaining a strong balance sheet and investment grade credit rating, returning meaningful cash to shareholders through dividends and share repurchases and making organic investments to maintain our world-class system and strengthen our packaging business. Capital spending for 2020 is planned at approximately $1.0 billion, or about 74% of depreciation and amortization, including approximately $250 million of strategic investments. Under our share repurchase program most recently approved by our Board of Directors on October 9, 2018, which does not have an expiration date, approximately $1.75 billion aggregate amount of shares of common stock remains authorized for purchase under this program. We may continue to repurchase shares under such authorization in open market transactions (including block trades), privately negotiated transactions or otherwise, subject to prevailing market conditions, our liquidity requirements, restrictions in our debt documents, applicable securities laws requirements and other factors. In addition, we pay regular quarterly cash 22 dividends and expect to continue to pay regular quarterly cash dividends in the foreseeable future. Each quarterly dividend is subject to review and approval by our Board of Directors, and is subject to restrictions in our debt documents. RESULTS OF OPERATIONS in While the operating results for International Paper’s various business segments are driven by a number of business-specific International factors, changes Paper’s operating results are closely tied to changes in general economic conditions in North America, Europe, Russia, Latin America, North Africa and the Middle East. (and were closely tied to general economic conditions in India prior to the sale of our controlling interest in International Paper APPM Limited, an India-based printing paper business, effective October 30, 2019). Factors that impact the demand for our products include industrial non-durable goods production, consumer preferences, 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; mill outage costs; salary and benefits costs, including pensions; and manufacturing conversion costs. The following is a discussion of International Paper’s consolidated results of operations for the year ended December 31, 2019, and the major factors affecting these results compared to 2018. For the year ended December 31, 2019, International Paper reported net sales of $22.4 billion, compared with $23.3 billion in 2018. International net sales (based on the location of the seller and including U.S. exports) totaled $8.1 billion or 36% of total sales in 2019. This compares with international net sales of $8.8 billion in 2018. Full year 2019 net earnings attributable to International Paper Company totaled $1.2 billion ($3.07 per diluted share), compared with net earnings of $2.0 billion ($4.85 per diluted share) in 2018. Amounts in 2018 include the results of discontinued operations. Earnings from continuing operations attributable to International Paper Company after taxes in 2019 and 2018 were as follows: In millions 2019 2018 Earnings from continuing operations attributable to International Paper Company $ 1,225 (a) $1,667 (b) (a) (b) Includes $515 million of net special items charges which included tax expense of $203 million related to a foreign deferred tax valuation allowance and $28 million of non-operating pension expense. Includes $166 million of net special items charges and $371 million of non-operating pension expense which included a pre- tax charge of $424 million ($318 million after taxes) for a settlement accounting charge associated with an annuity purchase and transfer of pension obligations for approximately 23,000 retirees. Compared with 2018, the benefits from lower input costs ($59 million), lower maintenance outage costs ($23 million), lower corporate and other costs ($8 million) and lower net interest expense ($32 million) were more than offset by lower average sales price and an unfavorable mix ($122 million), lower sales volumes ($89 million), higher operating costs ($235 million) and higher tax expense ($26 million). In addition, 2019 results included lower equity earnings, net of taxes, relating to the Company’s investments in Ilim and GPIP. See Business Segment Results on pages 26 through 29 for a discussion of the impact of these factors by segment. DISCONTINUED OPERATIONS 2018: In 2018, discontinued operations included an after- tax gain of $364 million on the transfer of the North American Consumer Packaging business and after-tax charges of $19 million for costs associated with the transfer. See Note 8 Divestitures and Impairments on pages 56 through 58 of Item 8. Financial Statements and Supplementary Data for further discussion. 23 INCOME TAXES A net income tax provision of $634 million was recorded for 2019, including tax expense of $203 million related to a foreign deferred tax valuation allowance, a tax benefit of $53 million related to internal investment restructuring, tax expense of $9 million related to a non U.S. tax rate change, tax expense of $3 million related to foreign tax audits and a tax benefit of $3 million related to state income tax legislative changes. Excluding these items, a $53 million net tax benefit for other special items and a $8 million tax benefit related to non-operating pension expense, the operational tax provision was $536 million, or 26% of pre-tax earnings before equity earnings. A net income tax provision of $445 million was recorded for 2018, including a tax benefit of $36 million to revise our 2017 estimated tax related to the enactment of the Tax Cuts and Jobs Act, tax expense of $25 million related to foreign tax audits, tax expense of $19 million related to an international investment restructuring and tax expense of $9 million related to state income tax legislative changes. Excluding these items, a $65 million net tax benefit for other special items and a $123 million tax benefit related to non-operating pension expense, the operational tax provision was $616 million, or 25% of pre- tax earnings before equity earnings. EQUITY EARNINGS, NET OF TAXES Equity earnings, net of taxes, consisted principally of the Company’s share of earnings from its 50% investment in Ilim of $207 million and $290 million in 2019 and 2018, respectively, and from its then 21.6% ownership interest in GPIP of $46 million in 2019, and from its then 20.5% ownership interest of $46 million in 2018 (see page 29). INTEREST EXPENSE AND NONCONTROLLING INTEREST Net corporate interest expense totaled $491 million in 2019 and $536 million in 2018. Net interest expense in 2019 includes $3 million of interest income associated with a foreign value-added tax refund accrual and $1 million of interest expense related to foreign tax audits. The decrease in 2019 compared with 2018 was due to lower average outstanding debt. Net earnings attributable to noncontrolling interests were a loss of $5 million in 2019, compared with earnings of $5 million in 2018. The decrease in 2019 was primarily due to the allocation of loss of $9 million associated with the impairment of the net assets of our India Papers business. SPECIAL ITEMS Restructuring and Other Charges, Net 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, (c) close high cost facilities, and (d) reduce costs. During 2019 and 2018, pre-tax restructuring and other charges, net, totaling $57 million and $29 million were recorded. Details of these charges were as follows: Restructuring and Other, Net In millions Business Segments 2019 2018 EMEA Packaging optimization $ 15 (a) $ 47 (a) Overhead reduction initiative 10 (b) — Riverdale mill paper machine conversion severance reserve Corporate Early debt extinguishment costs (see Note 15) $ Overhead reduction initiative Gain on sale of investment in Liaison Technologies — 25 21 11 — 32 3 (c) $ 50 10 — (31) (21) Total $ 57 $ 29 (a) Recorded in the Industrial Packaging business segment. (b) Includes $6 million recorded in the Printing Papers business segment and $4 million recorded in the Global Cellulose Fibers business segment. (c) Recorded in the Printing Papers business segment. 24 5 (c) 6 (c) INDUSTRIAL PACKAGING Other Special Items In addition, other pre-tax special items totaling $158 million and $63 million were recorded in 2019 and 2018, respectively. Details of these charges were as follows: Other Special Items In millions Business Segments Antitrust fines Abandoned property removal Multi-employer pension plan exit liability Riverdale mill conversion accelerated depreciation Gain on sale of previously closed Albany, Oregon mill site Litigation settlement recovery Other Corporate Litigation reserves Environmental remediation reserve adjustments Fair value adjustment on remaining investment in India India transaction costs Smurfit-Kappa acquisition proposal costs Legal settlement 2019 2018 $ 32 (a) $ — 50 (b) 9 (a) 32 (b) — (9) (a) — — (1) (d) 86 (5) (a) — 33 $ 41 $ — 25 3 3 — — 72 9 — — 12 9 30 63 Total $ 158 $ (a) Recorded in the Industrial Packaging business segment. (b) Includes $35 million and $20 million recorded in the Industrial Packaging business segment for 2019 and 2018, respectively; $12 million and $11 million recorded in the Global Cellulose Fibers business segment for 2019 and 2018, respectively; $3 million and $1 million recorded in the Printing Papers business segment for 2019 and 2018, respectively. (c) Recorded in the Printing Papers business segment. (d) Includes expense of $2 million recorded in the Industrial Packaging business segment and income of $3 million recorded in the Printing Papers business segment. Net Losses on Sales and Impairments of Businesses Net losses on sales and impairments of businesses included in special items totaled a pre-tax loss of $205 million and $122 million in 2019 and 2018, respectively. Details of these losses were as follows: Net Loss on Sales and Impairments of Businesses In millions India Papers impairment Global Cellulose Fibers goodwill impairment Gain on sale of EMEA Packaging box plant Brazil Packaging impairment of fixed assets and an intangible asset Total 2019 2018 $ 159 $ — 52 (6) — — — 122 $ 205 $ 122 25 See Note 8 Divestitures and Impairments on pages 56 through 58 of Item 8. Financial Statements and Supplementary Data for further discussion. 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. in International Paper is the largest manufacturer of containerboard 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 into corrugated boxes and other packaging by our 175 North American container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 18 recycling plants. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. In EMEA, our operations include one recycled fiber recycled containerboard mill containerboard mill in Spain and 28 container plants in France, Italy, Spain, Morocco, Turkey and Portugal. In Brazil, our operations include three containerboard mills and four box plants. in Morocco, a International Paper also produces high quality coated paperboard for a variety of packaging end uses with 443,000 tons of annual capacity at our mills in Poland and Russia. GLOBAL CELLULOSE FIBERS Our cellulose fibers product portfolio includes fluff, market and specialty pulps. International Paper is the largest producer of fluff pulp which is used to make absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products. 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 tons. PRINTING PAPERS BUSINESS SEGMENT RESULTS laser printers and digital 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 imaging. End-use and 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 and Brazil. The mills have uncoated paper production capacity of over 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. ILIM located In October 2007, International Paper and Ilim completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 3.5 million metric tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 19.5 million acres (7.88 million hectares). GPIP On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which includes its North American Coated Paperboard and Foodservice businesses, to Graphic Packaging International Partners, LLC (GPIP), a subsidiary of Graphic Packaging Holding Company, in exchange for a 20.5% ownership interest in GPIP. GPIP the North American subsequently Consumer Packaging business to Graphic Packaging International, LLC (GPI), a wholly-owned subsidiary of GPIP that holds the assets of the combined business. transferred On January 29, 2020, the Company exchanged approximately 19.0% of the aggregate units owned by the Company for an aggregated price of $250 million. the Company's ownership After percentage in GPIP is approximately 18.3%. The Company expects to record a gain on the exchange in the first quarter of 2020. transaction, this Products and brand designations appearing in italics are trademarks of International Paper or a related company. 26 The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability. 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, mill outage costs, manufacturing efficiency and product mix. Industrial Packaging In millions Net Sales Operating Profit (Loss) 2019 2018 $ 15,326 $ 15,900 2,076 $ 2,277 $ Industrial Packaging net sales for 2019 decreased 4% to $15.3 billion compared with $15.9 billion in 2018. Operating profits in 2019 were 9% lower than in 2018. Comparing 2019 with 2018, benefits from lower input costs ($124 million) and lower maintenance outage costs ($22 million) were more than offset by lower average sales price and an unfavorable mix ($61 million), lower sales volumes ($107 million) and higher operating costs ($179 million). North American Industrial Packaging In millions Net Sales (a) Operating Profit (Loss) 2019 2018 $ 13,509 $ 14,187 2,043 $ 2,307 $ (a) Includes intra-segment sales of $118 million for 2019 and $233 million for 2018. North American Industrial Packaging's sales volumes decreased in 2019 compared with 2018 for export containerboard, primarily due to customer destocking as customers exited 2018 with high inventory levels which persisted through the first half of 2019. Box shipments were also lower, reflecting weaker demand and the impact of customer gains and losses. In 2019, the business took about 1.4 million tons of total maintenance and economic downtime compared with 0.5 million tons of total downtime in 2018. Average sales prices were lower export significantly containerboard prices, which were partially offset by higher sales prices Input costs were substantially lower, primarily for recycled fiber. Planned maintenance downtime costs were $23 million lower in 2019 than in 2018. Operating costs increased due to inflation, but were mostly offset by strong mill manufacturing operations. Earnings benefited from a favorable inventory valuation adjustment in 2019, compared with an unfavorable inventory valuation adjustment in 2018. lower primarily due for boxes. to to be seasonally Looking ahead to the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes for boxes are lower. Shipments of expected containerboard to export markets are also expected to be lower. Average sales margins for boxes are expected to be lower, reflecting the recent price index movements. Input costs, primarily for wood and energy, are expected to be relatively flat. Planned maintenance downtime costs are expected to be about $90 million higher as we move into a high maintenance outage quarter. Operating costs are anticipated to be higher, reflecting the impact of unabsorbed the Riverdale conversion. fixed costs related to EMEA Industrial Packaging In millions Net Sales Operating Profit (Loss) 2019 2018 $ $ 1,335 $ 1,355 (73) (17) $ EMEA Industrial Packaging's sales volumes in 2019 were lower than in 2018, reflecting weaker economic conditions in Turkey and a slower fruit and vegetable season in Morocco. Average sales margins improved significantly in all regions driven by lower containerboard costs and stable sales prices for boxes. Other input costs were flat. Planned maintenance downtime costs were also flat. Operating costs were lower due to the ramp-up of the Madrid, Spain mill and the benefits of our optimization initiatives, partially offset by inflation in Turkey. Earnings also benefited from the box plant acquisitions completed in the first half of 2019. Earnings were negatively affected by unfavorable foreign currency impacts, primarily in Turkey. Entering the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes are expected to be seasonally higher. Average sales margins are expected to be slightly higher reflecting lower containerboard costs. Planned maintenance downtime costs are expected to be about $3 million higher. Input costs should be stable. Operating costs are expected to be higher, driven by inflation. Brazilian Industrial Packaging In millions Net Sales Operating Profit (Loss) 2019 2018 $ $ 235 $ (14) $ 232 (29) Industrial Packaging's sales volumes Brazilian increased in 2019 compared with 2018 for boxes and containerboard. Average sales margins improved reflecting higher average sales prices and a favorable mix. Input costs increased, primarily for utilities, recycled fiber, wood and chemicals. Operating costs were lower. Planned maintenance downtime costs were $1 million higher in 2019, compared with 2018. 27 Looking ahead to the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes are expected to be lower for both boxes and containerboard. Average sales margins are expected to be stable. Input costs are expected to be flat. Operating costs are expected to be stable. European Coated Paperboard In millions Net Sales Operating Profit (Loss) 2019 2018 $ $ 365 $ 64 $ 359 72 European Coated Paperboard's sales volumes in 2019 compared with 2018 increased in both Europe and Russia. Average sales margins were higher reflecting higher average sales prices net of an unfavorable mix in Europe and higher average sales prices and a favorable mix in Russia. Input costs were stable as lower purchased pulp and energy costs in Europe were offset by higher energy costs in Russia and higher wood and chemicals costs in Europe. Planned maintenance downtime costs were flat. Operating costs were higher. Earnings were negatively affected by unfavorable foreign currency impacts in both Europe and Russia. Looking forward to the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes are expected to be stable as higher volumes in Europe are offset by lower volumes in Russia. Average sales margins are expected to be higher in both regions. Input costs are expected to be flat in Europe and higher in Russia, primarily for wood and chemicals. Maintenance outage costs are expected to be flat due to no outages in the fourth quarter and no planned outages in the first quarter. Operating costs are expected to be lower. GLOBAL CELLULOSE FIBERS Demand is closely for Cellulose Fibers products correlated with changes in demand for absorbent hygiene products, primarily driven by the demographics and income growth in various geographic regions. It 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, mill outage costs, and freight costs. Global Cellulose Fibers In millions Net Sales Operating Profit (Loss) 2019 2018 $ 2,551 $ 2,819 $ (6) $ 262 Global Cellulose Fibers net sales for 2019 decreased 10% to $2.6 billion, compared with $2.8 billion in 2018. Operating profits in 2019 were significantly lower than in 2018. Comparing 2019 with 2018, benefits from higher sales volumes ($3 million), lower input costs ($8 million) and lower maintenance outage costs ($16 million) were more than offset by lower average sales price and mix ($216 million) and higher operating costs ($79 million). Sales volumes in 2019 compared with 2018 were lower as higher market pulp volumes were more than offset by lower fluff pulp volumes. In 2019, the business took about 300,000 tons of total maintenance and economic downtime compared with about 180,000 tons of total downtime in 2018. Average sales margins were significantly lower, reflecting lower average pulp prices driven by very challenging supply and demand conditions outside the U.S. Average sales margins were also negatively affected by an unfavorable product mix reflecting a decrease in sales of fluff pulp. Input costs were flat. Planned maintenance downtime costs were $16 million lower in 2019. Operating costs increased primarily due to inflation and an unfavorable mill manufacturing mix. In Europe and Russia, sales volumes increased. Average sales prices decreased significantly in both regions. Input costs were higher for wood, chemicals and purchased pulp in Europe and chemicals and energy in Russia. Planned maintenance downtime costs were flat. Entering the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes are expected to be slightly higher, primarily for fluff pulp. Average sales margins are expected to be lower, reflecting the impact of prior price index movement. Input costs are expected to be stable. Planned maintenance downtime costs are expected to be $27 million higher than in the fourth quarter of 2019. Operating costs are expected to increase due to seasonality and higher distribution costs. In Europe, sales volumes are expected to be slightly higher and stable in Russia. Average sales margins are expected to be higher in both regions. Planned maintenance downtime costs are expected to be about $7 million lower in the first quarter of 2020 in Europe and Rusia. PRINTING PAPERS Demand is closely for Printing Papers products correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated in white-collar cut-size products, with changes employment levels that affect the usage of copy and laser printer include manufacturing efficiency, raw material and energy costs, mill outage costs and freight costs. paper. Principal drivers cost Printing Papers In millions Net Sales Operating Profit (Loss) 2019 2018 $ 4,291 $ 4,375 $ 529 $ 543 Printing Papers net sales for 2019 of $4.3 billion decreased 2%, compared with $4.4 billion in 2018. Operating profits in 2019 were 3% lower than in 2018. Comparing 2019 with 2018, benefits from higher average 28 sales price realizations, net of mix ($116 million), were more than offset by lower sales volumes ($14 million), higher operating costs ($54 million), higher input costs ($54 million) and higher planned maintenance downtime costs ($8 million). North American Printing Papers In millions Net Sales Operating Profit (Loss) 2019 2018 $ 1,956 $ 1,956 $ 211 $ 170 North American Printing Papers' sales volumes for 2019 were lower than in 2018, primarily for commercial printing paper. In 2019, the business took about 125,000 tons of total maintenance and economic downtime compared with about 48,000 tons of total downtime in 2018. Average sales margins improved due to the realization of sales price increases for both cutsize paper and rolls, net of an unfavorable geographic mix. Input for wood. Planned costs were higher, primarily maintenance downtime costs were $4 million higher in 2019. Operating costs were higher primarily due to inflation and an unfavorable manufacturing mix, mostly offset by lower distribution costs and favorable mill operations. Earnings were negatively impacted by an unfavorable inventory valuation adjustment in 2019. Entering the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes are expected to be lower, primarily for export markets. Average sales margins are expected to be stable. Input costs are expected to be stable. Operating costs are expected to be higher due to seasonality and inflation. Earnings are expected to benefit from the non-repeat of an unfavorable inventory valuation adjustment in the fourth quarter of 2019. Planned maintenance downtime costs are expected to increase by about $29 million in the first quarter of 2020. Brazilian Papers In millions Net Sales (a) Operating Profit (Loss) 2019 2018 $ $ 967 $ 155 $ 978 227 (a) Includes intra-segment sales of $42 million for 2019 and $13 million for 2018. Brazilian Papers' sales volumes for uncoated freesheet paper in 2019, were higher compared with 2018 for export markets but lower for domestic markets. Average sales margins were lower as higher average domestic sales prices were more than offset by lower average export sales prices and an unfavorable geographic mix. Input costs increased, primarily for virgin fiber, chemicals and energy. Manufacturing costs were lower, but were offset by higher other operating costs. Planned maintenance downtime costs were $1 million lower in 2019. Looking ahead to the first quarter of 2020, compared with the fourth quarter of 2019, sales volumes for uncoated freesheet paper are expected to be seasonally lower. Average sales margins are expected to decrease, primarily due to an unfavorable geographic mix. Input costs are expected to be stable. Planned maintenance outage costs are expected to be about $3 million lower in the first quarter of 2020. Operating costs are expected to be lower. European Papers In millions Net Sales Operating Profit (Loss) 2019 2018 $ 1,250 $ 1,252 129 $ 144 $ European Papers' sales volumes for uncoated freesheet paper in 2019 were higher in Europe and Russia compared with 2018. Average sales margins increased for uncoated freesheet paper in both regions, reflecting the realization of price increases implemented throughout 2018 and 2019. Input costs were higher for wood and chemicals in Europe and chemicals and energy in Russia. Planned maintenance downtime costs were $3 million higher in 2019 than in 2018. Operating costs were higher. Earnings were negatively affected by unfavorable foreign currency impacts in both regions. Entering 2020, sales volumes for uncoated freesheet paper in the first quarter are expected to increase in Europe, but expected to decrease in Russia, compared to the fourth quarter of 2019. Average sales margins are expected to be lower in Europe and stable in Russia. Input costs should be higher in both regions, mainly for chemicals in Europe and wood and chemicals in Russia. Maintenance outage costs should be about $9 million lower due to no planned outages in the first quarter. Operating costs are expected to be lower. foreign exchange loss of $82 million in 2018, primarily on the remeasurement of Ilim's U.S. dollar denominated net debt. Coming off of a strong market in 2018, sales volumes for the joint venture decreased by 3% in 2019, primarily for containerboard shipments to China, Russia and other export markets. Shipments of softwood pulp and hardwood pulp to China were slightly higher, but fell below prior year levels in Russia and other export markets. Average sales price realizations were significantly lower for sales of softwood pulp, hardwood pulp and containerboard in all markets. Input costs were higher, primarily for wood, chemicals and fuel. Distribution costs were negatively impacted by transportation tariffs and inflation. Ilim completed two major capital projects in 2019: the rebuild of the kraft linerboard line at its Bratsk mill and the modernization of a pulp line at the Ust Ilmsk mill. The Company received cash dividends from the joint venture of $246 million in 2019 and $128 million in 2018. Entering the first quarter of 2020, sales volumes are expected to be lower than in the fourth quarter of 2019, due to the seasonal slowdown in China. Based on pricing to date in the current quarter, average sales prices are expected to decrease for softwood pulp, hardwood pulp and containerboard. Input costs and distribution costs are projected to be relatively flat. EQUITY EARNINGS - GPIP International Paper recorded equity earnings of $46 million in 2019 and $46 million in 2018 on its ownership position in GPIP. The Company received cash dividends from the investment of $27 million in 2019 and $25 million in 2018. Indian Papers In millions Net Sales Operating Profit (Loss) 2019 2018 $ $ 160 $ 19 $ 202 17 LIQUIDITY AND CAPITAL RESOURCES OVERVIEW On May 29, 2019, International Paper announced it had entered into an agreement to sell its controlling interest in its Indian Papers business. The transaction closed on October 30, 2019. See Note 8 Divestitures and Impairments on pages 56 through 58 of Item 8. Financial Statements and Supplementary Data further discussion. for EQUITY EARNINGS, NET OF TAXES - ILIM International Paper accounts for its investment in Ilim , a separate reportable industry segment, using the equity method of accounting. The Company recorded equity earnings, net of taxes, related to Ilim of $207 million in 2019, compared with earnings of $290 million in 2018. Operating results recorded in 2019 included an after-tax non-cash foreign exchange gain of $32 million, compared with an after-tax 29 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 operating cash costs, such as raw material, energy, mill outage and distribution, do have an effect on operating cash generation, we believe that our focus on commercial and operational excellence, as well as our ability to tightly manage costs and working capital has improved our cash flow generation over an operating cycle. Use of cash during 2019 was primarily focused on capital spending, debt reduction and returning cash to shareholders through dividends and share repurchases under the Company's share repurchase program. CASH PROVIDED BY OPERATING ACTIVITIES FINANCING ACTIVITIES Cash provided by operations, including discontinued operations, totaled $3.6 billion in 2019, compared with $3.2 billion for 2018. Cash provided by working capital components (accounts receivable, contract assets and inventory less accounts payable and accrued liabilities, interest payable and other) totaled $342 million in 2019, compared with cash used by working capital components of $439 million in 2018. Cash dividends received from equity investments were $273 million in 2019, compared with $153 million in 2018. INVESTMENT ACTIVITIES Including discontinued operations, the cash outflow from investment activities in 2019 decreased from 2018, as 2018 included higher capital spending. The Company maintains an average capital spending target around depreciation and amortization levels, or modestly above, due to strategic plans over the course of an economic cycle. Capital spending was $1.3 billion in 2019, or 98% of depreciation and amortization, compared with $1.6 billion in 2018, or 118% of depreciation and amortization. Across our segments, capital spending as a percentage of depreciation and amortization ranged from 61.6% to 116.1% in 2019. The following table shows capital spending by business segment for the years ended December 31, 2019 and 2018. In millions Industrial Packaging Global Cellulose Fibers Printing Papers Subtotal Corporate and other Capital Spending $ 2019 2018 922 $ 1,061 183 162 172 1,256 303 1,547 20 25 $ 1,276 $ 1,572 Capital spending in 2020 is expected to be approximately $1.0 billion, or 74% of depreciation and amortization, including approximately $250 million of strategic investments. The expected reduction in capital spending in 2020 is primarily due to the completion of large strategic investments in our containerboard mill system, including the Madrid, Spain mill and the Riverdale mill conversions, which is expected to be completed in the first half of 2020. Acquisitions See Note 7 Acquisitions on page 56 of Item 8. Financial Statements and Supplementary Data for a discussion of the Company's acquisitions. Amounts related to early debt extinguishment during the years ended December 31, 2019 and 2018 were as follows: In millions Early debt reductions (a) Pre-tax early debt extinguishment costs (b) 2019 2018 $ 614 $ 780 21 10 (a) Reductions related to notes with interest rates ranging from 3.00% to 9.50% with original maturities from 2021 to 2048 for the years ended December 31, 2019 and 2018. (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. 2019: Financing activities during 2019 included debt issuances of $534 million and reductions of $1.5 billion for a net decrease of $973 million. In June 2019, International Paper issued $200 million of 3.55% senior unsecured notes with a maturity date in 2029. The proceeds from this offering, together with a combination of available cash and other borrowings, were used for general corporate purposes, including repayment of outstanding commercial paper borrowings and other existing indebtedness. In October 2019, International Paper issued $127 million of environmental development bonds with interest rates ranging from 1.90% to 2.10% and maturity dates in 2024. The proceeds from this offering were used to repay other existing environmental development bonds. In June 2018, the borrowing capacity of the commercial paper program was increased from $750 million to $1.0 billion. Under the terms of the program, individual maturities on borrowings may vary, but may not exceed one year from the date of issuance. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of December 31, 2019 and 2018, the Company had $30 million and $465 million, respectively, outstanding under this program. Other financing activities during 2019 included the net repurchase of approximately 8.5 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $535 million, including $485 million related to shares repurchased under the Company's share repurchase program. On October 9, 2018, the Company announced an authorization to repurchase $2 billion of the Company's common stock to supplement remaining amounts under prior share repurchase authorizations, bringing total share repurchase authorizations since 2013 to $5.0 billion. The Company will continue to repurchase such shares in open market repurchase transactions. Under the $5.0 billion share repurchase program, the Company has repurchased 68.9 million shares at an average price 30 of $47.23, for a total of approximately $3.3 billion, as of December 31, 2019. In October 2019, International Paper announced that the quarterly dividend would be increased from $0.50 per share to $0.5125 per share, effective for the 2019 fourth quarter. 2018: Financing activities during 2018 included debt issuances of $490 million and retirements of $1.0 billion for a net decrease of $518 million. Other financing activities during 2018 included the net repurchase of approximately 12.3 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $732 million, including $700 million related to shares repurchased under the Company's share repurchase program. In October 2018, International Paper announced that the quarterly dividend would be increased from $0.4750 per share to $0.50 per share, effective for the 2018 fourth quarter. Interest Rate Swaps International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2019 and 2018, International Paper had interest rate swaps with a notional amount of $700 million and maturities ranging from 2024 to 2026 (see Note 17 Derivatives and Hedging Activities on pages 71 through 75 of Item 8. Financial Statements and Supplementary Data). During 2019 and 2018, the inclusion of the offsetting interest income from short-term investments reduced the effective interest rate from 4.8% to 4.4% and from 4.8% to 4.6%, respectively. Variable Interest Entities Information concerning variable interest entities is set forth in Note 15 Variable Interest Entities on pages 68 through 70 of Item 8. Financial Statements and Supplementary Data. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. These installment notes were used by variable interest entities as collateral for borrowings from third-party lenders. These variable interest entities were restructured in 2015 when the installment notes and third-party loans were extended. The restructured variable interest entities hold installment notes of $4.8 billion that mature in August 2021 (unless extended) and third-party loans of $4.2 billion that mature in the fourth quarter of 2020 (unless extended). These third-party loans are shown in Current nonrecourse financial liabilities of variable interest entities on the accompanying consolidated balance sheet. We are evaluating alternatives for extending the installment notes and refinancing the third-party loans. 31 Failure to extend, renew or refinance these third-party loans prior to their stated maturity, which we believe is unlikely, could necessitate a disposition of the installment notes to facilitate the $4.2 billion debt payment, which we are confident could be achieved. LIQUIDITY AND CAPITAL RESOURCES OUTLOOK FOR 2020 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 2020 with current cash balances and cash from operations. Additionally, the Company has existing credit facilities totaling $2.1 billion at December 31, 2019. 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. The Company was in compliance with all its debt covenants at December 31, 2019, and was well below the thresholds stipulated under the covenants as defined in our credit agreements. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2019, 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, 2019, were as follows: In millions Debt maturities Lease obligations Purchase obligations (a) 2020 2021 2022 2023 2024 Thereafter $ 168 $ 431 $ 136 $ 355 $ 803 $ 7,872 163 3,155 125 707 89 502 55 417 34 322 169 1,644 Total (b) $ 3,486 $ 1,263 $ 727 $ 827 $ 1,159 $ 9,685 (a) Includes $1.3 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. (b) Not included in the above table due to the uncertainty of the amount and timing of the payment are unrecognized tax benefits of approximately $153 million. Also not included in the above table is $128 million of Deemed Repatriation Transition Tax associated with the 2017 Tax Cuts and Jobs Act which will be settled from 2020 - 2026. We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2019, to be permanently reinvested and, accordingly, no U.S. income taxes have been provided thereon (see Note 13 Income Taxes on pages 62 through 65 of Item 8. Financial Statements and Supplementary Data). 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 minimum that are subject At December 31, 2019, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $1.5 billion higher than the fair value of plan assets, excluding non-U.S. plans. Approximately $1.2 billion of this amount relates funding to plans 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 elected not to make any voluntary contributions in 2018 or 2019. At this time, we do not expect to have any required contributions to our plans in 2020, although the Company may elect to make future voluntary 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. During the fourth quarter of 2018, the Company entered into an agreement with The Prudential Insurance Company of America to purchase a group annuity contract and transfer approximately $1.6 billion of International Paper's U.S. qualified pension plan projected benefit obligations, subject to customary closing conditions. The transaction closed on October 2, 2018 and was funded with pension plan assets. Under the transaction, at the end of 2018, Prudential assumed responsibility for pension benefits and annuity administration for approximately 23,000 retirees or their beneficiaries receiving less than $1,000 in monthly benefit payments from the plan. Settlement accounting rules required a remeasurement of the qualified plan as of October 2, 2018 and the Company recognized a non- cash pension settlement charge of $424 million before tax in the fourth quarter of 2018. ILIM SHAREHOLDER'S AGREEMENT that In October 2007, in connection with the formation of the Ilim joint venture, International Paper entered into a shareholder’s agreement 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 $1.6 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 requires International Paper The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 subjective 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 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 and with its independent registered public accounting firm. income CONTINGENT LIABILITIES Accruals for contingent liabilities, including personal injury, product liability, environmental and other legal matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount 32 and settlement experience of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical litigation and recommendations of legal counsel and, if applicable, other experts. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. The Company utilizes its in-house legal and environmental experts to develop estimates of its legal and environmental obligations, supplemented as needed by third-party specialists to analyze its most complex contingent liabilities. We calculate our workers' compensation reserves based on estimated actuarially calculated development factors. The workers' compensation reserves are reviewed at least quarterly to determine the adequacy of the accruals and related financial statement disclosure. While we believe that our assumptions are appropriate, the ultimate settlement of workers' compensation reserves may differ significantly from amounts we have accrued in our consolidated financial statements. 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 undiscounted cash flows from future operations or disposals. 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, evaluation for possible impairment of goodwill is required annually. The amount and timing of any impairment charges based on these assessments may require the estimation of future cash flows or the fair related assets based on market value of management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, various other projected operating economic factors and other intended uses of the assets. As these key factors change in future periods, the Company will update its impairment analysis to reflect its latest estimates and projections. the ASU 2011-08, "Intangibles - Goodwill and Other," allows entities testing goodwill for impairment the option of performing a qualitative assessment before performing the quantitative goodwill impairment test. If a qualitative assessment is performed, an entity is not required to perform the quantitative goodwill impairment test unless the entity determines that, based on that qualitative assessment, it is more likely than not that its fair value is less than its carrying value. 33 The Company performed its annual testing of its reporting units for possible goodwill impairments by applying the qualitative assessment to its North America Industrial Packaging, European Papers, Russian Papers, and Brazilian Papers reporting units and the quantitative goodwill impairment test to its Global Cellulose Fibers and EMEA Industrial Packaging reporting units as of October 1, 2019. For this evaluation, the Company assessed and circumstances that would have affected the estimated fair value of the reporting units under the qualitative assessment for the reporting units listed above and the result of the qualitative assessment indicated that it is not more likely than not that the fair values of its North Industrial Packaging, European Papers, America Russian Papers, and Brazilian Papers reporting units were less than their carrying values. assumptions, various events for EMEA The Company also performed the quantitative goodwill impairment test which included comparing the carrying amount of the Global Cellulose Fibers and EMEA Industrial Packaging reporting units to their estimated fair value. The Company performed the quantitative goodwill impairment test for Global Cellulose Fibers due to the reporting unit's outlook and Industrial Packaging due to the changes in the reporting unit's asset base as a result of strategic capital projects and acquisitions since the previous quantitative goodwill impairment test. The Company calculated the estimated fair value of its Global Cellulose Fibers and EMEA Industrial Packaging reporting units using a probability- weighted approach based on discounted future cash flows, market multiples and transaction multiples. The carrying amount did not exceed the estimated fair value of the EMEA Industrial Packaging reporting unit. The carrying amount did exceed the estimated fair value of the Global Cellulose Fibers reporting unit, and it was determined that all of the goodwill in the reporting unit, totaling $52 million, was impaired. This impairment charge was recognized during the fourth quarter of 2019. The decline in the fair value of Global Cellulose Fibers and resulting impairment charge was due to a change in the outlook of the Global Cellulose Fibers reporting unit's operations. In addition, the Company considered whether there were any events or circumstances outside of the annual evaluation that would reduce the fair value of its reporting units below their carrying amounts and necessitate a goodwill impairment evaluation. In consideration of all relevant factors, there were no indicators that would require goodwill impairment subsequent to October 1, 2019. No goodwill impairment charges were recorded in 2018. During 2018, a determination was made that the current carrying value of the long-lived assets of the Brazil Packaging business exceeded their estimated fair value due to a change in the outlook for the business. Management engaged a third party to assist with determining the fair value of the business and the fixed assets. The fair value of the business was calculated using a probability-weighted approach based on discounted future cash flows, market multiples, and transaction multiples and the fair value of the fixed assets was determined using a market approach. As a result, a pre-tax charge of $122 million ($81 million, net of tax) was recorded related to the impairment of an intangible asset and fixed assets. PENSION BENEFIT OBLIGATIONS The charges recorded for pension 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 and mortality rates. The calculations of pension 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 and the discount rate used to calculate plan liabilities. Benefit obligations and fair values of plan assets as of December 31, 2019, for International Paper’s pension plan were as follows: In millions U.S. qualified pension U.S. nonqualified pension Non-U.S. pension Benefit Obligation Fair Value of Plan Assets $ 11,318 $ 10,165 381 253 — 183 The table below shows assumptions used by International Paper to calculate U.S. pension obligations for the years shown: Discount rate Rate of compensation increase 2019 2018 2017 3.40% 2.25% 4.30% 2.25% 3.60% 3.75% International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of each year or more frequently if required, to calculate liability information as of that date and pension expense for the following year. The expected long-term rate of return on plan assets is based on projected rates of return for current 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. 34 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, 2019 was 7.25%. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would (increase) 2020 pension expense by decrease approximately $24 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $31 million. Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were: Year 2019 2018 2017 2016 2015 Return 23.9 % (3.0)% 19.3 % 7.1 % 1.3 % Year 2014 2013 2012 2011 2010 Return 6.4% 14.1% 14.1% 2.5% 15.1% 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 9.2% and 9.8% for the past five and ten years, respectively. 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. Net periodic pension plan expenses, calculated for all of International Paper’s plans, were as follows: In millions Pension expense U.S. plans Non-U.S. plans Net expense 2019 2018 2017 2016 2015 $ $ 93 $ 632 $ 717 $ 809 $ 461 6 4 5 4 6 99 $ 636 $ 722 $ 813 $ 467 The decrease in 2019 pension expense primarily reflects lower service cost due to the salaried pension freeze, lower amortization and the absence of a settlement loss in the current year slightly offset by lower asset returns. Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as of December 31, 2019, projected future net periodic pension plan expenses would be as follows: In millions Pension expense U.S. plans Non-U.S. plans Net (income) expense 2021 2020 $ $ (11) $ 4 (7) $ 46 5 51 The Company estimates that it will record net pension expense of approximately $46 million for its U.S. defined benefit plans in 2020, compared to expense of $93 million in 2019. The estimated decrease in net pension expense in 2020 is primarily due to higher return on assets and lower interest cost partially offset by higher amortization of actuarial losses and higher service cost. The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2019 totaled approximately $10.2 billion, consisting of approximately 37% equity securities, 50% debt securities, 8% real estate funds and 5% other assets. 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 considering the funded status of the plan, tax 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 were no required contributions to the U.S. qualified plan in 2019. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $26 million for the year ended December 31, 2019. 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 recent court cases that are relevant to the matter. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit 35 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 income, as well as successful implementation of various tax planning strategies. taxable 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. RECENT ACCOUNTING DEVELOPMENTS See Note 2 Recent Accounting Developments on pages 50 through 52 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements. LEGAL PROCEEDINGS legal proceedings Information concerning the Company’s environmental and in Note 14 Commitments and Contingent Liabilities on pages 65 through 68 of Item 8. Financial Statements and Supplementary Data. is set forth EFFECT OF INFLATION 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 indirect impacts on local currency the Company’s 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 financial and 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 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. 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 interest rate swaps, or foreign exchange contracts. At December 31, 2019 and 2018, the net fair value of financial instruments with exposure to foreign currency risk was approximately a $16 million asset and an $8 million liability, 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 $87 million and $29 million at December 31, 2019 and 2018, respectively. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the preceding discussion and Note 17 Derivatives and Hedging Activities on pages 71 through 75 of Item 8. Financial Statements and Supplementary Data. 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 International Paper’s debt obligations is included in Note 16 Debt and Lines of Credit on pages 70 and 71 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 17 Derivatives and Hedging Activities on pages 71 through 75 of Item 8. Financial Statements and Supplementary Data. related to 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. INTEREST RATE RISK 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, 2019 and 2018 are stated at cost, which approximates market due to their short-term nature. Our interest rate 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, 2019 and 2018, the fair value of the net liability of financial instruments with exposure to interest rate risk was approximately $9.8 billion and $9.2 billion, respectively. The potential increase in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $511 million and $538 million at December 31, 2019 and 2018, respectively. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT ON: Financial Statements in The management of International Paper Company is responsible for the preparation of the consolidated financial statements this annual report. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances 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. to present fairly 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 (as defined in Rules (13a-15(e) and 15d-15(e) under the Exchange Act). 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 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- limitations, including inherent monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. Our procedures for financial reporting include the active involvement of senior management, our Audit and Finance Committee and our staff of highly qualified financial and legal professionals. financial The Company has assessed the effectiveness of its internal control over reporting as of December 31, 2019. 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, 2019, the Company’s internal control over financial reporting was effective. The Company completed the acquisitions of four packaging businesses located in Portugal (Ovar), France (Torigni and Cabourg), and Spain (Tavernes de la Valldigna and Montblanc) over the course of 2019. Due to the timing of these acquisitions, we have excluded these businesses from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2019, sales and assets for these businesses represented approximately 0.4% of net sales and 0.6% 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 in legal standards 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 the conduct of ethical and 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. 37 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 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, 2019, 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 MARK S. SUTTON CHAIRMAN AND CHIEF EXECUTIVE OFFICER TIMOTHY S. NICHOLLS SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of International Paper Company: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the "Company") as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion the Company's These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, 39 evidence regarding the amounts and disclosures in the financial statements. Our audits also included the accounting principles used and evaluating significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Income Taxes - Valuation Allowances - Refer to Notes 1 and 13 to the financial statements Critical Audit Matter Description The Company recognizes deferred income tax assets for deductible temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized based on estimates of future taxable income. During the year ended December 31, 2019, the Company recorded a valuation allowance of $203 million related to indefinite-lived non-US net operating loss carryforwards. Management’s determination that a valuation allowance was necessary in the current year was influenced by current year changes in global tax laws, which have adversely impacted the time period over which the Company could reasonably realize the deferred tax asset based on its current global structure and ability to execute prudent and feasible tax planning actions. We identified the valuation allowance as a critical audit matter because it is dependent upon an analysis of complex tax laws and subjective projections of future result, performing audit taxable reasonableness of the procedures management's projections and the timing for recognition of the valuation allowance, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists. income. As a to evaluate How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to estimated future taxable income and the determination of whether it is more likely than not that the deferred tax asset will be realized included the following, among others: • We tested the effectiveness of controls over the valuation allowance assessment for income taxes, including management’s controls over the identification and evaluation of changes in global tax laws, estimates of future taxable income, and the determination of whether it is more likely than not that the deferred tax asset will be realized. • With the assistance of our income tax specialists: • We identified and evaluated changes in global tax laws and the potential impact on the Company’s ability to utilize the deferred tax asset. • We considered management’s intent and ability to execute prudent and feasible tax planning actions based upon their underlying economic substance and local tax laws. • We evaluated management’s ability to accurately estimate future taxable income by comparing actual results to management’s historical estimates. • We considered whether management’s determination that a valuation allowance was required in the current year was indicative of management bias by evaluating the Company’s historical conclusions reached with respect to the realizability of its deferred tax assets in other jurisdictions with unlimited carryforward periods. Other Accrued Liabilities - Commitments and Contingent Liabilities - Harris County San Jacinto Environmental Proceeding - Refer to Note 14 to the financial statements Critical Audit Matter Description The Company has obligations related to certain environmental matters. Such obligations are recorded when it is probable that a liability has been incurred and the loss can be reasonably estimated. The Company has been named a potentially responsible party (“PRP”) at the Harris County San Jacinto Waste Pits Superfund Site (“San Jacinto”). The Company has been participating in the remediation activities at the site with other PRPs. 40 During 2017, the Environmental Protection Agency (“EPA”) issued a Record of Decision (“ROD”) which included a waste removal and relocation remedy for the site, including an estimate of costs to remediate. Due to uncertainty about feasibility of executing the remedy prescribed within the ROD, the Company believes additional losses for this site are not estimable. technological the We identified the San Jacinto environmental proceeding as a critical audit matter because of the uncertainty associated with executing the remedy prescribed in the ROD. As a result, auditing management's determination that additional losses for the site are not reasonably estimable required a high degree of auditor judgment and an increased extent of effort, including the need to involve our environmental specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures to management’s determination and the Company’s disclosure that additional losses are not estimable related to San Jacinto included the following, among others: related • We tested the effectiveness of controls related to San Jacinto, including management’s controls over evaluating whether the liability was reflective of current circumstances, included necessary costs (i.e. probable and estimable), and the related disclosure in the financial statements was accurate and complete. • With assistance from our environmental specialists: • We inquired of the Company’s environmental specialists, including inquiries of both internal and external legal counsel, to understand the status of progress under the 2018 Administrative Order on Consent (“AOC”) as well as the status of ongoing discussions with the EPA and the other regulatory agencies involved. • We inspected correspondence between the PRPs and the EPA to gain an understanding of progress and developments related to the site based on timeline and requirements outlined in the AOC, including consideration of contradictory evidence or indications of Management bias. the • We assessed management’s assertion regarding the technical feasibility of compliance with the ROD in evaluating the recorded liability. • We evaluated the sufficiency of the Company’s disclosures related to additional losses not being reasonably estimable. /s/ Deloitte & Touche LLP Memphis, Tennessee February 19, 2020 We have served as the Company's auditor since 2002. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Shareholders and Board of Directors of International Paper Company: Opinion on Reporting Internal Control over Financial We have audited the internal control over financial reporting of International Paper Company and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company, and our report dated February 19, 2020 expressed an unqualified opinion on those financial statements. As described in the Report of Management on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting the acquisitions of packaging businesses located in Portugal (Ovar), France (Torigni and Cabourg), and Spain (Tavernes de la Valldigna and Montblanc) completed during 2019. The acquired businesses constitute 0.4% of net sales and 0.6% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at these acquired businesses. 41 Basis for Opinion is responsible for The Company’s management 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 respects. Our audit included obtaining an understanding of internal control over financial 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. Definition and Limitations of Internal Control over Financial Reporting reporting financial statements A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of for external purposes in accordance with generally accepted accounting principles. A company’s internal control over those policies and includes financial 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Memphis, Tennessee February 19, 2020 42 CONSOLIDATED STATEMENT OF OPERATIONS 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, net Net (gains) losses on sales and impairments of businesses Antitrust fines and settlements Net bargain purchase gain on acquisition of business Interest expense, net Non-operating pension expense 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) The accompanying notes are an integral part of these financial statements. 2019 2018 2017 $ 22,376 $ 23,306 $ 21,743 15,268 15,555 14,802 1,647 1,306 1,560 170 57 205 32 — 491 36 1,723 1,328 1,567 171 29 122 — — 536 494 1,621 1,343 1,434 169 67 9 354 (6) 572 530 1,604 1,781 848 634 250 1,220 — 1,220 (5) 445 336 1,672 345 2,017 5 (1,085) 177 2,110 34 2,144 — $ 1,225 $ 2,012 $ 2,144 $ $ $ $ 3.10 $ 4.07 $ — 0.84 3.10 $ 4.91 $ 3.07 $ 4.02 $ — 0.83 3.07 $ 4.85 $ 5.11 0.08 5.19 5.05 0.08 5.13 43 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 $54, $196 and $280) Non-U.S. plans (less tax of $0, $0 and $0) Pension and postretirement liability adjustments: U.S. plans (less tax of $7, $6 and $69) Non-U.S. plans (less tax of $3, $1 and $1) Change in cumulative foreign currency translation adjustment (less tax of $1, $1 and $0) Net gains/losses on cash flow hedging derivatives: Net gains (losses) arising during the period (less tax of $2, $5 and $4) Reclassification adjustment for (gains) losses included in net earnings (less tax of $2, $1 and $2) 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 2019 2018 2017 $ 1,220 $ 2,017 $ 2,144 163 1 22 (20) 116 4 4 290 1,510 5 — 588 1 18 4 (473) (10) 2 130 2,147 (5) 3 486 — 56 3 177 15 (7) 730 2,874 — (1) COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY $ 1,515 $ 2,145 $ 2,873 The accompanying notes are an integral part of these financial statements. 44 CONSOLIDATED BALANCE SHEET In millions, except per share amounts, at December 31 2019 2018 ASSETS Current Assets Cash and temporary investments Accounts and notes receivable (less allowances of $73 in 2019 and $81 in 2018) Contract assets Inventories Other current assets Total Current Assets Plants, Properties and Equipment, net Forestlands Investments Financial Assets of Variable Interest Entities (Note 15) Goodwill Right of Use Assets Deferred Charges and Other Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Notes payable and current maturities of long-term debt Current nonrecourse financial liabilities of variable interest entities (Note 15) Accounts payable Accrued payroll and benefits Other current liabilities Total Current Liabilities Long-Term Debt Long-Term Nonrecourse Financial Liabilities of Variable Interest Entities (Note 15) Deferred Income Taxes Pension Benefit Obligation Postretirement and Postemployment Benefit Obligation Long-Term Lease Obligations Other Liabilities Commitments and Contingent Liabilities (Note 14) Equity Common stock $1 par value, 2019 - 448.9 shares and 2018 - 448.9 shares Paid-in capital Retained earnings Accumulated other comprehensive loss Less: Common stock held in treasury, at cost, 2019 – 56.800 shares and 2018 – 48.310 shares Total International Paper Shareholders’ Equity Noncontrolling interests Total Equity TOTAL LIABILITIES AND EQUITY The accompanying notes are an integral part of these financial statements. 45 $ 511 $ 589 3,280 393 2,208 247 6,639 3,521 395 2,241 250 6,996 13,004 13,067 391 1,721 7,088 3,347 434 847 402 1,648 7,070 3,374 — 1,019 $ 33,471 $ 33,576 $ 168 $ 4,220 2,423 466 1,369 8,646 9,597 2,085 2,633 1,578 270 304 640 449 6,297 8,408 639 — 2,413 535 1,107 4,694 10,015 6,298 2,600 1,762 264 — 560 449 6,280 7,465 (4,739) (4,500) 10,415 2,702 7,713 5 9,694 2,332 7,362 21 7,718 7,383 $ 33,471 $ 33,576 CONSOLIDATED STATEMENT OF CASH FLOWS In millions for the years ended December 31 OPERATING ACTIVITIES Net earnings (loss) Depreciation, amortization, and cost of timber harvested Deferred income tax provision (benefit), net Restructuring and other charges, net Pension plan contributions Periodic pension expense, net Net gain on transfer of North American Consumer Packaging business Net bargain purchase gain on acquisition of business Net (gains) losses on sales and impairments of businesses Antitrust fines Equity method dividends received Equity (earnings) losses, net Other, net Changes in current assets and liabilities Accounts and notes receivable Contract assets Inventories Accounts payable and accrued liabilities Interest payable Other CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES INVESTMENT ACTIVITIES Invested in capital projects Acquisitions, net of cash acquired Net settlement on transfer of North American Consumer Packaging business Proceeds from divestitures, net of cash divested Proceeds from sale of fixed assets Other CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES FINANCING ACTIVITIES Repurchases of common stock and payments of restricted stock tax withholding Issuance of debt Reduction of debt Change in book overdrafts Dividends paid Net 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 The accompanying notes are an integral part of these financial statements. 46 2019 2018 2017 $ 1,220 $ 2,017 $ 2,144 1,423 1,328 1,306 212 57 — 93 — — 205 32 273 (250) 120 246 2 (1) 139 (19) (25) 133 29 (1,113) 67 — (1,250) 632 (488) — 122 — 153 (336) 75 (342) (32) (236) 151 (8) 28 717 — (6) 9 — 133 (177) 212 (370) — (87) 114 1 (60) 3,610 3,226 1,757 (1,276) (1,572) (1,391) (103) — 81 18 (20) (8) (40) — 23 28 (45) — 4 26 15 (1,300) (1,569) (1,391) (535) 534 (732) 490 (47) 1,907 (1,507) (1,008) (1,424) (66) (796) (18) (1) (1) (789) (6) — (2,389) (2,046) 1 (78) (40) (429) 26 (769) (84) (8) (399) 18 (15) 589 511 $ 1,018 1,033 589 $ 1,018 $ CONSOLIDATED STATEMENT OF CHANGES IN EQUITY In millions BALANCE, JANUARY 1, 2017 Issuance of stock for various plans, net Repurchase of stock Dividends ($1.863 per share) Transactions of equity method investees Comprehensive income (loss) BALANCE, DECEMBER 31, 2017 Adoption of ASC 606 revenue from contracts with customers Issuance of stock for various plans, net Repurchase of stock Dividends ($1.925 per share) Transactions of equity method investees Comprehensive income (loss) BALANCE, DECEMBER 31, 2018 Adoption of ASU 2018-02 reclassification of stranded tax effects resulting from Tax Reform Issuance of stock for various plans, net Repurchase of stock Dividends ($2.013 per share) Transactions of equity method investees Divestiture of noncontrolling interests Comprehensive income (loss) BALANCE, DECEMBER 31, 2019 Common Stock Issued Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Common Stock Held In Treasury, At Cost Total International Paper Shareholders’ Equity Noncontrolling Interests Total Equity $ 449 $ 6,189 $ 4,818 $ (5,362) $ 1,753 $ 4,341 $ 18 $ 4,359 — — — — — 42 — — (25) — — — (782) — 2,144 — — — — 729 (120) 47 — — — 449 6,206 6,180 (4,633) 1,680 — — — — — — — 62 — — 12 — 73 — — (800) — 2,012 — — — — — 133 — (80) 732 — — — 449 6,280 7,465 (4,500) 2,332 — — — — — — — — (18) — — 35 — — 529 — — (811) — — (529) — — — — — — (165) 535 — — — — 1,225 290 162 (47) (782) (25) 2,873 6,522 73 142 (732) (800) 12 2,145 7,362 — 147 (535) (811) 35 — — — — — 1 162 (47) (782) (25) 2,874 19 6,541 — — — — — 2 73 142 (732) (800) 12 2,147 21 7,383 — — — — — — 147 (535) (811) 35 (11) (11) 1,515 (5) 1,510 $ 449 $ 6,297 $ 8,408 $ (4,739) $ 2,702 $ 7,713 $ 5 $ 7,718 The accompanying notes are an integral part of these financial statements. 47 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, North Africa and Russia. 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 in conformity with accounting principles prepared generally accepted in the United States that require the use of management’s estimates. Actual results could differ from management’s estimates. On January 1, 2018, the Company completed the previously announced transfer of its North American Consumer Packaging business and received a 20.5% ownership interest in a subsidiary of Graphic Packaging Holding Company that holds the assets of the combined business. See Note 8 for further details. CONSOLIDATION financial statements The consolidated the accounts of International Paper and subsidiaries for which we have a controlling financial interest, including variable interest entities for which we are the primary beneficiary. All significant intercompany balances and transactions are eliminated. include 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 asset acquired and liabilities assumed, whichever comes first, any subsequent adjustments are charged to the consolidated statement 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. See Note 7 for further details. DISCONTINUED OPERATIONS A discontinued operation may include a component or a group of components of the Company's operations. A disposal of a component or a group of components is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results when the following occurs: (1) a component (or group of components) meets the criteria to be classified as held for sale; (2) the component or group of components is disposed of by sale; or (3) the component or group of components is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). For any component classified as held for sale or disposed of by sale or other than by sale, qualifying for presentation as a discontinued operation, the Company reports the results of operations of the discontinued operations (including any gain or loss recognized on the disposal or loss recognized on classification as held for sale of a discontinued operation), less applicable income taxes (benefit), as a separate component in the consolidated statement of operations for current and all prior periods presented. See Note 8 for further details. EQUITY METHOD INVESTMENTS RESTRUCTURING LIABILITIES AND COSTS is applied The equity method of accounting for investments when the Company has significant influence over the investee’s operations, or when the investee is structured with separate capital accounts and our investment is considered more than minor. Our material equity method investments are described in Note 11. BUSINESS COMBINATIONS The Company allocates the total consideration 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 48 For operations to be closed or restructured, a liability and related expense is recorded in the period when operations cease. For termination costs associated with employees covered by a written or substantive plan, a liability is recorded when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. For termination costs associated with employees not covered by a written and broadly communicated policy covering involuntary termination benefits (severance plan), a liability is recorded for costs to terminate employees (one-time termination benefits) when the termination plan has been approved and committed to by management, the employees to be terminated have been identified, the termination plan benefit the employees identified in the plan have been notified and actions required to complete the plan indicate that it is unlikely terms are communicated, that significant changes to the plan will be made or that the plan will be withdrawn. The timing and amount of an accrual is dependent upon the type of benefits granted, the timing of communication and other provisions that may be provided in the benefit plan. The accounting for each termination is evaluated individually. See Note 6 for further details. REVENUE RECOGNITION Generally, the Company recognizes revenue on a point- in-time basis when the customer takes title to the goods and assumes the risks and rewards for the goods. For customized goods where the Company has a legally enforceable right to payment for the goods, the Company recognizes revenue over time, which generally is, as the goods are produced. The Company’s revenue is primarily derived from fixed consideration; however, we do have contract terms that give rise to variable consideration, primarily cash discounts and volume rebates. International Paper offers early payment discounts to customers across the Company’s businesses. The Company estimates the expected cash discounts and other customer refunds based on the historical experience across the Company’s portfolio of customers to record reductions in revenue which is consistent with the most likely amount method outlined in ASC 606. Management has concluded that this method is the best estimate of the consideration the Company will be entitled to from its customers. The Company has elected to present all sales taxes on a net basis, account for shipping and handling activities as fulfillment activities, recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period of the asset the Company would recognize is one year or less, and not record interest income or interest expense when the difference in timing of control or transfer and customer payment is one year or less. See Note 3 for further details. TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less and money market funds with greater than three month maturities but with the right to redeem without notice are treated as cash equivalents and are stated at cost, which approximates market value. See Note 9 for further details. INVENTORIES Inventories are valued at the lower of cost or market value include all costs directly associated with and manufacturing and 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. labor Other inventories are valued using the first-in, first-out or average cost methods. See Note 9 for further details. LEASED ASSETS the related that option. Some Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that we will leases have variable exercise payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases to common area maintenance, primarily insurance, taxes and utilities. Variable payments for equipment, vehicles, and leases within supply agreements primarily related to usage, repairs and is not readily maintenance. As determinable for most of the Company's leases, the Company applies a portfolio approach using an estimated incremental borrowing rate to determine the initial present value of lease payments over the lease terms on a collateralized basis over a similar term, which is based on market and company specific information. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate, and apply the rate based on the currency of the lease, which is updated on a quarterly basis for measurement of new lease liabilities. Leases having a lease term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, the Company has applied the practical expedient to account for the lease and non- lease components as a single lease component for all of the Company's leases. See Note 10 for further details. implicit rate 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. See Note 9 for further details. GOODWILL Annual evaluation for possible goodwill impairment is performed as of the beginning of the fourth quarter of each year, with additional interim evaluation performed when management believes that it is more likely than not, that events or circumstances have occurred that would result in the impairment of a reporting unit’s goodwill. The Company has the option to evaluate goodwill for impairment by first performing a qualitative assessment of events and circumstances to determine whether it is 49 more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amounts, then the quantitative goodwill impairment test is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company does not elect the option to perform an initial qualitative assessment, the Company is required to perform the quantitative goodwill impairment test. In performing this evaluation, the Company estimates the fair value of its reporting unit using a probability-weighted approach based on discounted future cash flows, market multiples and transaction multiples. Key assumptions in the quantitative goodwill impairment test considered by management include the discount rate, long-term growth rate, tax rate, inflation rate, and business forecast. For reporting units whose carrying amount is in excess of their estimated fair value, the reporting unit will record an impairment charge by the amount that the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. See Note 12 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. A recoverability test is performed based on undiscounted cash flows, requiring judgments as to whether assets are held and used or held for sale, the weighting of operational alternatives being considered by management and estimates of the amount and timing of expected future cash flows from the use of the long-lived assets generated by their use. Impaired assets are recorded at their estimated fair value. See Note 8 for further discussion. 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 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. 50 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 adjustments that could materially affect future financial statements. See Note 13 for further details. International Paper uses the flow-through method to account for investment tax credits earned on eligible open-loop biomass facilities and combined heat and power system expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned rather than a reduction in the asset basis. ENVIRONMENTAL REMEDIATION COSTS remediation Costs associated with environmental obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. for environmental Costs of remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable. See Note 14 for further details. future expenditures 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 statement translations are included as cumulative translation adjustments in Accumulated other comprehensive loss. resulting financial from 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. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS Comprehensive Income Intangibles In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This guidance eliminates the requirement to calculate the implied fair value of goodwill under Step 2 of the previous goodwill impairment test approach to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. This guidance should be applied prospectively. The Company early adopted the provision of this guidance in the fourth quarter of 2019 in conjunction with our annual evaluation for possible goodwill impairment which resulted in the recognition of a goodwill impairment charge of $52 million for the Global Cellulose Fibers reporting unit. See Note 12. Pension Plan Disclosures which the FASB Improvements," issued ASU 2018-09, In July 2018, "Codification included amendments to Subtopic 962-325. This disclosure guidance pertains to the presentation of certain types of investments. The Company adopted the provisions of this guidance in the fourth quarter of 2019 in conjunction with the preparation of our 2019 annual Form 10-K disclosures and presentation related to pension plan assets. Leases the modified In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842): Leases." The Company adopted the provisions of this guidance effective January 1, 2019, using retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2019, and prior periods were not restated. The adoption of the standard did not result in a cumulative effect adjustment to the opening balance of Retained earnings. The Company elected the package of practical expedients and implemented internal controls and system functionality to enable the preparation of financial information upon adoption. liabilities recorded on The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term the Company's consolidated balance sheet related to operating leases. Accounting for finance leases remained substantially unchanged. In addition, the adoption of the standard did not have a material impact on the Company's results of operations or cash flows. See Note 10. 51 In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This guidance provided entities the option to reclassify stranded tax effects caused by the newly-enacted U.S. Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. As a result, the Company adopted this guidance effective January 1, 2019, and recorded a net increase to opening Retained earnings and a decrease to opening Accumulated other comprehensive income of $529 million, due to the cumulative impact of adopting the new guidance. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED Income Taxes from taxes recognizing deferred In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This guidance removes certain exceptions for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This guidance is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company is currently evaluating the provisions of this guidance. Financial Instruments - Credit Losses In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This guidance replaces the current incurred loss impairment method with a method that reflects expected credit losses. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company has substantially completed its evaluation of the provisions of this guidance and determined it will not have a material impact on the consolidated statement of position, results of operations or cash flows. The Company will adopt this guidance using the modified retrospective approach on its effective date of January 1, 2020. As a result of using this approach, the Company will recognize the cumulative effect adjustment to the opening balance of retained earnings for initial application of the guidance. NOTE 3 - REVENUE RECOGNITION DISAGGREGATED REVENUE A geographic disaggregation of revenues across our company segmentation in the following tables provides information to assist in evaluating the nature, timing and uncertainty of revenue and cash flows and how they may be impacted by economic factors. Reportable Segments Primary Geographical Markets (a) United States EMEA Pacific Rim and Asia Americas, other than U.S. Total Operating Segments North American Industrial Packaging EMEA Industrial Packaging Brazilian Industrial Packaging European Coated Paperboard Global Cellulose Fibers North American Printing Papers Brazilian Papers European Papers Indian Papers Intra-segment Eliminations Corporate & Inter-segment Sales Total $ $ 2019 Industrial Packaging Global Cellulose Fibers Printing Papers Corporate & Intersegment Total $ 12,668 $ 2,148 $ 1,912 $ 220 $ 16,948 1,692 65 901 254 149 — 1,323 189 867 (11) 12 (13) 3,258 415 1,755 15,326 $ 2,551 $ 4,291 $ 208 $ 22,376 13,509 $ — $ — $ — $ 1,335 235 365 — — — — — (118) — — — — 2,551 — — — — — — — — — — 1,956 967 1,250 160 (42) — $ 15,326 $ 2,551 $ 4,291 $ — — — — — — — — — 208 208 13,509 1,335 235 365 2,551 1,956 967 1,250 160 (160) 208 $ 22,376 (a) Net sales are attributed to countries based on the location of the reportable segment making the sale. 52 Reportable Segments Primary Geographical Markets (a) United States EMEA Pacific Rim and Asia Americas, other than U.S. Total Operating Segments North American Industrial Packaging EMEA Industrial Packaging Brazilian Industrial Packaging European Coated Paperboard Global Cellulose Fibers North American Printing Papers Brazilian Papers European Papers Indian Papers Intra-segment Eliminations Corporate & Inter-segment Sales Total $ $ 2018 Industrial Packaging Global Cellulose Fibers Printing Papers Corporate & Intersegment Total $ 13,167 $ 2,336 $ 1,903 $ 203 $ 17,609 1,704 142 887 304 179 — 1,330 245 897 (17) 39 (13) 3,321 605 1,771 15,900 $ 2,819 $ 4,375 $ 212 $ 23,306 14,187 $ — $ — $ — $ 1,355 232 359 — — — — — (233) — — — — 2,819 — — — — — — — — — — 1,956 978 1,252 202 (13) — $ 15,900 $ 2,819 $ 4,375 $ — — — — — — — — — 212 212 14,187 1,355 232 359 2,819 1,956 978 1,252 202 (246) 212 $ 23,306 (a) Net sales are attributed to countries based on the location of the reportable segment making the sale. REVENUE CONTRACT BALANCES The opening and closing balances of the Company's contract assets and current contract liabilities are as follows: In millions Beginning Balance - January 1, 2019 Ending Balance - December 31, 2019 Increase / (Decrease) A contract asset is created when the Company recognizes revenue on its customized products prior to having an unconditional right to payment from the customer, which generally does not occur until title and risk of loss passes to the customer. A contract liability is created when customers prepay for goods prior to the Company transferring those goods to the customer. The contract liability is reduced once control of the goods is transferred to the customer. The majority of our customer prepayments are received during the fourth quarter each year for goods that will be transferred to customers over the following twelve months. The difference between the opening and closing balances of the Company's contract assets and contract liabilities primarily results from the difference between 53 Contract Assets (Short-Term) Contract Liabilities (Short-Term) $ $ 395 $ 393 (2) $ 56 56 — the price and quantity at comparable points in time for goods which we have an unconditional right to payment or receive pre-payment from the customer, respectively. PERFORMANCE JUDGEMENTS OBLIGATIONS AND SIGNIFICANT International Paper's principal business to manufacture and sell fiber-based packaging, pulp and paper goods. As a general rule, none of our businesses provide equipment installation or other ancillary services outside of producing and shipping packaging, pulp and paper goods to customers. is The nature of the Company's contracts can vary based on the business, customer type and region; however, in all instances it is International Paper's customary business practice to receive a valid order from the customer, in which each parties' rights and related payment terms are clearly identifiable. Contracts or purchase orders with customers could include a single type of product or it could include multiple types/grades of products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. The Company does not bundle prices; however, we do negotiate with customers on pricing and rebates for the same products based on a variety of factors (e.g. level of contractual volume, geographical location, etc.). Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product. NOTE 4 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 were converted into common shares. NOTE 5 OTHER COMPREHENSIVE INCOME There are no adjustments required to be made to net income for purposes of computing basic and diluted EPS. 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 2019 2018 2017 Earnings (loss) from continuing operations attributable to International Paper common shareholders Weighted average common shares outstanding Effect of dilutive securities: $ 1,225 $ 1,667 $ 2,110 395.3 409.1 412.7 Restricted performance share plan 3.5 5.1 5.0 Weighted average common shares outstanding – assuming dilution 398.8 414.2 417.7 Basic earnings (loss) per share from continuing operations Diluted earnings (loss) per share from continuing operations $ 3.10 $ 4.07 $ 5.11 $ 3.07 $ 4.02 $ 5.05 The following table presents changes in AOCI, net of tax, reported in the consolidated financial statements for the years ended December 31: In millions Defined Benefit Pension and Postretirement Adjustments Balance at beginning of period Other comprehensive income (loss) before reclassifications Reclassification of stranded tax effects Amounts reclassified from accumulated other comprehensive income Balance at end of period Change in Cumulative Foreign Currency Translation Adjustments Balance at beginning of period Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest Balance at end of period Net Gains and Losses on Cash Flow Hedging Derivatives Balance at beginning of period Other comprehensive income (loss) before reclassifications Reclassification of stranded tax effects Amounts reclassified from accumulated other comprehensive income Balance at end of period Total Accumulated Other Comprehensive Income (Loss) at End of Period 2019 2018 2017 $ $ (1,916) $ 2 (527) (2,527) $ 22 — 164 589 (3,072) 59 — 486 (2,277) (1,916) (2,527) (2,581) 14 102 — (2,465) (3) 4 (2) 4 3 (4,739) $ (2,111) (475) 2 3 (2,581) 5 (10) — 2 (3) (4,500) $ (2,287) 178 (1) (1) (2,111) (3) 15 — (7) 5 (4,633) 54 Reclassifications out of AOCI for the three years ended December 31 were as follows: In millions Defined benefit pension and postretirement items: Prior-service costs Actuarial gains/(losses) Total pre-tax amount Tax (expense)/benefit Net of tax Reclassification of stranded tax effects Total, net of tax Change in cumulative foreign currency translation adjustments: Business acquisitions/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 Reclassification of stranded tax effects Total, net of tax Amount Reclassified from Accumulated Other Comprehensive Income 2019 2018 2017 Location of Amount Reclassified from AOCI $ (10) $ (11) $ (33) (a) Non-operating pension expense (208) (218) 54 (164) 527 363 (102) — (102) (6) (6) 2 (4) 2 (2) (774) (785) 196 (589) — (589) (2) — (2) (3) (3) 1 (2) — (2) (733) (a) Non-operating pension expense (766) 280 (486) — (486) 1 (b) — 1 Retained Earnings Net (gains) losses on sales and impairment of businesses and Cost of products sold 9 (c) Cost of products sold 9 (2) 7 — 7 Retained Earnings Total reclassifications for the period, net of tax $ 259 $ (593) $ (478) (a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 19 for additional details). (b) Amounts for 2018 were reclassed to Discontinued operations, net of taxes. (c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 17 for additional details). 2018: During 2018, restructuring and other charges, net, totaling $29 million before taxes were recorded. These charges included: In millions EMEA packaging restructuring (a) Gain on sale of investment in Liaison Technologies Inc. Early debt extinguishment costs (see Note 16) Riverdale mill conversion severance Total 2018 $ 47 (31) 10 3 29 $ (a) Includes $33 million of severance, $6 million in accelerated depreciation, $2 million in accelerated amortization and $6 million in other charges in conjunction with the optimization of our EMEA Packaging business. The majority of the severance charges recorded were paid throughout the year. NOTE 6 RESTRUCTURING CHARGES AND OTHER ITEMS 2019: During 2019, restructuring and other charges, net, totaling $57 million before taxes were recorded. These charges included: In millions Overhead cost reduction initiative (a) EMEA packaging restructuring (b) Early debt extinguishment costs (see Note 16) Total 2019 21 15 21 57 $ $ (a) Includes pre-tax charges of $11 million, $6 million and $4 million in Corporate, the Printing Papers segment and the Global Cellulose Fibers segment, respectively, for severance related to an overhead cost reduction initiative. The majority of the severance charges will be paid in 2020. (b) Includes $14 million of severance and $1 million in other charges in conjunction with the restructuring of our EMEA Packaging business. The majority of the severance charges will be paid in 2020. 55 2017: During 2017, restructuring and other charges, net, totaling $67 million before taxes were recorded. These charges included: In millions Early debt extinguishment costs (see Note 16) Gain on sale of investment in ArborGen Other Total 2017 83 (14) (2) 67 $ $ NOTE 7 ACQUISITIONS EMEA PACKAGING BUSINESSES 2019: On June 28, 2019, the Company completed the acquisition of two packaging businesses located in Portugal (Ovar) and France (Torigni and Cabourg) from DS Smith Packaging. The total purchase consideration, inclusive of working capital adjustments, was approximately €71 million (approximately $81 million at current exchange rates). The following table summarizes the consideration paid and the amounts of the assets and liabilities assumed as of June 28, 2019: In millions June 28, 2019 Cash and temporary investments $ Accounts and notes receivable Inventory Plants, properties and equipment Goodwill Intangible assets Right of use assets Deferred charges and other assets Total assets acquired Short-term debt Accounts payable and accrued liabilities Other current liabilities Deferred income taxes Long-term lease obligations Other Liabilities Total liabilities assumed Net assets acquired $ 2 22 8 40 23 16 3 1 115 2 21 4 3 3 1 34 81 Since the date of acquisition, Net sales of $50 million and Earnings (loss) from continuing operations before income taxes and equity earnings of $4 million from the acquired businesses have been included in the Company's consolidated statement of operations for the year ended December 31, 2019. The allocation of the consideration paid is preliminary and could be revised as a result of additional information obtained regarding assets acquired and liabilities assumed, and revisions to provisional estimates of fair 56 values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and acquired intangible assets. Adjustments to provisional amounts will be finalized as new information becomes available, but within the adjustment period of up to one year from the acquisition date. Pro forma information has not been included as it is impracticable to obtain the information due to the lack of availability of historical U.S. GAAP financial data. The results of the operations of these businesses do not have a material effect on the Company's consolidated results of operations. TANGIER, MOROCCO FACILITY 2017: On June 30, 2017, the Company completed the acquisition of Europac's Tangier, Morocco facility, a for €40 million corrugated packaging (approximately $46 million using the June 30, 2017 exchange rate). After working capital and other post- close adjustments, final consideration exchanged was €33 million (approximately $38 million using the June 30, 2017 exchange rate). facility, The following table summarizes the final fair value assigned to assets and liabilities acquired as of June 30, 2017: In millions June 30, 2017 Cash and temporary investments $ Accounts and notes receivable Inventory 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 $ 1 7 3 31 4 5 4 55 4 11 2 17 38 NOTE 8 DIVESTITURES AND IMPAIRMENTS OF BUSINESSES 2019: On October 30, 2019, the Company closed the previously announced sale of its controlling interest in International Paper APPM Limited (APPM) to West Coast Paper Mills Limited (WCPM). The net proceeds received for the sale totaled $82 million. International Paper remains a passive investor retaining a 20% interest in APPM until such time that IP sells its remaining shares. The Company will account for its retained investment at fair value. As a result of the transaction, a net pre-tax impairment charge of $159 million ($157 million after taxes) was recorded during 2019. This charge included $97 million related to a loss for the write-off of the cumulative foreign currency translation of APPM and a $62 million loss related to the write-off of the long-lived assets of APPM. This charge is included in the Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations and is included in the results for the Printing Papers segment. A loss of $9 million (before and after taxes) has been allocated to the noncontrolling interest related to the impairment of the long-lived assets of APPM. The fair value of the Company's retained investment in APPM was $32 million at December 31, 2019. 2018: During 2018, a determination was made that the current carrying value of the long-lived assets of the Brazil Packaging business exceeded their estimated fair value due to a change in the outlook for the business. Management engaged a third party to assist with determining the fair value of the business and the fixed assets. The fair value of the business was calculated using a probability-weighted approach based on discounted future cash flows, market multiples, and transaction multiples and the fair value of the fixed assets was determined using a market approach. As a result, a pre-tax charge of $122 million ($81 million, net of tax) was recorded related to the impairment of an intangible asset and fixed assets. This charge is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations and is included in the results for the Industrial Packaging segment. In the fourth quarter of 2018, the Company announced that it was exploring strategic options for its Brazil Packaging business. 2017: On September 7, 2017, the Company completed the sale of its foodservice business in China to Huhtamaki Hong Kong Limited. Proceeds received totaled approximately RMB 129 million ($18 million using the September 30, 2017 exchange rate). Under the terms of the transaction, and after post-closing adjustments, received approximately RMB 49 million in exchange for its ownership interest in two China foodservice entities and RMB 80 million for the sale of notes receivable from the acquired entities. International Paper DISCONTINUED OPERATIONS transferred 2017: On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which included its North American Coated Paperboard and Foodservice businesses, to Graphic Packaging International Partners, LLC (GPIP), a subsidiary of Graphic Packaging Holding Company, in exchange for a 20.5% ownership interest in GPIP. GPIP subsequently the North American Consumer Packaging business to Graphic Packaging International, LLC (GPI), a wholly-owned subsidiary of GPIP. International Paper is accounting for its ownership interest in the combined business under the equity method. The Company determined the fair value of its investment in the combined business to be $1.1 billion and recorded a pre-tax gain of $488 million ($364 million, net of tax) in 2018. The fair value was calculated using a market approach using inputs classified as Level 2 and Level 3 within the fair value hierarchy, which is further defined in Note 17. in tax, included All current and historical operating results for North in American Consumer Packaging are 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 and Equity Earnings reconciled to Discontinued Operations, net of tax, related to the transfer of the North American Consumer Packaging business for all prior periods presented in the consolidated statement of operations: In millions 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 (Gain) loss on transfer of business Interest expense, net Earnings (Loss) Before Income Taxes and Equity Earnings Income tax provision (benefit) 2018 2017 $ — $ 1,559 — 25 — — — (488) — 463 118 1,179 110 80 126 11 — 1 52 18 34 Discontinued Operations, Net of Taxes $ 345 $ Subsequent to the announced agreement in June 2017, a determination was made that the current book value of the asset group exceeded its estimated fair value of $7 million, which was the agreed upon selling price. As a result, a pre-tax charge of $9 million was recorded during the second quarter of 2017, to write down the long-lived assets of this business to their estimated fair value. Amounts related to this business included in the Company's statement of operations were immaterial for all periods presented. 57 Total cash provided by (used for) operations related to the North American Consumer Packaging business of $(25) million and $207 million for 2018 and 2017 is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash used for investing activities related to the North American Consumer Packaging business of $40 million and $111 million for 2018 and 2017 is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows. NOTE 9 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 $335 million and $402 million at December 31, 2019 and 2018, respectively. Non-cash additions to plants, property and equipment included within accounts payable were $164 million, $135 million and $275 million at December 31, 2019, 2018 and 2017, respectively. Annual straight-line depreciable lives generally are, for buildings - 20 to 40 years, and for machinery and equipment - 3 to 20 years. Depreciation expense was $1.2 billion the years ended the each of December 31, 2019, 2018 and 2017, respectively. Cost of products sold excludes depreciation and amortization expense. for ACCOUNTS AND NOTES RECEIVABLE INTEREST Accounts and notes receivable, net, by classification were: In millions at December 31 2019 2018 Accounts and notes receivable: Trade Other Total INVENTORIES In millions at December 31 Raw materials Finished pulp, paper and packaging products Operating supplies Other Inventories $ 3,020 $ 3,249 260 272 $ 3,280 $ 3,521 2019 2018 $ 298 $ 260 1,192 1,241 659 59 641 99 $ 2,208 $ 2,241 International Paper’s U.S. The last-in, first-out inventory method is used to value most of inventories. Approximately 71% of total raw materials and finished products inventories were valued using this method. The last-in, first-out inventory reserve was $295 million and $329 million at December 31, 2019 and 2018, respectively. PLANTS, PROPERTIES AND EQUIPMENT In millions at December 31 2019 2018 Pulp, paper and packaging facilities $ 32,292 $ 32,329 Other properties and equipment Gross cost Less: Accumulated depreciation 1,224 1,232 33,516 33,561 20,512 20,494 Plants, properties and equipment, net $ 13,004 $ 13,067 Interest payments of $754 million, $772 million and $782 million were made during years ended December 31, 2019, 2018 and 2017, respectively. the Amounts related to interest were as follows: In millions Interest expense Interest income Capitalized interest costs 2019 2018 2017 $ 706 $ 734 $ 215 29 198 30 758 186 25 ASSET RETIREMENT OBLIGATIONS At December 31, 2019 and 2018, we had recorded liabilities of $96 million and $86 million, respectively, related to asset retirement obligations. NOTE 10 LEASES International Paper leases various real estate, including certain operating facilities, warehouses, office space and land. The Company also leases material handling equipment, vehicles, and certain other equipment. The Company's leases have remaining lease terms of one year to 97 years. COMPONENTS OF LEASE EXPENSE In millions Operating lease costs, net Variable lease costs Short-term lease costs, net Finance lease cost Amortization of lease assets Interest on lease liabilities Total lease cost, net December 31, 2019 $ $ 132 70 59 12 5 278 58 SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO LEASES MATURITY OF LEASE LIABILITIES Classification December 31, 2019 In millions Operating Leases Financing Leases Total In millions Assets Operating lease assets Total leased assets Liabilities Current Operating Finance Noncurrent Operating Right of use assets Finance lease assets Plants, properties and equipment, net (a) $ $ Other current liabilities $ Notes payable and current maturities of long-term debt Long-term lease obligations Finance Long-term debt Total lease liabilities $ 434 103 537 134 12 304 88 538 (a) Finance leases are recorded net of accumulated amortization of $40 million. LEASE TERM AND DISCOUNT RATE In millions December 31, 2019 Weighted average remaining lease term (years) Operating leases Finance leases Weighted average discount rate Operating leases Finance leases 9.8 years 10.9 years 3.06% 4.69% SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES In millions December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows related to operating leases $ Operating cash flows related to financing leases Financing cash flows related to finance leases Right of use assets obtained in exchange for lease liabilities Operating leases Finance leases 147 5 9 162 11 59 2020 2021 2022 2023 2024 Thereafter Total lease payments Less imputed interest Present value of lease liabilities $ 147 $ 110 75 42 24 103 501 63 16 $ 15 14 13 10 66 134 34 163 125 89 55 34 169 635 97 $ 438 $ 100 $ 538 At December 31, 2018, future minimum commitments under existing non-cancelable operating leases were as follows: total In millions Lease obligations 2019 2020 2021 2022 2023 Thereafter 160 125 77 49 28 118 NOTE 11 EQUITY METHOD INVESTMENTS The Company accounts for the following investments under the equity method of accounting. GRAPHIC PACKAGING INTERNATIONAL PARTNERS, LLC transferred On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which includes its North American Coated Paperboard and Foodservice businesses, to Graphic Packaging International Partners, LLC (GPIP), a subsidiary of Graphic Packaging Holding Company, in exchange for a 20.5% ownership interest in GPIP. GPIP subsequently the North American Consumer Packaging business to Graphic Packaging International, LLC (GPI), a wholly-owned subsidiary of GPIP that holds the assets of the combined business. As of December 31, 2019, the Company's ownership percentage in GPIP was 21.6%. The Company recorded equity earnings, net of taxes, of $46 million for each of the years ended December 31, 2019 and 2018. The Company received cash dividends from GPIP of $27 million and $25 million in 2019 and 2018, respectively. At both December 31, 2019 and 2018, the Company's investment in GPIP was $1.1 billion, which was $529 million and $562 million more than the Company's proportionate share of the entity's underlying net assets at December 31, 2019 and 2018, respectively. The difference primarily relates to the basis difference between fair value of our investment and the underlying net assets and is generally amortized in equity earnings over a period consistent with the underlying long-lived assets. the Management engaged a third party to assist with determining the fair value of the intangible assets and the fixed assets. The fair value of the intangible assets were calculated using income and market approaches and the fair value of the fixed assets was calculated using a cost approach. The fair values were determined using inputs classified as Level 2 and Level 3 within the fair value hierarchy, which is further defined in Note 17. The Company is party to various agreements with GPI under which it sells fiber and other products to GPI. Sales under these agreements were $274 million and $240 million for the years ended December 31, 2019 and 2018, respectively. On January 29, 2020, the Company exchanged approximately 19.0% of the aggregate units owned by the Company for an aggregated price of $250 million. After this transaction, the Company's ownership percentage in GPIP is approximately 18.3%. The Company expects to record a gain on the exchange in the first quarter of 2020. Summarized financial information for GPIP is presented in the following tables: Balance Sheet In millions Current assets Noncurrent assets Current liabilities Noncurrent liabilities Income Statement In millions Net sales Gross profit Income from continuing operations Net income ILIM S.A. (Ilim) $ $ 2019 2018 $ 1,796 5,482 1,178 3,244 1,757 5,292 1,148 3,156 2019 2018 6,160 1,093 333 334 946 336 337 The Company also holds a 50% equity interest in Ilim, which has subsidiaries whose primary operations are in Russia. The Company recorded equity earnings, net of taxes, of $207 million, $290 million, and $183 million (losses) includes an after-tax in 2019, 2018, and 2017, respectively, for Ilim. Equity earnings foreign exchange (loss) gain of $32 million, $(82) million, and $15 million in 2019, 2018 and 2017, respectively, primarily on the remeasurement of U.S. dollar- denominated net debt. The Company received cash dividends from the joint venture of $246 million and $128 million in 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company's investment in Ilim, which is recorded in Investments in the consolidated balance sheet, was $508 million and $478 million, respectively, which was $136 million and $145 million, respectively, more than the Company's proportionate share of the joint venture's underlying net assets. The differences primarily relate to currency translation adjustments and the basis difference between the fair value of our investment at acquisition and the underlying net assets. The Company is party to a joint marketing agreement with JSC Ilim Group, a the Company Ilim, under which subsidiary of purchases, markets and sells paper produced by JSC Ilim Group. Purchases under this agreement were $215 million, $214 million and $205 million for the years ended December 31, 2019, 2018 and 2017, respectively. Summarized financial information for Ilim is presented in the following tables: Balance Sheet In millions Current assets Noncurrent assets Current liabilities Noncurrent liabilities $ 6,023 Noncontrolling interests $ 2019 2018 $ 804 2,813 1,015 1,844 16 981 1,710 545 1,470 11 Income Statement In millions Net sales Gross profit Income from continuing operations Net income 2019 2018 2017 $ 2,189 1,025 438 424 $ 2,713 $ 1,549 592 571 2,150 1,047 379 362 The audited U.S. GAAP financial statements for Ilim are included in Exhibit 99.1 to this Form 10-K. 60 NOTE 12 GOODWILL AND OTHER INTANGIBLES GOODWILL The following table presents changes in the goodwill balances as allocated to each business segment for the years ended December 31, 2019 and 2018: In millions Balance as of December 31, 2017 Goodwill Accumulated impairment losses Currency translation and other (a) Goodwill additions/reductions Balance as of December 31, 2018 Goodwill Accumulated impairment losses Currency translation and other (a) Goodwill additions/reductions Accumulated impairment loss additions/reductions Balance as of December 31, 2019 Goodwill Accumulated impairment losses Total Industrial Packaging Global Cellulose Fibers Printing Papers Total $ 3,382 $ 52 $ 2,150 $ 5,584 (296) 3,086 (1) (2) (b) 3,379 (296) 3,083 — 31 (b)(c) — 3,410 (296) — (1,877) 52 — — 52 — 52 — — (52) (e) 52 (52) 273 (34) — 2,116 (1,877) 239 (6) (112) (d) 112 (d) 1,998 (1,765) (2,173) 3,411 (35) (2) 5,547 (2,173) 3,374 (6) (81) 60 5,460 (2,113) $ 3,114 $ — $ 233 $ 3,347 (a) Represents the effects of foreign currency translations and reclassifications. (b) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in the U.S. (c) Reflects the goodwill for the acquisitions of Industrial Packaging box plants in EMEA of which $28 million is considered provisional. (d) Reflects the reclassification of India goodwill and related impairment losses to held for sale prior to the sale of the business. (e) Reflects the impairment of the Global Cellulose Fibers reporting unit. The Company performed its annual testing of its reporting units for possible goodwill impairments by applying the qualitative assessment to its North America Industrial Packaging, European Papers, Russian Papers, and Brazilian Papers reporting units and the quantitative goodwill impairment test to its Global Cellulose Fibers and EMEA Industrial Packaging reporting units as of October 1, 2019. For the current year evaluation, the Company assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units under the qualitative assessment for the reporting units listed above and the results of the qualitative assessments indicated that it is not more likely than not that the fair values of its North America Industrial Packaging, European Papers, Russian Papers, and Brazilian Papers reporting units were less than their carrying values. The company also performed the quantitative goodwill impairment test which included comparing the carrying amount of the Global Cellulose Fibers and EMEA Industrial Packaging reporting units to their estimated fair value. The Company performed the quantitative goodwill impairment test for Global Cellulose Fibers due to the reporting unit's outlook and Industrial Packaging due to the changes in the reporting unit's asset for EMEA 61 base as a result of strategic capital projects and acquisitions since the previous quantitative goodwill impairment test. The Company calculated the estimated fair value of its Global Cellulose Fibers and EMEA Industrial Packaging reporting units using a probability- weighted approach based on discounted future cash flows, market multiples and transaction multiples. The carrying amount did not exceed the estimated fair value of the EMEA Industrial Packaging reporting unit. The carrying amount did exceed the estimated fair value of the Global Cellulose Fibers reporting unit, and it was determined that all of the goodwill in the reporting unit, totaling $52 million, was impaired. This charge is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. The decline in the fair value of Global Cellulose Fibers and resulting impairment charge was due to a change in the outlook of the Global Cellulose Fibers reporting unit's operations. In addition, the Company considered whether there were any events or circumstances outside of the annual evaluation that would reduce the fair value of its reporting units below their carrying amounts and necessitate a goodwill impairment evaluation. In consideration of all relevant factors, there were no indicators that would require goodwill impairment subsequent to October 1, 2019. OTHER INTANGIBLES Identifiable intangible assets comprised the following: In millions at December 31 Customer relationships and lists Non-compete agreements Tradenames, patents and trademarks, and developed technology Land and water rights Software Other Total 2019 2018 Gross Carrying Amount Accumulated Amortization Net Intangible Assets Gross Carrying Amount Accumulated Amortization Net Intangible Assets $ $ 560 $ — 170 8 26 18 782 $ 275 $ — 102 2 25 10 414 $ 285 $ — 68 6 1 8 368 $ 542 $ 67 174 8 26 30 847 $ 247 $ 67 90 2 25 23 454 $ 295 — 84 6 1 7 393 The Company recognized the following amounts as amortization expense related to intangible assets: In millions Amortization expense related to intangible assets 2019 2018 2017 $ 58 $ 59 $ 77 Based on current intangibles subject to amortization, estimated amortization expense for each of the succeeding years is as follows: 2020 – $50 million, 2021 – $48 million, 2022 – $46 million, 2023 – $41 million, 2024 – $41 million, and cumulatively thereafter – $136 million. NOTE 13 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. 2019 2018 2017 $ 1,342 $ 1,450 $ 262 331 297 551 Earnings (loss) from continuing operations before income taxes and equity earnings $ 1,604 $ 1,781 $ 848 On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation from income taxes on dividends transition tax (the Transition Tax) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how AMT credits can be realized; (6) capital expensing; (7) the deduction on U.S. manufacturing eliminating activities; and (8) creating new limitations on deductible interest expense and executive compensation. In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional net tax benefit of $1.22 billion in the period ending December 31, 2017. The net tax benefit primarily consisted of a net tax benefit for the re-measurement of U.S. deferred taxes of $1.454 billion and an expense for the Transition Tax of $231 million. During the period ended December 31, 2018, we recorded an additional net tax benefit of $36 million associated with the one-time effects of the Tax Act. 62 In millions 2019 2018 2017 Earnings (loss) from continuing operations before income taxes and equity earnings $ 1,604 $ 1,781 $ 848 Statutory U.S. income tax rate 21% 21% 35 % Tax expense (benefit) using statutory U.S. income tax rate State and local income taxes Impact of rate differential on non-U.S. permanent differences and earnings Foreign valuation allowance Tax expense (benefit) on manufacturing activities Non-deductible business expenses Non-deductible impairments Tax audits Deemed repatriation, net of foreign tax credits U.S. federal tax rate change Foreign derived intangible income deduction US tax on non-U.S. earnings (GILTI and Subpart F) Foreign tax credits General business and other tax credits Other, net 337 6 31 203 — 20 31 — 1 — 2 36 (2) (33) 2 374 72 35 — (1) 27 — 28 (25) (13) (25) 19 (15) (26) (5) 297 (7) (36) — 23 7 — — 231 (1,451) — 44 (96) (86) (11) Income tax provision (benefit) $ 634 $ 445 $ (1,085) Effective income tax rate 40% 25% (128)% The provision (benefit) for income taxes from continuing operations (excluding noncontrolling interests) by taxing jurisdiction was as follows: In millions 2019 2018 2017 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. Income tax provision (benefit) $ $ $ $ $ 271 $ 227 $ 29 122 37 165 422 $ 429 $ (73) (23) 112 16 44 $ 12 $ (1,150) (23) 191 212 $ 634 $ 50 (46) 9 40 16 $ (1,101) 445 $ (1,085) The Company’s deferred income tax provision (benefit) includes a $44 million benefit, a $13 million benefit and a $1.459 billion benefit for 2019, 2018 and 2017, respectively, for the effect of various changes in non- U.S. and U.S. federal and state tax rates. International Paper made income tax payments, net of refunds, of $349 million, $388 million and $7 million in 2019, 2018 and 2017, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows: 63 The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2019 and 2018, were as follows: A reconciliation of the beginning and ending amount of unrecognized the years ended December 31, 2019, 2018 and 2017 is as follows: tax benefits for In millions Deferred income tax assets: 2019 2018 In millions 2019 2018 2017 Balance at January 1 $ (220) $ (188) $ (98) Postretirement benefit accruals $ 90 $ (Additions) reductions for tax positions related to current year (Additions) for tax positions related to prior years Reductions for tax positions related to prior years Settlements Expiration of statutes of limitations Currency translation adjustment (5) (6) 5 31 3 3 (7) (54) (37) (40) 5 2 2 3 4 6 1 (7) Balance at December 31 $ (189) $ (220) $ (188) If the Company were to prevail on the unrecognized tax benefits recorded, substantially all of the balances at December 31, 2019, 2018 and 2017 would benefit the effective tax rate. 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 $21 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at both December 31, 2019 and 2018, respectively. The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2006 through 2018 remain open and subject to examination by the relevant faces tax authorities. The Company challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature, and amount of deductions and the allocation of income among various tax jurisdictions. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $53 million during the next twelve months. frequently Pension obligations Tax credits Net operating and capital loss carryforwards Compensation reserves Lease obligations Environmental reserves Other Gross deferred income tax assets Less: valuation allowance (a) Net deferred income tax asset Deferred income tax liabilities: Intangibles Investments Right of use assets 89 465 291 594 191 — 78 86 421 290 621 181 106 93 126 $ $ $ 1,928 $ 1,794 (691) (441) 1,237 $ 1,353 (152) $ (265) (106) (152) (255) — Plants, properties and equipment (1,866) (1,826) Forestlands, related installment sales, and investment in subsidiary (1,407) (1,453) Gross deferred income tax liabilities $ (3,796) $ (3,686) Net deferred income tax liability $ (2,559) $ (2,333) (a) The net change in the total valuation allowance for the years ended December 31, 2019 and 2018 was an increase of $250 million and an increase of $12 million, respectively. The net change in the current year is primarily due to tax law changes in foreign jurisdictions impacting future utilization of deferred tax assets of $203 million. Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred charges and other assets and Deferred income taxes. Of the $1.4 billion of deferred tax liabilities for forestlands, related installment sales, and investment in subsidiary, $884 million is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $485 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 15). 64 The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by International Paper do Brasil Ltda., a wholly-owned subsidiary of the Company. The Company received assessments for the tax years 2007-2015 totaling approximately $146 million in tax, and $387 million in interest and penalties as of December 31, 2019 (adjusted for variation in currency exchange rates). After a previous favorable ruling challenging the basis for these assessments, we received unfavorable decisions in October 2018 and November 2019 from the Brazilian Administrative Council of Tax Appeals. The Company has appealed and intends to further appeal these and any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. The Company believes that it has appropriately evaluated the transaction underlying these assessments, and has concluded based on Brazilian tax law, that its tax position would be sustained. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015. The Company provides for foreign withholding taxes and any applicable U.S. state income taxes on earnings intended to be repatriated from non-U.S. subsidiaries, which we believe will be limited in the future to each year's current earnings. No provision for these taxes on approximately $2.2 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2019 has been made, as these earnings are considered indefinitely invested. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted in a taxable manner is not practicable. If management decided to monetize the Company’s foreign investments, we would recognize the tax cost related to the excess of the book value over the tax basis of those investments. This would include foreign withholding taxes and any applicable U.S. Federal and state income taxes. Determination of the tax cost that that would be incurred upon monetization of the Company’s foreign investments is not practicable; however, we do not believe it would be material. 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 (a) U.S. federal, non- U.S. and state tax credit carryforwards (a) U.S. federal and state capital loss carryforwards (a) Total Less: valuation allowance (a) Total, net 2020 Through 2029 2030 Through 2039 Indefinite Total $ 55 $ 48 $ 424 $ 527 — 94 118 290 76 160 — 18 12 — 291 $ 78 $ 542 $ — — 911 (198) (44) (393) (635) 93 $ 34 $ 149 $ 276 $ $ (a) State amounts are presented net of federal benefit. NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES GUARANTEES indemnify buyers with 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 tax and environmental liabilities, breaches of representations and warranties, and other matters. Where liabilities for such matters are determined to be probable and reasonably estimable, accrued liabilities are recorded at the time of sale as a cost of the transaction. respect to 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 65 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 associated with these environmental remediation matters, including those described herein, to be approximately $157 million ($166 million undiscounted) in the aggregate as of December 31, 2019. Other than as described below, completion of required environmental 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, the estimated cost of which is reflected in the overall remediation reserve for the site of $46 million as of December 31, 2019. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In June 2019, the EPA issued a revised proposed plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the reserve referenced above. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other PRPs 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, in excess of the liability noted above 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. • Operable Unit 5, Area 1: 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 known as Operable Unit 5, Area 1, and (ii) demanding reimbursement of EPA past costs totaling $37 million, including $19 million in past costs previously demanded by the 66 EPA. In December 2016, the EPA issued a unilateral administrative order to the Company and other PRPs to perform the remedy. The Company responded to the unilateral administrative order, agreeing to comply with the order subject to its sufficient cause defenses. • Operable Unit 5, Area 2: In September 2017, the EPA issued a Record of Decision selecting the final remedy for a portion of the site known as Operable Unit 5, Area 2, but has not yet issued a special notice letter for implementing the remedy. • Operable Unit 1: 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, which is also known as Operable Unit 1. The Record of Decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. In February 2017, the EPA informed the Company that it would make other arrangements for the performance of the remedial design. As noted below, the Company is involved in allocation/ apportionment litigation with regard to the site. In addition, in December 2019, the United States published notice in the Federal Register of a proposed consent decree with NCR Corporation (one of the parties to the allocation/apportionment litigation described below), the State of Michigan and natural resource trustees under which NCR would make payments of more than $100 million and perform work at the Site at an estimated cost of $135.7 million. The public comment period with respect to the proposed consent decree closes in February 2020. The Company’s CERCLA liability has not been finally determined with respect to any portions of the site, and except as noted above, the Company has declined to perform any work or reimburse the EPA at this time. Accordingly, it is premature to predict the outcome or estimate our maximum reasonably possible loss or range of loss with respect to this site. We have a recorded liability for future remediation costs at the site that are probable and reasonably estimable, and it remains reasonably possible that additional losses in excess of this recorded liability could be material. 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. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. 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. In June 2018, the Court issued its Final Judgment and Order, which fixed the past cost amount at approximately $50 million (plus interest to be determined) and allocated to the Company a 15% share of responsibility for those past costs. The Court did not address responsibility for future costs in its decision. In July 2018, the Company and each of the other parties filed notices appealing the Final Judgment and prior orders incorporated into that Judgment. The proposed consent decree with NCR described above, if entered, would result in the termination of NCR’s involvement in the appeal. Harris County: International Paper and McGinnis Industrial Maintenance Corporation (MIMC), a subsidiary of Waste Management, Inc. (WMI), are PRPs at the San Jacinto River Waste Pits Superfund Site in Harris County, Texas. The PRPs have been actively participating in the activities at the site and share the costs of these activities. In September 2016, the EPA issued a proposed remedial action plan (PRAP) for the site, which identified 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 impoundment that requires offsite disposal. In January 2017, the PRPs submitted comments on the PRAP. On October 11, 2017, the EPA issued a Record of Decision (ROD) selecting the final remedy for the site: removal and relocation of the waste material from both the northern and southern impoundments. The EPA did not specify the methods or practices needed to perform this work. While the EPA’s selected remedy was accompanied by a cost estimate of approximately $115 million ($105 million for the northern impoundment, and $10 million for the southern impoundment), we do not believe that estimate provides a reasonable basis for accrual under GAAP because the estimate was based on a technological method for performing the work that we believe is not feasible with respect to the northern impoundment. Subsequent to the issuance of the ROD, there have been numerous meetings between the EPA and the PRPs, and the Company continues to work with the EPA and MIMC/WMI to develop the remedial design. To this end, in April 2018, the PRPs entered into an Administrative Order on Consent (AOC) with the EPA, agreeing to work together to develop the remedial design over the subsequent 29 months. The AOC does not include any agreement to perform waste removal or other construction activity at the site. Rather, it involves adaptive management techniques and a pre-design investigation, the objectives of which include filling data gaps (including but not limited to post-Hurricane Harvey technical data generated prior to the ROD and not incorporated into the selected remedy), refining areas and volumes of materials to be addressed, determining if an excavation remedy is able to be implemented in a manner protective of human health and the environment, and investigating potential impacts of remediation activities to infrastructure in the vicinity. In October 2019, the PRPs received a special notice letter from the EPA (i) inviting participation in implementing the remedy described in the ROD, and (ii) demanding reimbursement of EPA’s past costs, for which we have accrued our portion as of December 31, 2019. In December 2019, the PRPs each responded to the special notice letter. In its response, the Company took the position that the special notice letter was premature and should be withdrawn, given concerns and uncertainties implementability and constructability of the remedy described in the ROD. regarding the The Company’s response to the special notice letter was consistent with concerns and uncertainties it has raised since the ROD was issued regarding the remedy described in the ROD and regarding the EPA’s estimates for the costs and time required to implement the selected remedy for the northern impoundment. The Company has determined, however, that even if the ROD cannot be implemented, a sheet pile "engineered barrier" can be constructed, which would enhance the existing remedy for the northern impoundment and could also be used should the ROD be determined to be feasible and implementable. In the third quarter of 2018, we increased our recorded liability accordingly to reflect the estimated cost of constructing this barrier. In December 2019, certain pre-design investigation results indicated that dry excavation of the southern impoundment as required by the ROD is feasible, and we increased our recorded liability accordingly to reflect the estimated cost of implementing this remedy for the southern impoundment. Because of ongoing questions regarding cost effectiveness, technical feasibility, timing and other technical data, however, it continues to be uncertain how the ROD will be the northern implemented impoundment. Consequently, while additional losses in excess of our recorded liability are probable as a result of the selected remedy, we are currently unable to reasonably estimate any further adjustment to our recorded liability or any loss or range of loss in excess of such liability. It remains reasonably possible that additional losses could be material as the remedial design process with the EPA continues over the coming quarters. for International Paper and MIMC/WMI are also defending a lawsuit related to the site brought by approximately 600 individuals who allege property damage and personal injury. In the first quarter of 2020, the Company resolved a significant number of these plaintiffs’ claims, and we do not believe a material loss is reasonably possible with respect to the remaining plaintiffs’ claims, whether they are settled or litigated to verdict. 67 Antitrust Containerboard: 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. This lawsuit has been dismissed for failure to prosecute and is no longer pending. Italy: In March 2017, the Italian Competition Authority (ICA) commenced an investigation into the Italian packaging industry to determine whether producers of corrugated sheets and boxes violated the applicable European competition law. In April 2019, the ICA concluded its investigation and issued initial findings alleging that over 30 producers, including our Italian packaging subsidiary (IP Italy), improperly coordinated the production and sale of corrugated sheets and boxes. On August 6, 2019, the ICA issued its decision and assessed IP Italy a fine of €29 million (approximately $32 million at current exchange rates) which was recorded in the third quarter of 2019. This charge is included in the Antitrust fines and settlements line item in the accompanying consolidated statement of operations. However, we are vigorously appealing this decision of the ICA to the Italian courts and have numerous and strong bases for our appeal. Contract Signature: In August 2014, a lawsuit captioned Signature Industrial Services LLC et al. v. International Paper Company was filed in state court in Texas. The Signature lawsuit arises out of approximately $1 million in disputed invoices related to the installation of new equipment at the Company's Orange, Texas mill. In addition to the invoices in dispute, Signature and its president allege consequential damages arising from the Company's nonpayment of those invoices. The lawsuit was tried before a jury in Beaumont, Texas, in May 2017. On June 1, 2017, the jury returned a verdict awarding approximately $125 million in damages to the plaintiffs. The Court issued a judgment on December 14, 2017, awarding the plaintiffs a total of approximately $137 million in actual and consequential damages, fees, costs and pre-judgment interest, and awarding post- judgment interest. The Company has appealed this judgment. The Company has presented in its briefing numerous and strong bases for appeal, and we believe we will prevail on appeal. Because the appellate proceedings are ongoing, we are unable to estimate a range of reasonably possible loss, but we expect the amount of any loss to be immaterial. Taxes Other Than Payroll and Income Taxes In 2017, the Brazilian Federal Supreme Court decided that the state value-added tax (VAT) should not be 68 included in the basis of federal VAT calculations. In 2018 and 2019, the Brazilian tax authorities published both an internal consultation and a normative ruling with a narrow interpretation of the effects of the case. We have determined that any related federal VAT refunds should be recognized when they are both probable and reasonably estimable. Based upon the best information available to us, we have determined that the amount of refund that is probable of being realized is limited to that determined by the tax authorities’ narrow interpretation, for which we have recognized a receivable of $6 million as of December 31, 2019. Upcoming court decisions and guidance from the tax authorities could expand the scope of the federal VAT refunds. General The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, personal injury, product liability, labor and employment, contracts, sales of property, intellectual property, tax and other matters, some of which allege substantial monetary damages. See Note 13 for details regarding a tax matter. Assessments of lawsuits and claims can involve a series of complex judgments about future events, can rely heavily on estimates and assumptions, and are otherwise subject to significant uncertainties. As a result, there can be no certainty that the Company will not ultimately incur charges in excess of presently recorded liabilities. The Company believes that loss contingencies arising from pending matters, including the matters described herein, will not have a material effect on the consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending or threatened legal matters, some of which are beyond the Company’s control, and the large or indeterminate damages sought in some of these matters, a future adverse ruling, settlement, unfavorable development, or increase in accruals with respect to these matters could result in future charges that could be material to the Company’s results of operations or cash flows in any particular reporting period. NOTE 15 VARIABLE INTEREST ENTITIES In connection with the 2006 sale of approximately 5.6 International Paper million acres of received installment notes (the Timber Notes) totaling approximately $4.8 billion. forestlands, The Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes through the creation of newly formed special purposes entities (the Entities). The monetization structure preserved the tax deferral that resulted from the 2006 forestlands sales. As of December 31, 2019, this deferred tax liability was $884 million. 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 deferred tax liability. The Entities, with assets and liabilities primarily consisting of the Timber Notes and third-party bank loans (the Extension Loans), were restructured which resulted in the formation of wholly- owned, bankruptcy-remote special purpose entities (the 2015 Financing Entities). interest entities on The Timber Notes are shown in Financial assets of the accompanying variable consolidated balance sheet and mature in August 2021 unless extended for an additional five years. These notes, which do not require principal payments prior to their maturity, are supported by approximately $4.8 billion of irrevocable letters of credit. The Extension Loans are shown in Current nonrecourse financial liabilities of variable interest entities on the accompanying consolidated balance sheet and mature in the fourth quarter of 2020. These bank loans, totaling approximately $4.2 billion, 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. 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. As of December 31, 2019 and 2018, the fair value of the Timber Notes was $4.9 billion and $4.7 billion, respectively, and the fair value of the Extension Loans was $4.3 billion and $4.2 billion for the years ended 2019 and 2018. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 17. Activity between the Company and the 2015 Financing Entities was as follows: In millions Revenue (a) Expense (a) Cash receipts (b) Cash payments (c) 2017 2018 2019 $ 95 $ 95 $ 95 128 128 95 95 128 95 128 128 128 69 (a) The revenue and expense are included in Interest expense, net in the accompanying consolidated statement of operations. (b) The cash receipts are interest received on the Financial assets of variable interest entities. (c) The cash payments represent interest paid on Current nonrecourse financial liabilities of variable interest 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. As of December 31, 2019, this deferred tax liability was $485 million, 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 variable interest 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. As of December 31, 2019 and 2018, the fair value of the notes was $2.3 billion and $2.2 billion, respectively. These notes are classified as Level 2 within the fair value hierarchy, which is further defined in Note 17. In December 2007, Temple-Inland's two wholly-owned special purpose entities borrowed $2.1 billion which is shown in Long-term nonrecourse financial liabilities of variable interest entities. The loans are repayable in 2027 and are secured 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. As of December 31, 2019 and 2018, 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 17. Activity between the Company and the 2007 financing entities was as follows: In millions Revenue (a) Expense (b) Cash receipts (c) Cash payments (d) 2017 2018 2019 $ 79 $ 72 $ 49 48 67 76 62 69 48 57 28 39 (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, 2019, 2018 and 2017, respectively, of accretion income for the amortization of the purchase accounting adjustment on the Financial assets of variable interest 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, 2019, 2018 and 2017, respectively, of accretion expense for the amortization of the purchase accounting adjustment on the Long-term nonrecourse financial liabilities of variable interest 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. NOTE 16 DEBT AND LINES OF CREDIT Amounts related to early debt extinguishment during the years ended December 31, 2019, 2018 and 2017 were as follows: In millions 2019 2018 2017 Early debt reductions (a) $ 614 $ 780 $ 993 Pre-tax early debt extinguishment costs (b) 21 10 83 (a) Reductions related to notes with interest rates ranging from 1.57% to 9.50% with original maturities from 2018 to 2048 for the years ended December 31, 2019, 2018 and 2017. (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. In June 2018, the borrowing capacity of the commercial paper program was increased from $750 million to $1.0 billion. 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, 2019 and 2018, the Company had $30 million and $465 million, respectively, outstanding under this program. A summary of long-term debt follows: In millions at December 31 7.500% notes – due 2021 4.750% notes – due 2022 6.875% notes – due 2023 3.650% notes – due 2024 7.350% notes – due 2025 7.750% notes – due 2025 3.800% notes – due 2026 7.200% notes – due 2026 6.400% notes – due 2026 3.000% notes – due 2027 7.150% notes – due 2027 3.550% notes – due 2029 6.875% notes – due 2029 5.000% notes – due 2035 6.650% notes – due 2037 8.700% notes – due 2038 7.300% notes – due 2039 6.000% notes – due 2041 4.800% notes – due 2044 5.150% notes – due 2046 4.400% notes – due 2047 4.350% notes – due 2048 Floating rate notes – due 2019 – 2024 (a) Environmental and industrial development bonds – due 2019 – 2035 (b) Total principal Capitalized leases Premiums, discounts, and debt issuance costs Interest rate swaps Other (c) Total (d) Less: current maturities Long-term debt 2019 2018 $ 406 $ — 94 658 44 31 645 58 5 803 7 200 37 600 4 265 722 585 800 700 406 355 94 676 44 31 669 58 5 939 7 — 37 600 4 265 722 585 800 700 1,158 986 339 552 1,200 1,000 908 556 9,699 10,661 100 (88) 46 8 63 (98) 16 12 9,765 10,654 168 639 $ 9,597 $ 10,015 (a) The weighted average interest rate on these notes was 3.1% in 2019 and 3.5% in 2018. (b) The weighted average interest rate on these bonds was 4.4% (c) in 2019 and 5.5% in 2018. Includes $7 million and $10 million of fair market value adjustments as of December 31, 2019 and 2018, respectively. (d) The fair market value was approximately $10.9 billion at December 31, 2019 and $10.6 billion at December 31, 2018. 70 Total maturities of long-term debt over the next five years are 2020 – $168 million; 2021 – $431 million; 2022 – $136 million; 2023 – $355 million; and 2024 – $803 million. At December 31, 2019, 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 include a $1.5 billion contractually Agreements 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 under a receivables securitization program that expires in December 2020. At December 31, 2019, there were no borrowings under either the bank facility or receivables securitization program. financial covenants require The Company’s the maintenance of a minimum net worth, as defined in our debt agreements, of $9 billion and 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 comprehensive income/loss and both the current and long-term Nonrecourse Financial Liabilities of Variable Interest Entities. The total debt-to- capital ratio is defined as total debt divided by the sum of total debt plus net worth. As of December 31, 2019, we were in compliance with our debt covenants. NOTE 17 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 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 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 or net investment hedges of foreign denominated subsidiaries. For cash flow hedges, the effective portion of the changes in fair value of these instruments is reported in AOCI and reclassified 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. For net investment hedges, all changes in the fair value of these instruments are recorded in AOCI, offsetting the currency translation adjustment of the related investment that is also recorded in AOCI. into earnings the same in 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. 71 (a) These contracts had maturities of two years or less as of December 31, 2019. The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments: Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) In millions 2019 2018 2017 Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts Derivatives in Net Investment Hedging Relationships: Interest rate contracts $ $ 4 $ (10) $ 15 7 $ — $ — During the next 12 months, the amount of the December 31, 2019 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $3 million. 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 in Net Investment Hedging Relationships: Interest rate contracts Derivatives Not Designated as Hedging Instruments: Electricity contract Foreign exchange contracts December 31, 2019 December 31, 2018 407 700 475 16 7 407 700 — 8 19 72 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 2019 2018 2017 Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts Interest rate contracts Total $ $ (3) (1) (4) $ $ (1) (1) (2) $ $ 8 Cost of products sold Interest expense, net (1) 7 Gain (Loss) Recognized in Income Location of Gain (Loss) in Consolidated Statement of Operations In millions 2019 2018 2017 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 $ 30 $ 16 $ — Interest expense, net (30) (16) — Interest expense, net $ — $ — $ — $ $ 3 (2) — 1 $ 2 1 — $ (10) Cost of products sold — Cost of products sold 1 (a) Interest expense, net $ 3 $ (9) (a) Excluding gain of $1 million related to debt reduction recorded to Restructuring and other charges. 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 to hedge exposures to interest rate, commodity and currency risks. For these financial instruments, fair value is determined at each balance sheet date using an income approach. for The guidance 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 that are quoted prices observable for the asset or liability, either directly or indirectly. included within Level 1 Level 3: Unobservable inputs for the asset or liability reflecting the reporting entity’s own assumptions or external inputs from inactive markets. 73 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 Company is party to an electricity contract used to manage market fluctuations in energy pricing. The Company's 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. 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 Derivatives designated as hedging instruments Foreign exchange contracts – cash flow Interest rate contracts - net investment Interest rate contracts – fair value Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments Electricity contract Foreign exchange contracts Total derivatives not designated as hedging instruments Total derivatives Assets Liabilities December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 $ $ $ 10 11 47 68 — — $ 3 — 16 19 — — — 68 (a) $ — 19 (b) $ $ 4 — — 4 2 1 3 10 — — 10 4 1 5 7 (c) $ 15 (d) (a) (b) (c) (d) Includes $14 million recorded in Other current assets and $54 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet. Included $2 million recorded in Other current assets and $17 million Deferred charges recorded in the accompanying consolidated balance sheet. Included $6 million recorded in Other accrued liabilities and $1 million recorded in Other liabilities the accompanying consolidated balance sheet. Included in Other accrued 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 immaterial with respect to each counterparty and in the aggregate with all counterparties. 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 terminate. The fair value of derivative instruments containing credit-risk-related contingent features in a net liability position was $1 million as of December 31, 2019. As of December 31, 2018, there were no derivative instruments containing credit-risk- 74 related contingent features in a net liability position. The Company was not required to post any collateral as of December 31, 2019 or 2018. NOTE 18 CAPITAL STOCK The authorized capital stock at both December 31, 2019 and 2018, 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, 2019, 2018 and 2017: In thousands Balance at January 1, 2017 Common Stock Issued 448,916 Treasury 37,671 Issuance of stock for various plans, net Repurchase of stock — — Balance at December 31, 2017 448,916 (2,577) 881 35,975 Issuance of stock for various plans, net Repurchase of stock Balance at December 31, 2018 Issuance of stock for various plans, net Repurchase of stock Balance at December 31, 2019 — (1,721) — 14,056 48,310 448,916 — (3,416) — 11,906 56,800 448,916 NOTE 19 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 union and non- 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 two 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 a supplemental retirement plan 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 $26 million, $29 million and $40 million in 2019, 2018 and 2017, respectively, and which are expected to be $28 million in 2020. credited including the Company service froze Effective January 1, 2019, and participation, compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the SERP plan. This change does not affect benefits accrued through December 31, 2018. For service after December 31, 2018, employees affected by the freeze receive a company contribution to their individual Retirement Savings Account as described later in this Note 19. 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. 75 OBLIGATIONS AND FUNDED STATUS The following table shows the changes in the benefit obligation and plan assets for 2019 and 2018, and the plans’ funded status. Actuarial loss (gain) 1,230 2019 2018 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $10,467 $ 215 $13,264 $ 247 68 440 — — — — 40 (546) — 5 8 (1) (6) 33 3 (1) — (8) 5 153 467 — (1,653) (1,089) — — 2 (677) 5 8 — (2) (17) — — — (9) — (17) $11,699 $ 253 $10,467 $ 215 $ 8,735 $ 161 $11,368 $ 176 1,950 26 (546) — — 23 10 (8) (6) 3 (332) 29 (677) (1,653) (2) 10 (9) (2) — (12) $10,165 $ 183 $ 8,735 $ 161 $ (1,534) $ (70) $ (1,732) $ (54) In millions Change in projected benefit obligation: Benefit obligation, January 1 Service cost Interest cost Curtailment Settlements Acquisitions Divestitures 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 $ — $ 6 $ — $ Current liability (28) (3) (27) Non-current liability (1,506) (73) (1,705) $ (1,534) $ (70) $ (1,732) $ 5 (2) (57) (54) Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Prior service cost (credit) $ 98 $ (1) $ 74 $ (1) Net actuarial loss 2,851 75 3,140 $ 2,949 $ 74 $ 3,214 $ 57 56 The largest contributor to the actuarial loss affecting the benefit obligation was the decrease in the discount rate from 4.30% at December 31, 2018 to 3.40% at December 31, 2019. However positive asset returns 76 offset the higher obligation for a slightly improved funded position. The components of the $(265) million and $18 million related to U.S. plans and non-U.S. plans, respectively, in the amounts recognized in OCI during 2019 consisted of: In millions U.S. Plans Non- U.S. Plans Current year actuarial (gain) loss $ (89) $ Amortization of actuarial loss Current year prior service cost Amortization of prior service cost Settlements/curtailments Effect of foreign currency exchange rate movements (200) 40 (16) — — $ (265) $ 19 (2) — — (1) 2 18 The portion of the change in the funded status that was recognized in net periodic benefit cost and OCI for the U.S. plans was $(172) million, $(134) million and $(184) million in 2019, 2018 and 2017, respectively. The portion of the change in funded status for the non-U.S. plans was $24 million, $(6) million, and $10 million in 2019, 2018 and 2017, respectively. The accumulated benefit obligation at December 31, 2019 and 2018 was $11.7 billion and $10.4 billion, respectively, for our U.S. defined benefit plans and $236 million and $200 million, respectively, at December 31, 2019 and 2018 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, 2019 and 2018: 2019 2018 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans $ 11,699 $ 225 $ 10,467 $ 187 11,672 10,165 208 149 10,440 8,735 175 128 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. 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: 2019 2018 2017 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans In millions Service cost $ 68 $ 5 $ 153 $ 5 $ 160 $ Interest cost 440 8 467 8 536 4 9 Expected return on plan assets Actuarial loss (gain) Amortization of prior service cost Curtailment loss (gain) (a) Settlement loss Special termination benefits (a) Net periodic pension expense (631) (10) (765) (11) (774) (11) 200 16 — — 2 — (1) 2 337 2 339 16 — 424 — — 28 23 — 383 — — — — 22 2 — — 1 — $ 93 $ 6 $ 632 $ 4 $ 717 $ 5 (a) 2017 amounts were recorded in Discontinued operations in the consolidated statement of operations. The components of net periodic pension expense other than the Service cost component are included in Non- the Consolidated operating pension expense Statement of Operations. in The decrease in 2019 pension expense primarily reflects lower service cost due to the salaried pension freeze, lower amortization and the current year absence of a settlement loss related to the October 2018 annuity purchase transaction slightly offset by lower asset returns due to the 2018 annuity purchase. 77 On September 25, 2018, the Company entered into an agreement with The Prudential Insurance Company of America to purchase a group annuity contract and transfer approximately $1.6 billion of International Paper's U.S. qualified pension plan projected benefit obligations, subject to customary closing conditions. The transaction closed on October 2, 2018 and was funded with pension plan assets. Under the transaction, at the end of 2018, Prudential assumed responsibility for pension benefits and annuity administration for approximately 23,000 retirees or their beneficiaries receiving less than $1,000 in monthly benefit payments from the plan. Settlement accounting rules required a remeasurement of the qualified plan as of October 2, 2018 and the Company recognized a non-cash pension settlement charge of $424 million before tax in the fourth quarter of 2018. On September 26, 2017, the Company entered into an agreement with The Prudential Insurance Company of America to purchase a group annuity contract and transfer approximately $1.3 billion of International Paper's U.S. qualified pension plan projected benefit obligations, subject to customary closing conditions. The transaction closed on October 3, 2017 and was funded with pension plan assets. Under the transaction, at the end of 2017, Prudential assumed responsibility for pension benefits and annuity administration for approximately 45,000 retirees or their beneficiaries receiving less than $450 in monthly benefit payments from the plan. Settlement accounting rules required a remeasurement of the qualified plan as of October 3, 2017 and the Company recognized a non-cash pension settlement charge of $376 million before tax in the fourth quarter of 2017. In addition, large payments from the required a non-qualified pension plan also remeasurement as of October 2, 2017 and a non-cash settlement charge of $7 million was also recognized in the fourth quarter of 2017. ASSUMPTIONS accounting 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’ 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, 2019 is also the discount rate used to determine net pension expense for the 2020 year). for 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: Discount rate (a) Expected long-term rate of return on plan assets Rate of compensation increase 2019 2018 2017 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans 3.40% 2.70% 4.30% 3.97% 3.60% 3.59% 2.25% 3.62% 2.25% 4.05% 3.75% 4.06% 4.30% 3.97% 3.80% 3.59% 4.03% 3.88% 7.25% 6.20% 7.50% 6.52% 7.50% 6.73% 2.25% 4.05% 3.38% 4.06% 3.75% 4.20% (a) Represents the weighted average rate for the U.S. qualified plans in 2018 and 2017 due to the remeasurements. The expected long-term rate of return on plan assets is based on projected rates of return for current 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 2020, the Company will use an expected long-term rate of return on plan assets of 7.00% for the Retirement Plan of International Paper, a discount rate of 3.40% and an assumed rate of compensation increase of 2.25%. The Company estimates that it will record net pension expense of approximately $46 million for its U.S. defined benefit plans in 2020, compared to expense of $93 million in 2019. The estimated decrease in net pension expense in 2020 is primarily due to higher return on assets and lower interest cost partially offset by higher amortization of actuarial losses and higher service cost. For non-U.S. pension plans, assumptions reflect economic assumptions applicable to each country. The following illustrates the effect on pension expense for 2020 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 PLAN ASSETS 2020 $ 31 24 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. 78 International Paper’s U.S. pension allocations by type of fund at December 31, 2019 and 2018 and target allocations were as follows: Asset Class Equity accounts Fixed income accounts Real estate accounts Other Total 2019 2018 37% 50% 8% 5% 32% 51% 11% 6% 100% 100% Target Allocations 32% - 43% 44% - 56% 5% - 11% 3% - 8% The fair values of International Paper’s pension plan assets at December 31, 2019 and 2018 by asset class are shown below. Hedge funds disclosed in the following table are allocated to fixed income accounts for target allocation purposes. Following our adoption of ASU 2018-09 Improvements", we have evaluated certain investments and classified them as Level 2 (previously Level 0). Prior year leveling disclosures have been updated for comparability as a result of our retrospective adoption of this disclosure guidance. "Codification Fair Value Measurement at December 31, 2019 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 $ 1,613 $ 965 $ 648 $ 1,599 — — — — — 336 582 1,845 2,659 1 (661) — — Equities – international Corporate bonds Government securities Mortgage backed securities Other fixed income Derivatives Cash and cash equivalents Other investments: Hedge funds Private equity Real estate funds 2,181 1,845 2,659 1 (647) (19) 336 902 522 772 — — — — — 14 (19) — Total Investments $10,165 $ 2,900 $ 5,074 $ (5) Fair Value Measurement at December 31, 2018 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 $ 1,200 $ 685 $ 515 $ Equities – international Corporate bonds Government securities Other fixed income Derivatives Cash and cash equivalents Other investments: Hedge funds Private equity Real estate funds Total Investments 1,141 — — — — 294 442 1,493 2,262 (556) — — 1,583 1,493 2,262 (543) 98 294 886 518 944 $ 8,735 $ 2,120 $ 4,156 $ 111 — — — — 13 98 — In accordance with accounting standards, certain investments that are measured at NAV and are not classified in the fair value hierarchy. Other Investments at December 31, 2019 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period In millions Hedge funds Private equity Real estate funds 902 522 772 Total $ 2,196 $ — Daily to annually 1 - 100 days (a) None Quarterly 45 - 60 days 198 147 345 (a) A private equity fund investment ("partnership interest") is contractually locked up for the life of the private equity fund by the partnership agreement. Limited partners do not have the option to redeem partnership interests. Other Investments at December 31, 2018 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period In millions Hedge funds Private equity Real estate funds 886 518 944 Total $ 2,348 $ — Daily to annually 1 - 100 days (a) None Quarterly 45 - 60 days 310 109 419 (a) A private equity fund investment ("partnership interest") is contractually locked up for the life of the private equity fund by the partnership agreement. Limited partners do not have the option to redeem partnership interests. 79 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, common collective funds and other fixed income investments. 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. Other fixed income investments of $(647) million and $(543) million at December 31, 2019 and 2018, respectively, primarily include reverse repurchase agreement obligations in which we have sold a security and have an agreement to repurchase the same or substantially the same security at a later date for a price specified in the agreement. investments such as forward Derivative contracts, options and swaps are used to help manage risks. Derivatives are generally employed as asset class substitutes (such as when employed in a portable alpha strategy), for managing asset/liability mismatches, or futures, 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. (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 funds include commercial properties, land and timberland, and generally include, but are 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. 80 The following is a reconciliation of the assets that are classified using significant unobservable inputs (Level 3) at December 31, 2019. Fair Value Measurements Using Significant Unobservable Inputs (Level 3) In millions Beginning balance at December 31, 2017 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, 2018 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, 2019 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 $1.25 billion were made by the Company in 2017. No voluntary contributions were made in 2018 or 2019. 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, 2019, projected future pension benefit payments, excluding any termination benefits, were as follows: In millions 2020 2021 2022 2023 2024 2025-2029 $ 569 579 593 607 619 3,217 OTHER U.S. PLANS 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 Mortgage backed securities Other fixed income Derivatives Total $ 1 $ 12 $ 16 $ 29 — — (1) — 1 — — — 75 (19) 26 — 76 (19) 25 — $ — $ 13 $ 98 $ 111 — — — — 1 — — — $ — $ 14 $ (127) (126) 314 314 (304) (304) — (19) $ — (5) 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. The Company makes Retirement Savings Account contributions equal to a percentage of an eligible employee’s pay. Beginning in 2019, as a result of the freeze for salaried employees under the Pension Plan, all salaried employees are eligible for the contribution to the Retirement Savings Account. 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 (and Retirement Savings Account 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 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. to the plans contributions Company totaled approximately $172 million, $125 million and $117 million for the plan years ending in 2019, 2018 and 2017, respectively. The increase in 2019 reflects increased contributions in connection with the salaried pension plan freeze. NOTE 20 POSTRETIREMENT BENEFITS U.S. POSTRETIREMENT BENEFITS International Paper provides certain retiree health care and life insurance benefits covering certain U.S. 81 The discount rates used to determine net U.S. and non- U.S. postretirement benefit cost for the years ended December 31, 2019, 2018 and 2017 were as follows: 2019 2018 2017 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% 9.10% 3.50% 9.38% 4.00% 10.53% The weighted average assumptions used to determine the benefit obligation at December 31, 2019 and 2018 were as follows: 2019 2018 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans 3.30% 7.15% 4.20% 9.10% 6.75% 9.57% 7.00% 10.04% 5.00% 4.78% 5.00% 4.93% 2026 2030 2026 2030 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. The components of postretirement benefit expense in 2019, 2018 and 2017 were as follows: In millions 2019 2018 2017 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Service cost Interest cost Actuarial loss Amortization of prior service credits Net postretirement expense $ — $ 1 $ 1 $ — $ 1 $ — Discount rate 8 4 1 2 8 9 2 2 11 8 2 3 (2) (3) (2) (3) (3) (4) $ 10 $ 1 $ 16 $ 1 $ 17 $ 1 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 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 rate assumption was determined based on a hypothetical settlement portfolio selected from a universe of high quality corporate bonds. 82 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 2019 and 2018: The components of the $18 million and $8 million change in the amounts recognized in OCI during 2019 for U.S. and non-U.S. plans, respectively, consisted of: In millions 2019 2018 U.S. Plans Non- U.S. Plans U.S. Plans Non- U.S. Plans Change in projected benefit obligation: Benefit obligation, January 1 $ 213 $ 24 $ 270 $ — 8 4 20 (32) 1 — 1 1 — 8 (2) — (1) 1 8 5 (34) (38) 1 — 25 — 2 — 2 (1) — (4) $ 214 $ 31 $ 213 $ 24 Service cost Interest cost Participants’ contributions Actuarial (gain) loss 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 In millions U.S. Plans Non- U.S. Plans Current year actuarial (gain) loss $ 20 $ Amortization of actuarial (loss) gain Current year prior service cost Amortization of prior service credit Currency impact (4) — 2 — $ 18 $ 7 (2) — 3 — 8 The portion of the change in the funded status that was recognized in net periodic benefit cost and OCI for the U.S. plans was $29 million, $(25) million and $25 million in 2019, 2018 and 2017, respectively. The portion of the change in funded status for the non-U.S. plans was $9 million, $5 million, and $3 million in 2019, 2018 and 2017, respectively. $ — $ — $ — $ — 28 4 (32) 2 — (2) 33 5 (38) 1 — (1) At December 31, 2019, 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 Funded status, December 31 $ (214) $ (31) $ (213) $ (24) Amounts recognized in the consolidated balance sheet under ASC 715: Current liability $ (21) $ (1) $ (23) $ Non-current liability (193) (30) (190) (1) (23) $ (214) $ (31) $ (213) $ (24) Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Net actuarial loss (gain) Prior service credit $ $ 47 $ 19 $ 31 $ 15 (2) (18) (4) 45 $ 1 $ 27 $ (22) (7) 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. 2020 2021 2022 2023 2024 2025 – 2029 U.S. Plans U.S. Plans $ 22 $ 1 $ Non- U.S. Plans 21 20 18 17 73 1 1 1 1 4 1 — 1 1 1 6 NOTE 21 INCENTIVE PLANS International Paper currently has an Incentive Compensation Plan (ICP). 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 of the Management Development and 83 PERFORMANCE SHARE PLAN Outstanding at December 31, 2016 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. Under the Performance Share Plan (PSP), contingent awards of International Paper common stock are granted by the Committee. The PSP awards are earned over a three-year period. PSP awards are earned based on the achievement of defined performance of Return on Invested Capital (ROIC) measured against our internal benchmark and ranking of Total Shareholder Return (TSR) compared to the TSR peer group of companies. The 2017-2019 Award is 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 2018-2020 and 2019-2021 Awards are weighted 50% ROIC and 50% TSR for all participants. 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 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, 2019 22.81%-24.60% 1.47%-2.44% The following summarizes PSP activity for the three years ended December 31, 2019: Weighted Average Grant Date Fair Value $35.89 51.78 51.00 45.96 36.17 62.97 53.67 56.57 38.79 43.49 36.79 50.64 Share/ Units 5,950,130 2,163,912 (1,876,134) (438,024) 5,799,884 1,751,235 (1,588,642) (196,000) 5,766,477 2,353,613 (2,367,135) (238,227) Granted Shares issued Forfeited Outstanding at December 31, 2017 Granted Shares issued Forfeited Outstanding at December 31, 2018 Granted Shares issued Forfeited Outstanding at December 31, 2019 5,514,728 $41.14 RESTRICTED STOCK AWARD PROGRAMS The service-based Restricted Stock Award program (RSA), designed for recruitment, retention and special recognition purposes, provides for awards of restricted stock to key employees. The following summarizes the activity of the RSA program for the three years ended December 31, 2019: Outstanding at December 31, 2016 Granted Shares issued Forfeited Outstanding at December 31, 2017 Granted Shares issued Forfeited Outstanding at December 31, 2018 Granted Shares issued Forfeited Weighted Average Grant Date Fair Value $45.34 57.24 47.90 53.53 48.63 51.43 48.44 — 50.17 43.70 48.90 45.10 Shares 169,331 63,319 (59,650) (6,700) 166,300 66,100 (100,289) — 132,111 87,910 (52,021) (7,300) Outstanding at December 31, 2019 160,700 $47.27 At December 31, 2019, 2018 and 2017 a total of 9.8 million, 11.9 million and 13.2 million shares, respectively, were available for grant under the ICP. 84 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. INFORMATION BY BUSINESS SEGMENT Net Sales In millions 2019 2018 Industrial Packaging $ 15,326 Global Cellulose Fibers Printing Papers Corporate and Intersegment Sales (a) $ 15,900 2,819 2017 $ 15,077 2,551 4,375 4,157 2,551 4,291 208 212 (42) Net Sales $ 22,376 $ 23,306 $ 21,743 Operating Profit In millions 2019 2018 2017 Industrial Packaging $ 2,076 $ 2,277 $ 1,919 Global Cellulose Fibers Printing Papers Business Segment Operating Profit (6) 529 262 543 116 459 2,599 3,082 2,494 Earnings (loss) from continuing operations before income taxes and equity earnings Interest expense, net Noncontrolling interests / equity earnings adjustment (b) Corporate expenses, net (a) Corporate special items, net (a) Business special items, net Non-operating pension expense 1,604 491 1,781 536 3 54 104 307 36 (10) 67 9 205 494 848 572 (2) 91 76 425 484 $ 2,599 $ 3,082 $ 2,494 Business Special Items, Net In millions 2019 2018 2017 Industrial Packaging $ Global Cellulose Fibers Printing Papers Business Special Items, Net $ 78 68 161 307 $ 184 $ 372 11 10 51 2 $ 205 $ 425 Stock-based compensation expense and related income tax benefits were as follows: In millions 2019 2018 2017 Total stock-based compensation expense (included in selling and administrative expense) Income tax benefits related to stock- based compensation $ 130 $ 135 $ 147 30 16 45 At December 31, 2019, $92 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 22 FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA International Paper’s business segments, Industrial Packaging, Global Cellulose Fibers and Printing Papers, are consistent with the internal structure used to manage these businesses. See the Description of Business 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. 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, and excluding interest expense, net, corporate items, net, corporate special items, net, business special items, net, and non-operating pension expense. In 2019, the Company changed its measure of business segment operating profits to exclude items considered by management to be unusual (business special items, net) from the normal operations of the business segment. As a result, all prior periods have been restated to reflect the current measure. 85 Assets In millions Industrial Packaging Global Cellulose Fibers Printing Papers Corporate and other (c) Assets Capital Spending INFORMATION BY GEOGRAPHIC AREA 2019 $ 16,338 3,733 3,476 9,924 $ 33,471 2018 $ 15,859 3,880 3,905 9,932 $ 33,576 Net Sales (f) In millions United States (g) EMEA Pacific Rim and Asia Americas, other than U.S. 2019 2018 2017 $ 16,948 $ 17,609 $ 16,247 3,258 415 1,755 3,321 605 1,771 3,129 625 1,742 Net Sales $ 22,376 $ 23,306 $ 21,743 In millions 2019 2018 2017 Industrial Packaging $ Global Cellulose Fibers Printing Papers Subtotal Corporate and other Capital Spending 922 162 172 1,256 20 $ 1,061 $ 183 303 1,547 25 836 188 235 1,259 21 $ 1,276 $ 1,572 $ 1,280 Long-Lived Assets (h) In millions United States EMEA Pacific Rim and Asia Americas, other than U.S. Long-Lived Assets 2019 $ 10,706 1,368 — 1,321 $ 13,395 2018 $ 10,586 1,315 201 1,367 $ 13,469 Depreciation, Amortization and Cost of Timber Harvested In millions 2019 2018 2017 (a) Includes sales of $15 million, operating profits (losses) of $0 million and corporate special items expense of $9 million in 2017 from previously divested businesses. Industrial Packaging $ Global Cellulose Fibers Printing Papers Corporate (d) Depreciation and Amortization $ 794 263 244 5 $ 803 262 258 5 815 264 254 10 $ 1,306 $ 1,328 $ 1,343 External Sales By Major Product In millions 2019 2018 Industrial Packaging $ 15,259 Global Cellulose Fibers Printing Papers Other (e) Net Sales $ 15,828 2,810 4,359 309 2,545 4,284 288 $ 22,376 $ 23,306 interests and equity earnings (b) 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 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. Includes $1 million in 2017 from previously divested businesses. Includes $15 million from previously divested businesses. in 2017 (d) (e) for (c) 2017 $ 14,946 2,524 4,142 131 $ 21,743 (f) Net sales are attributed to countries based on the location of the seller. (g) Export sales to unaffiliated customers were $2.7 billion in 2019, $3.1 billion in 2018 and $2.9 billion in 2017. (h) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. 86 INTERIM FINANCIAL RESULTS (UNAUDITED) In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year 2019 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) $ 5,643 $ 5,667 $ 5,568 $ 5,498 $ 22,376 418 (a) 334 (a) 452 (a) 400 (a) 1,604 (a) — — — — — 424 (a-b) 292 (a-c) 344 (a-c) 165 (a-b) 1,225 (a-c) $ 1.06 $ 0.74 $ 0.88 $ 0.42 $ 3.10 — 1.06 1.05 — 1.05 — 0.74 0.73 — 0.73 — 0.88 0.87 — 0.87 — 0.42 0.42 — 0.42 — 3.10 3.07 — 3.07 Dividends per share of common stock 0.5000 0.5000 0.5000 0.5125 2.0125 2018 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) $ 5,621 $ 5,833 $ 5,901 $ 5,951 $ 23,306 356 (d) 368 (e) 490 (d) (23) (e) 553 (d) — (e) 382 (d) — (e) 1,781 (d) 345 (e) 729 (d-f) 405 (d-f) 562 (d-f) 316 (d-f) 2,012 (d-f) $ 0.87 0.89 1.76 0.86 0.88 1.74 $ 1.03 $ 1.38 $ 0.79 $ (0.05) 0.98 1.02 (0.05) 0.97 — 1.38 1.37 — 1.37 — 0.79 0.78 — 0.78 4.07 0.84 4.91 4.02 0.83 4.85 Dividends per share of common stock 0.4750 0.4750 0.4750 0.5000 1.9250 Note: International Paper's common shares (symbol: IP) are listed on the New York Stock Exchange. 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. 87 Footnotes to Interim Financial Results (d) Includes the following pre-tax charges (gains): (a) Includes the following pre-tax charges (gains): 2018 In millions Q1 Q2 Q3 Q4 Smurfit-Kappa acquisition proposal costs $ — $ 12 $ — $ — Legal settlement Litigation settlement recovery Environmental remediation reserve adjustment EMEA Packaging business optimization Abandoned property removal Riverdale mill conversion costs Brazil Packaging impairment Debt extinguishment costs Gain on sale of investment in Liaison Technologies Non-operating pension expense 9 — — 22 9 — — — — 4 — (5) — (1) 8 4 — 10 (31) — — — 26 9 — — — 9 — 6 5 — 122 — — — — 36 25 429 Total $ 44 $ 83 $167 $414 (e) Includes the following pre-tax charges (gains): 2018 In millions Q1 Q2 Q3 Q4 North American Consumer Packaging transaction costs North American Consumer Packaging gain on transfer Total $ 23 $ 2 $ — $ — (516) 28 — — $ (493) $ 30 $ — $ — (f) Includes the following tax expenses (benefits): In millions Q1 Q2 Q3 Q4 2018 State income tax legislative changes Tax benefit of Tax Cuts and Jobs Act Internal investment restructuring Foreign tax audits Tax impact of other special items Tax impact of non- operating pension expense Total $ — $ 9 $ — $ — — — — — — — (36) — — (9) (13) (46) — 19 25 3 (1) (9) (6) (107) $(10) $ (13) $ (88) $ (60) In millions India impairment India divestiture transaction costs Global Cellulose Fibers goodwill impairment Litigation reserves Italian antitrust fine Environmental remediation reserve adjustment (Gain) loss on sale of EMEA Packaging box plant EMEA Packaging business optimization Multi-employer pension plan exit liability Abandoned property removal Riverdale mill conversion costs Foreign VAT refund accrual including interest Debt extinguishment costs Gain on sale of previously closed Oregon mill site Overhead cost reduction initiative Other items Non-operating pension expense 2019 Q1 Q2 Q3 Q4 $ — $152 $ 8 $ (1) — — — — — — — — — — 22 32 3 52 19 — — — 15 10 (7) — 16 11 1 — — — — — 10 — — — 11 1 — — — — 1 8 — — (7) 13 1 — — (9) 21 — 9 1 17 — 15 2 (6) 21 — — 3 9 Total $ 31 $173 $ 105 $145 (b) Includes the following tax expenses (benefits): In millions Q1 Q2 Q3 Q4 Luxembourg statutory tax rate change $ — $ 9 $ — $ — 2019 State income tax legislative changes Foreign tax audits Internal investment restructuring Foreign deferred tax valuation allowance Tax impact of other special items Tax impact of non- operating pension expense Total — — — — (3) 3 — — — — — — — — (53) 203 (6) (5) (14) (28) (2) (2) (2) (2) $ (8) $ 2 $ (16) $ 120 (c) Includes allocation of loss to noncontrolling interest of $7 million and $2 million for the three months ended June 30, 2019 and September 30, 2019, respectively, associated with the impairment of the net assets of our India Papers business. 88 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE ACCOUNTING ON None. ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2019, an evaluation was carried out under the supervision and with the participation of the including our principal Company’s management, executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rule 13a-15(f) and 15d-15(f) of 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, 2019. The Company completed the acquisitions of four packaging businesses located in Portugal (Ovar), France (Torigni and Cabourg), and Spain (Tavernes de la Valldigna and Montblanc) over the course of 2019. Due to the timing of these acquisitions, we have excluded these businesses from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2019, sales and assets for these businesses represented approximately 0.4% of net sales and 0.6% of total assets. CHANGES REPORTING IN INTERNAL CONTROL OVER FINANCIAL reporting during There have been no changes in our internal control over financial the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See Item 8. Financial Statements and Supplementary Data on pages 37 and 38 of this Form 10-K for management's annual report on our internal control over financial reporting and the attestation report of our independent public accounting firm. 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 4 through 6 in Part I of this Form 10-K under the caption, “Information About Our Executive Officers.” 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 website within four business days following such amendment or waiver. To date, no waivers of the Code have been granted. in print We make available free of charge on our website at www.internationalpaper.com, and 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. respect to compliance with Information with Section 16(a) of the 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 9B. OTHER INFORMATION ITEM 11. EXECUTIVE COMPENSATION None. PART III. 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 89 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 applicable information with respect to certain relationships and related transactions and director independence matters, 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. (3.2) (4.1) (4.2) ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES (4.3) Information with respect to fees paid to, and services registered public independent rendered by, our accounting firm, 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 financial conjunction with statements in Item 8. Financial Statements and Supplementary Data. 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 2019, 2018 and 2017 (2.1) (3.1) Transaction Agreement, dated October 23, 2017, by and among the Company, Graphic Packaging Holding Company, Gazelle Newco LLC and Graphic Packaging International, by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated October 24, 2017). (incorporated Inc. Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 13, 2013). 90 (4.4) (4.5) (4.6) (4.7) (4.8) By-laws of the 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). Indenture, dated as of April 12, 1999, between the 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 16, 2000). Supplemental Indenture (including the form of Notes), dated as of June 4, 2008, between the 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). 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). Supplemental Indenture (including the form of Notes), dated as of August 10, 2009, between the 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). Supplemental Indenture (including the form of Notes), dated as of December 7, 2009, 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 December 7, 2009). 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). 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). 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). (10.6) (10.7) (10.8) (10.9) (10.10) (10.11) (10.12) (10.13) (10.14) (10.15) (10.16) (4.9) (4.10) (4.11) (4.12) (4.13) (10.1) (10.2) (10.3) (10.4) (10.5) 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). Supplemental Indenture (including the form of Notes), dated as of August 9, 2017, 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 9, 2017). Supplemental Indenture (including the form of Notes), dated as of June 10, 2019, 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, 2019). with accordance In 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. Description of Securities.* (ICP) Amended and Restated 2009 Incentive (corrected Compensation Plan version of a previously filed exhibit) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). + and Deferred Restricted 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). + Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 2017). + Form of Restricted Stock Unit Award Agreement (cash settled) (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017). + Form of Restricted Stock Unit Award Agreement (stock settled) (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017). + 91 Form of Performance Share Plan award certificate (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017). + 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). + the Amendment Number One International Paper Pension Restoration Plan for Salaried Employees effective January 1, 2013.* + to Amendment Number Two the International Paper Pension Restoration Plan for Salaried Employees effective January 1, 2013.* + to Amendment Number Three the International Paper Pension Restoration Plan for Salaried Employees effective January 1, 2015.* + to Amendment Number Four the International Paper Pension Restoration Plan for Salaried Employees effective July 1, 2014.* + to Amendment Number Five the International Paper Pension Restoration Plan for Salaried Employees effective January 1, 2019.* + to 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 Form 10-K fiscal year ended December 31, 2007). + the for Unfunded 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 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 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 (10.26) (10.27) (10.28) (10.29) (10.30) (10.31) (10.32) (10.33) (10.17) (10.18) (10.19) (10.20) (10.21) (10.22) (10.23) (10.24) (10.25) Unfunded 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 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 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). + Amendment No. 7 to the International Paper Company Supplemental Retirement Plan for Senior Managers effective July 12, 2016.* + Unfunded Amendment No. 8 to the International Paper Company Supplemental Retirement Plan for Senior Managers effective January 1, 2019.* + Unfunded Unfunded Amendment No. 9 to the International Paper Company Supplemental Retirement Plan for Senior Managers effective November 1, 2019 (incorporated by the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. † to Exhibit 10.1 reference to Form of Non-Competition Agreement, entered into by certain Company employees (including named executive officers) who have received restricted stock (incorporated the by reference Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). + to Exhibit 10.22 to 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 Form of Change-in-Control Agreement - Tier I, for the Chief Executive Officer and all "grandfathered" senior vice presidents elected prior to 2012 (all but one named executive officer) - 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). + 92 Form of Change-in-Control Agreement - Tier II, for all future senior vice presidents and all "grandfathered" vice presidents (one named executive officer) 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). + 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). + 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). + 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). + Time Sharing Agreement, dated October 17, 2014 (and effective November 1, 2014), by and between Mark S. Sutton and International Paper Company (incorporated the by Company’s Current Report on Form 8-K dated October 14, 2014). + to Exhibit 99.1 reference to Five-Year Credit Agreement dated as of December 12, 2016, among International Paper Company, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 6, 2017). Commitment Agreement, dated September 26, 2017, between International Paper Company and The Prudential Insurance Company of America, relating the Retirement Plan of International Paper Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017). † to Credit Agreement, dated December 8, 2017, by and among the Company, Bank of America, N.A. and BNP Paribas (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8- K filed December 12, 2017). (101.INS) (101.SCH) (101.CAL) (101.DEF) (101.LAB) XBRL Instance Document - the instance document does not appear the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. * in XBRL Taxonomy Extension Schema * XBRL Taxonomy Extension Calculation Linkbase * XBRL Taxonomy Extension Definition Linkbase * XBRL Taxonomy Extension Label Linkbase * (101.PRE) XBRL Extension Presentation Linkbase * + Management contract or compensatory plan or arrangement. * Filed herewith ** Furnished herewith † Confidential treatment has been granted for certain information pursuant to Rule 24b-2 under the Securities Act of 1934, as amended. (10.34) Commitment Agreement, dated September 25, 2018, between International Paper Insurance Company and Prudential Company of America, relating the Retirement Plan of International Paper Company (corrected version of previously filed exhibit) (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K fiscal the year ended December 31, 2018). * + for to (21) (23.1) Subsidiaries and Joint Ventures.* Consent of Independent Registered Public Accounting Firm. * (23.2) Consent of Independent Auditors. * (24) (31.1) (31.2) (32) (99.1) Power of Attorney (contained on the signature page to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019). * Certification by Mark S. Sutton, Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * Certification by Tim S. Nicholls, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** Audited Financial Statements for Ilim S.A. and its subsidiaries as of and for the year ended December 31, 2019 and 2018. * 93 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES INTERNATIONAL PAPER COMPANY By: /S/ SHARON R. RYAN Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary POWER OF ATTORNEY February 19, 2020 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sharon R. Ryan and Matthew Barron 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 his 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 /S/ MARK S. SUTTON Mark S. Sutton Chairman of the Board & Chief Executive Officer and Director February 19, 2020 /S/ WILLIAM J. BURNS Director William J. Burns /S/ CHRISTOPHER M. CONNOR Director Christopher M. Connor /S/ AHMET C. DORDUNCU Director Ahmet C. Dorduncu /S/ ILENE S. GORDON Director Ilene S. Gordon /S/ ANDERS GUSTAFSSON Director Anders Gustafsson 94 February 19, 2020 February 19, 2020 February 19, 2020 February 19, 2020 February 19, 2020 /S/ JACQUELINE C. HINMAN Director Jacqueline C. Hinman /s/ CLINTON A. LEWIS, JR. Director Clinton A. Lewis, Jr. /S/ KATHRYN D. SULLIVAN Director Kathryn D. Sullivan /S/ J. STEVEN WHISLER Director J. Steven Whisler /S/ RAY G. YOUNG Director Ray G. Young February 19, 2020 February 19, 2020 February 19, 2020 February 19, 2020 February 19, 2020 /S/ TIMOTHY S. NICHOLLS Timothy S. Nicholls Senior Vice President and Chief Financial Officer February 19, 2020 /S/ VINCENT P. BONNOT Vice President – Finance and Controller February 19, 2020 Vincent P. Bonnot 95 This page intentionally left blank. 2019 LISTING OF FACILITIES (all facilities are owned except noted otherwise) PRINTING PAPERS Uncoated Papers U.S.: Rome, Georgia Savannah, Georgia Cayuga, Indiana Cedar Rapids, Iowa Selma, Alabama (Riverdale Mill) Henderson, Kentucky Ticonderoga, New York Eastover, South Carolina Georgetown, South Carolina Sumter, South Carolina International: Luiz Antônio, São Paulo, Brazil Maysville, Kentucky Bogalusa, Louisiana Campti, Louisiana Mansfield, Louisiana Vicksburg, Mississippi Valliant, Oklahoma Springfield, Oregon Mogi Guacu, São Paulo, Brazil Orange, Texas Três Lagoas, Mato Grosso do Sul, Brazil International: APPENDIX I Stockton, 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 Savannah, Georgia Tucker, Georgia Saillat, France Kadiam, India 2 Rajahmundry, India 2 Kwidzyn, Poland Svetogorsk, Russia GLOBAL CELLULOSE FIBERS Pulp U.S.: Franco da Rocha, São Paulo, Brazil Aurora, Illinois (3 locations) Nova Campina, São Paulo, Brazil Bedford Park, Illinois (2 locations) 1 leased Paulinia, São Paulo, Brazil Belleville, Illinois Veracruz, Mexico Kenitra, Morocco Madrid, Spain Corrugated Container U.S.: Carol Stream, Illinois Des Plaines, Illinois Lincoln, Illinois Montgomery, Illinois Northlake, Illinois Rockford, Illinois Butler, Indiana Cantonment, Florida (Pensacola Mill) Bay Minette, Alabama Flint River, Georgia Port Wentworth, Georgia Columbus, Mississippi New Bern, North Carolina Decatur, Alabama Crawfordsville, Indiana Dothan, Alabama leased Fort Wayne, Indiana Huntsville, Alabama Conway, Arkansas Indianapolis, Indiana (2 locations) Saint Anthony, Indiana Riegelwood, North Carolina Fort Smith, Arkansas (2 locations) Tipton, Indiana Eastover, South Carolina Russellville, Arkansas (2 locations) Cedar Rapids, Iowa Georgetown, South Carolina Franklin, Virginia Tolleson, Arizona Yuma, Arizona Anaheim, California Waterloo, Iowa Garden City, Kansas Kansas City, Kansas International: Buena Park, California leased Bowling Green, Kentucky Grande Prairie, Alberta, Canada Camarillo, California Saillat, France Gdansk, Poland Kwidzyn, Poland Svetogorsk, Russia Lexington, Kentucky Louisville, Kentucky Carson, California Cerritos, California leased Walton, Kentucky Compton, California Elk Grove, California Exeter, California Bogalusa, Louisiana Lafayette, Louisiana Shreveport, Louisiana INDUSTRIAL PACKAGING Gilroy, California (2 locations) Springhill, Louisiana Los Angeles, California Auburn, Maine Containerboard U.S.: Pine Hill, Alabama Prattville, Alabama Modesto, California Ontario, California Salinas, California Sanger, California Three Rivers, Michigan Arden Hills, Minnesota Austin, Minnesota Fridley, Minnesota Cantonment, Florida (Pensacola Mill) Santa Fe Springs, California (2 locations) Minneapolis, Minnesota leased A-1  Shakopee, Minnesota Laurens, South Carolina White Bear Lake, Minnesota Lexington, South Carolina San Jose Iturbide, Mexico Santa Catarina, Mexico Houston, Mississippi Jackson, Mississippi Ashland City, Tennessee leased Silao, Mexico Cleveland, Tennessee Magnolia, Mississippi leased Elizabethton, Tennessee leased Olive Branch, Mississippi Fenton, Missouri Kansas City, Missouri Morristown, Tennessee Murfreesboro, Tennessee Amarillo, Texas Maryland Heights, Missouri Carrollton, Texas (2 locations) North Kansas City, Missouri leased Edinburg, Texas 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 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 Statesville, North Carolina International: Toluca, Mexico Villa Nicolas Romero, Mexico 1 Zapopan, Mexico Agadir, Morocco Casablanca, Morocco Tangier, Morocco Ovar, Portugal Barcelona, Spain Bilbao, Spain Gandia, Spain Las Palmas, Spain Madrid, Spain Montblanc, Spain Tavernes de la Valldigna, Spain Tenerife, Spain Adana, Turkey Bursa, Turkey Corlu, Turkey 4 Corum, Turkey Gebze, Turkey Izmir, Turkey Recycling U.S.: Phoenix, Arizona Fremont, California Norwalk, California Byesville, Ohio Delaware, Ohio Eaton, Ohio Madison, Ohio Marion, Ohio Marysville, Ohio leased Middletown, Ohio Mt. Vernon, Ohio Newark, Ohio Streetsboro, Ohio Wooster, Ohio Manaus, Amazonas, Brazil Paulinia, São Paulo, Brazil Rio Verde, Goias, Brazil West Sacramento, California Suzano, São Paulo, Brazil Itasca, Illinois Rancagua, Chile Arles, France Cabourg, France Chalon-sur-Saone, France Creil, France 3 Des Moines, Iowa Wichita, Kansas Roseville, Minnesota Omaha, Nebraska Charlotte, North Carolina LePuy, France (Espaly Box Plant) Beaverton, Oregon Mortagne, France Springfield, Oregon leased Oklahoma City, Oklahoma Saint Amand, France Carrollton, Texas Beaverton, Oregon (3 locations) Guadeloupe, French West Indies Salt Lake City, Utah Hillsboro, Oregon Portland, Oregon Salem, Oregon leased Bellusco, Italy Catania, Italy Pomezia, Italy Richmond, Virginia Kent, Washington Biglerville, Pennsylvania (2 locations) San Felice, Italy International: Eighty-four, Pennsylvania Hazleton, Pennsylvania Apodaco (Monterrey), Mexico leased Monterrey, Mexico leased Ixtaczoquitlan, Mexico Xalapa, Veracruz, Mexico leased Kennett Square, Pennsylvania Juarez, Mexico leased Lancaster, Pennsylvania Los Mochis, Mexico Mount Carmel, Pennsylvania Puebla, Mexico leased Georgetown, South Carolina Reynosa, Mexico A-2 Bags U.S.: Buena Park, California Beaverton, Oregon Grand Prairie, Texas Coated Paperboard International: Kwidzyn, Poland Svetogorsk, Russia DISTRIBUTION IP Asia International: Guangzhou, China leased Hong Kong, China leased Shanghai, China leased Japan leased Korea leased Singapore leased FOREST RESOURCES International: Approximately 329,400 acres in Brazil 1) Closed July 2019 2) Sold October 2019 3) Sold March 2019 4) Closed April 2019 A-3 APPENDIX II U.S. EMEA Americas, other than U.S. 13,507 — 13,507 302 443 745 364 — 364 Total 14,173 443 14,616 2,988 268 489 3,745 1,959 1,152 1,135 — 96 — 1,959 1,248 1,135 4,246 96 4,342 2019 CAPACITY INFORMATION (in thousands of short tons except as noted) Industrial Packaging Containerboard (a) Coated Paperboard Total Industrial Packaging Global Cellulose Fibers Dried Pulp (in thousands of metric tons) Printing Papers Uncoated Freesheet & Bristols (b) Newsprint Total Printing Papers (a) In addition to Containerboard, this also includes saturated kraft, kraft bag, and gypsum. (b) In addition to Uncoated Freesheet and Bristols, includes bleached multiwall bag and plate. Forest Resources We own, manage or have an interest in approximately 1.2 million acres of forestlands worldwide. These forestlands and associated acres are located in the following regions: Brazil We have harvesting rights in: Russia Total (M Acres) 329 862 1,191 A-4 This page intentionally left blank. This page intentionally left blank. INTERNATIONAL PAPER LEADERSHIP As of April 1, 2020 Mark S. Sutton Chairman of the Board and Chief Executive Officer W. Michael Amick, Jr. Senior Vice President Paper the Americas Clay R. Ellis Senior Vice President Enterprise Operational Excellence W. Thomas Hamic Senior Vice President Containerboard and Enterprise Commercial Excellence Timothy S. Nicholls Senior Vice President and Chief Financial Officer Thomas J. Plath Senior Vice President Human Resources and Global Citizenship Jean-Michel Ribiéras Senior Vice President Industrial Packaging the Americas James P. Royalty, Jr. Senior Vice President and President International Paper Europe, Middle East, Africa and Russia Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary John V. Sims Senior Vice President Corporate Development Catherine I. Slater Senior Vice President Global Cellulose Fibers and IP Asia Gregory T. Wanta Senior Vice President North American Container Lee C. Alexander Vice President Global Fiber Supply Santiago Arbelaez Vice President Industrial Packaging International Paper Brazil Mark M. Azzarello Vice President Human Resources, Global Compensation and Benefits Hans M. Bjorkman Vice President and General Manager European Papers September G. Blain Vice President Disruptive Technologies Paul J. Blanchard Vice President Supply Chain Operations Industrial Packaging Vincent P. Bonnot Vice President Finance, Controller and Chief Accounting Officer Eric Chartrain Vice President and General Manager Packaging Europe, Middle East and Africa Thomas A. Cleves Vice President Global Citizenship Kirt Cuevas Vice President Environment, Health and Safety Rodrigo Davoli Vice President Latin America Papers President International Paper Brazil Donald P. Devlin Vice President Finance and Strategy Industrial Packaging Gary M. Gavin Vice President West Area North American Container Greg C. Gibson Vice President and General Manager North American Papers Holly Goughnour Vice President Tax John F. Grover Vice President Enterprise Converting Optimization North American Container Bathsheba T. Sams Vice President Human Resources Industrial Packaging the Americas Fred A. Towler Chief Diversity Officer and Vice President Human Resources, Talent Management and Global Mobility Keith R. Townsend Vice President and President International Paper Russia Marc Van Lieshout Vice President Corporate Audit Robert W. Wenker Vice President and Chief Information Officer Hunter M. Whiteley Vice President Manufacturing Global Cellulose Fibers Patrick Wilczynski Vice President Capital Effectiveness Ron P. Wise Vice President Commercial and National Accounts North American Container ILIM GROUP SENIOR LEADERSHIP Ksenia Sosnina Chief Executive Officer Guillermo Gutierrez Vice President Investor Relations Jason J. Handel Vice President Sales and Marketing Global Cellulose Fibers Errol A. Harris Vice President and Treasurer Russell V. Harris Vice President Manufacturing Industrial Packaging Peter G. Heist Vice President North Area North American Container Kally Hodgson Vice President Global Sourcing Robert M. Hunkeler Vice President Trust Investments Chris J. Keuleman Vice President Global Government Relations Allison B. Magness Vice President South Area North American Container Brian N.G. McDonald Vice President Strategic Planning Brett A. Mosley Vice President Manufacturing Industrial Packaging Mark P. Nellessen Vice President Financial Planning and Analysis Michael V. Pauly Vice President Manufacturing Paper the Americas Aimee K. Gregg Vice President and General Manager Recycling and Recovered Fiber Joseph R. Saab Vice President Deputy General Counsel and Assistant Corporate Secretary BOARD OF DIRECTORS As of April 1, 2020 Mark S. Sutton Chairman of the Board and Chief Executive Officer International Paper Company William J. Burns President The Carnegie Endowment for International Peace Christopher M. Connor Retired Chairman, President and Chief Executive Officer The Sherwin-Williams Company Ahmet C. Dorduncu Chief Executive Officer Akkök Group Ilene S. Gordon Presiding Director Retired Chairman, President and Chief Executive Officer Ingredion Incorporated Anders Gustafsson Chief Executive Officer Zebra Technologies Corporation Jacqueline C. Hinman Former Chairman, President and Chief Executive Officer CH2M HILL Companies, Ltd. Clinton A. Lewis, Jr. Former Executive Vice President and Group President International Operations, Commercial Development, Global Genetics and Aquatic Health Zoetis Inc. Kathryn D. Sullivan Senior Fellow at the Potomac Institute for Policy Studies and Ambassador-at-Large at the Smithsonian National Air and Space Museum J. Steven Whisler Retired Chairman and Chief Executive Officer Phelps Dodge Corporation Ray G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland Company 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 11, 2020. 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 Investor Services P.O. Box 505000 Louisville, KY 40233-5000 USA Overnight mail delivery: Computershare Investor Services 462 South 4th Street, Ste. 1600 Louisville, KY 40202 USA 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 $250,000 of additional shares each year. 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. https://www-us.computershare.com/Investor/#DirectStock INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Suite 350 6075 Poplar Avenue Memphis, TN 38119-0112 USA 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. Our Vision is to be among the most successful, sustainable and responsible companies in the world. International Paper Board of Directors Mark S. Sutton Chairman of the Board and Chief Executive Officer International Paper Company William J. Burns President The Carnegie Endowment for International Peace Christopher M. Connor Retired Chairman, President and Chief Executive Officer The Sherwin-Williams Company Ahmet C. Dorduncu Chief Executive Officer Akkök Group Ilene S. Gordon Presiding Director Retired Chairman, President and Chief Executive Officer Ingredion Incorporated Anders Gustafsson Chief Executive Officer Zebra Technologies Corporation Jacqueline C. Hinman Former Chairman, President and Chief Executive Officer CH2M HILL Companies, Ltd. Clinton A. Lewis, Jr. Former Executive Vice President and Group President International Operations, Commercial Development, Global Genetics and Aquatic Health Zoetis Inc. Kathryn D. Sullivan Senior Fellow at the Potomac Institute for Policy Studies and Ambassador-at-Large at the Smithsonian National Air and Space Museum J. Steven Whisler Retired Chairman and Chief Executive Officer Phelps Dodge Corporation Ray G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland Company The IP Way Forward is our strategic framework for pursuing our Vision and creating value for all stakeholders for generations to come. World Headquarters Regional Headquarters International Paper Company 6400 Poplar Avenue Memphis, TN 38197 United States of America International Paper Asia 8F, Building A Xuhui Vanke Center 55 Ding An Road Shanghai, 200235, China International Paper Do Brasil Rodovia SP 340, KM 171 Mogi Guaçu/SP CEP: 13845-901 International Paper Europe, Middle East and Africa (EMEA) Chaussée de la Hulpe 166 1170 Brussels, Belgium International Paper Russia Kropotkina Street 1, Litera I Saint Petersburg, 197101 Russia 366159_IPA0032_03092020_APS_Covers_FINAL.indd 3-4 3/11/20 2:54 PM More than 25,000 Customers in 150 Countries $22 Billion Total Revenue in 2019 More than 50,000 Employees WHO WE ARE We are one of the world’s leading producers of renewable, fiber-based packaging, pulp and paper. WHAT WE DO We improve people’s lives, the planet and our company’s performance by transforming renewable resources into products people depend on every day. HOW WE DO IT We do the right things, in the right ways, for the right reasons, all of the time – this is The IP Way. Together, The IP Way and our Core Values of Safety, Ethics and Stewardship serve as our guideposts as we carry out our Mission. | 2019 ANNUAL PERFORMANCE SUMMARY  ANNUAL PERFORMANCE SUMMARY 2 0 1 9 I N T E R N A T I O N A L P A P E R | 2 0 1 9 A N N U A L P E R F O R M A N C E S U M M A R Y ©2020 International Paper Company. All rights reserved. Accent, Ballet, by George, Chamex, Hammermill, International Paper logo, POL, PRO-DESIGN, REY and SvetoCopy are registered trademarks of International Paper Company or its affiliates. From FORTUNE Magazine, February 2020, ©2020 Fortune Media IP Limited. FORTUNE and The World’s Most Admired Companies are registered trademarks of Fortune Media IP Limited and are used under license. FORTUNE and Fortune Media IP Limited are not affiliated with, and do not endorse the products or services of, International Paper Company. “World’s Most Ethical Companies” and “Ethisphere” names and marks are registered trademarks of Ethisphere LLC. FTSE Russell (the trading name of FTSE International Limited and Frank Russell Company) confirms that International Paper has been independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to become a constituent of the FTSE4Good Index Series. Created by the global index provider FTSE Russell, the FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices. The FTSE4Good indices are used by a wide variety of market participants to create and assess responsible investment funds and other products. All product names, logos and brands are property of their respective owners. Annual Performance Summary printed on Accent Opaque Cover Smooth 100lb. and Text Smooth 100lb. 10-K printed on Accent Opaque Text Smooth 50lb. InternationalPaper.com 366159_IPA0032_03092020_APS_Covers_FINAL.indd 1-2 3/11/20 2:54 PM 

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