10-K
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________________ 
FORM 10-K
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2015
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
 
13-0872805
(State or other jurisdiction of incorporation or organization)
 
(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
  
Name of each exchange on which registered
Common Stock, $1 per share par value
  
New York Stock Exchange
_____________________________________________________ 
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý    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 ý
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 ý    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No ý
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, 2015) was approximately $21,026,985,885.
The number of shares outstanding of the Company’s common stock as of February 19, 2016 was 411,157,696.
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 2016 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

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INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1A.
ITEM 1B.
ITEM 2.
 
 
 
ITEM 3.
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
 
 
 
 
 
 
 
 
 
 
 
 





Table of Contents


INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015

ITEM 7A.
ITEM 8.
 
 
 
 
 
 
 
 
 
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
PART III.
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
PART IV.
 
 
 
 
ITEM 15.
 
 
 
APPENDIX I
APPENDIX II


Table of Contents

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 paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. We are a New York corporation, incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site.
In the United States, at December 31, 2015, the Company operated 24 pulp, paper and packaging mills, 169 converting and packaging plants, 16 recycling plants and three bag facilities. Production facilities at December 31, 2015 in Europe, Asia, Africa, India, Latin America and South America included 16 pulp, paper and packaging mills, 67 converting and packaging plants, and two recycling plants. We operate a printing and packaging products distribution business principally through 12 branches in Asia. At December 31, 2015, we owned or managed approximately 335,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions.
For management and financial reporting purposes, our businesses are separated into three segments: Industrial Packaging; Printing Papers; and Consumer Packaging. A description of these business segments can be found on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s 50% equity interest in Ilim Holding S.A. is also a separate reportable industry segment.
From 2011 through 2015, International Paper’s capital expenditures approximated $6.6 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs and maintain reliability of operations. Capital spending in 2015 was approximately $1.5 billion and is expected to be approximately $1.3 billion in 2016. You can find more information about capital expenditures on page 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Discussions of acquisitions can be found on pages 31 and 32 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 22 through 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our Internet Web site at www.internationalpaper.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our Web site is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC.
FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
The financial information concerning segments is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on pages 81 and 82 of Item 8. Financial Statements and Supplementary Data.
FINANCIAL INFORMATION ABOUT INTERNATIONAL AND U.S. OPERATIONS
The financial information concerning international and U.S. operations and export sales is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on page 82 of Item 8. Financial Statements and Supplementary Data.
COMPETITION AND COSTS
The markets in the pulp, paper and packaging product lines are large and fragmented. The major markets, both U.S. and non-U.S., in which the Company sells its principal products are very competitive. Our products compete with similar products produced by other forest products companies. We also compete, in some instances, with companies in other industries and against substitutes for wood-fiber products.
Many factors influence the Company’s competitive position, including price, cost, product quality and services. You can find more information about the impact of these factors on operating profits on pages 17 through 30 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of


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Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II.
MARKETING AND DISTRIBUTION
The Company sells packaging products, paper products and other products directly to end users and converters, as well as through agents, resellers and paper distributors.

 
DESCRIPTION OF PRINCIPAL PRODUCTS
The Company’s principal products are described on pages 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SALES VOLUMES BY PRODUCT
Sales volumes of major products for 2015, 2014 and 2013 were as follows:
Sales Volumes by Product (1)
 
In thousands of short tons
2015
2014
2013
Industrial Packaging
 
 
 
North American Corrugated Packaging
10,284

10,355

10,393

North American Containerboard
3,110

3,035

3,273

North American Recycling
2,379

2,459

2,379

North American Saturated Kraft
156

186

176

North American Gypsum/Release Kraft
171

168

157

North American Bleached Kraft
23

26

132

EMEA Industrial Packaging
1,417

1,379

1,342

Asian Box
359

408

416

Brazilian Packaging
305

318

297

Industrial Packaging
18,204

18,334

18,565

Printing Papers
 
 
 
U.S. Uncoated Papers
1,879

1,968

2,508

European and Russian Uncoated Papers
1,493

1,531

1,413

Brazilian Uncoated Papers
1,125

1,141

1,150

Indian Uncoated Papers
241

231

232

Uncoated Papers
4,738

4,871

5,303

Market Pulp (2)
1,736

1,776

1,711

Consumer Packaging
 
 
 
North American Consumer Packaging
1,425

1,486

1,556

European and Russian Coated Paperboard
381

354

355

Asian Coated Paperboard
958

1,358

1,430

Consumer Packaging
2,764

3,198

3,341


(1)
Includes third-party and inter-segment sales and excludes sales of equity investees.
(2)
Includes North American, European and Brazilian volumes and internal sales to mills.

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RESEARCH AND DEVELOPMENT
The Company operates its primary research and development center in Loveland, Ohio, as well as several product laboratories. Additionally, the Company has an interest in ArborGen, Inc., a joint venture with certain other forest products companies.
We direct research and development activities to short-term, long-term and technical assistance needs of customers and operating divisions, and to process, equipment and product innovations. Activities include product development within the operating divisions; studies on innovation and improvement of pulping, bleaching, chemical recovery, papermaking, converting and coating processes; packaging design and materials development; mechanical packaging systems, environmentally sensitive printing inks and reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $27 million in 2015, $16 million in 2014 and $18 million in 2013.
We own numerous patents, copyrights, trademarks, trade secrets and other intellectual property rights relating to our products and to the processes for their production. We also license intellectual property rights to and from others where advantageous or necessary. Many of the manufacturing processes are among our trade secrets. Some of our products are covered by U.S. and non-U.S. patents and are sold under well known trademarks. We derive a competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses.
ENVIRONMENTAL PROTECTION

International Paper is subject to extensive federal and state environmental regulation as well as similar regulations internationally. Our continuing objectives include: (1) controlling emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, and (2) maintaining compliance with applicable laws and regulations. The Company spent $93 million in 2015 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. The 2015 spend included costs associated with the U.S. Environmental Protection Agency’s (EPA) Boiler MACT (maximum achievable control technology) regulations. We expect
 
to spend $118 million in 2016 for similar capital projects. Capital expenditures for 2017 environmental projects are anticipated to be approximately $114 million. Capital expenditures for 2018 environmental projects are estimated to be $83 million. On January 31, 2013, EPA issued the final suite of Boiler MACT regulations. These regulations require owners of specified boilers to meet revised air emissions standards for certain substances. Several lawsuits have been filed to challenge all or portions of the Boiler MACT regulations. On December 3, 2015, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments of the petitioners challenging these regulations. As such, the projected capital expenditures for environmental projects represent our current best estimate of future expenditures with the recognition that the Boiler MACT regulations could change as a result of the pending court decision.
In the U.S., revisions to National Ambient Air Quality Standards (NAAQS) for sulfur dioxide (SO2), nitrogen dioxide (NO2), and fine particulate (PM2.5) finalized between 2010 and 2012, and a promulgated revision to the NAAQS for ozone on October 1, 2015, have not had a material impact on the Company. Similarly, regulations addressing specific implementation issues related to the SO2 NAAQS were released in 2015 by the EPA and are being implemented during the next two to four years. Potentially material capital investment may be required in response to these emerging requirements, but evaluations are ongoing.

CLIMATE CHANGE

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

International Efforts

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


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of on-going international negotiations including a Conference of the Parties (COP21) to the Kyoto Protocol. COP21 took place in December 2015 and although well short of reaching another international agreement, many countries, including the U.S. and EU member states, did establish non-binding emissions reduction targets. The U.S non-binding commitment is for greenhouse gas (GHG) emissions to be 26% to 28% below 2005 GHG emissions levels by 2025. Other countries in which we do business made similar non-binding commitments. The Company’s voluntary GHG reductions, which are set out in the Company’s annual Sustainability Report, are roughly in line with the percentages of the U.S. non-binding commitment. 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 future international agreements on the Company.
To assist member countries in meeting obligations under the Kyoto Protocol, the EU established and continues to operate an Emissions Trading System (EU ETS). Currently, we have two sites directly subject to regulation under Phase III of the EU ETS, one in Poland and one in France. Other sites that we operate in the EU experience indirect impacts of the EU ETS through purchased power pricing. Neither the direct nor indirect impacts of the EU ETS have been material to the Company, but they could be material to the Company in the future depending on how the 2015 non-binding commitments or allocation of and market prices for GHG credits under existing rules evolve over the coming years.
National Efforts
In the U.S., the Kyoto Protocol was not ratified and Congress has not passed GHG legislation. EPA has enacted (i) regulations to control GHGs from mobile sources (through transportation fuel efficiency standards), (ii) New Source Performance Standards (NSPS) for new Electrica Generating Units (EGUs), (iii) regulations requiring reporting of GHGs from sources of GHGs greater than 25,000 tons per year, and (iv) in 2015, requirements for states to develop plans to reduce GHGs from utility electric generating units (EGUs). In 2015, the Company reported to EPA the GHG emissions from 21 of our U.S. manufacturing sites and 9 landfills.
On November 19, 2014, EPA issued a revised draft carbon accounting framework addressing the circumstances under which biomass combustion can be considered carbon neutral. EPA has stated it intends to issue future rulemakings to address how states may use the revised framework in implementing state permit rules and in developing plans for regulating GHGs from utility electric generators. Given the uncertainties
 
regarding the framework and scope of future GHG rulemaking, it is unclear what impacts, if any, EPA’s actions in this area will have on the Company’s operations. To date there have been only minor permitting considerations and no substantive impacts.

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

On August 3, 2015, EPA promulgated the Clean Power Plan (CPP) rule to address climate change by reducing carbon dioxide (CO2) and other designated green house gas pollutant emissions from utility EGUs. In response, states are to develop EGU pollutant reduction plans over the next 1 to 3 years to reduce emissions over the 2022 to 2033 timeframe by about 32 percent from 2005 levels. These plans, or the federal plan that would take effect if the states do not act, pose potential cost increases for electricity purchased by the Company. EPA estimated that the proposed rule would increase purchased electricity prices by less than seven percent, but some utilities are estimating significantly higher price increases from the final rule (11 to 14%, or more). The magnitude of the cost increase to the Company will not be possible to estimate reliably until the plans and the utility industries’ responses are better defined over the next few years. Adding to the uncertainty, states and some industry parties have filed lawsuits challenging the rule, the result of which could materially affect the scope and stringency of the regulations. On February 9, 2016, the U.S. Supreme Court granted a stay of the Clean Power Plan.  The stay will remain in effect until final disposition of the case, and as such, the rule’s potential impact on the Company remains unclear.
State, Regional and Local Measures

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


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have on the Company’s operations. Further state measures are under substantive review as they respond to EPA’s 2015 Clean Power Plan and develop an implementation plan over the next 1 to 3 years. The CPP allows significant flexibility in how states develop their plans, so the uncertainty regarding potential impacts will remain high until more specificity is reached and individual power companies develop their compliance strategies.
Summary

Regulation of GHGs continues to evolve in various countries in which we do business. While it is likely that there will be increased governmental action regarding GHGs and climate change, any material impact to the company is not likely to occur before 2020 and at this time it is not reasonably possible to estimate Company costs of compliance with rules that have not yet been adopted or implemented and may not be adopted or implemented in the future. In addition to possible direct impacts, future legislation and regulation could have indirect impacts on International Paper, such as higher prices for transportation, energy and other inputs, as well as more protracted air permitting processes, 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.
Additional information regarding climate change and International Paper is available in our Sustainability Report found at http://www.internationalpaper.com/US/ EN/Company/Sustainability/SustainabilityReport.html, 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, 2015, we have approximately 56,000 employees, nearly 34,000 of whom are located in the United States. Of the U.S. employees, approximately 26,000 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 mill master agreement covers 19 of our U.S. pulp, paper, and packaging mills; the converting agreement includes 61 of our converting facilities. In addition, International Paper is party to a master agreement with District Council 2, International Brotherhood of Teamsters, covering 13 additional converting facilities.
During 2015, local labor agreements were negotiated at five mills and 13 converting facilities. In 2016, local labor agreements are scheduled to be negotiated at 29 facilities, including four mills and 25 converting facilities. 26 of these agreements will automatically renew under the terms of the applicable master agreement if new agreements are not reached.

EXECUTIVE OFFICERS OF THE REGISTRANT
Mark S. Sutton, 54, 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.
W. Michael Amick, Jr., 52, senior vice president - North American papers, pulp & consumer packaging since November 1, 2014. Mr. Amick previously served as vice president - president, IP India, from August 2012 to October 31, 2014, and vice president and general manager for the coated paperboard business from 2010 to 2012. Mr. Amick joined International Paper in 1990.
C. Cato Ealy, 59, senior vice president - corporate development since 2003. Mr. Ealy is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ealy joined International Paper in 1992.
William P. Hoel, 59, senior vice president, Container The Americas, since February 2012. Mr. Hoel previously served as vice president, Container The Americas, from 2005 until 2012, senior vice president, corporate sales and marketing, from 2004 until 2005,


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and vice president, Wood Products, from 2000 until 2004. Mr. Hoel joined International Paper in 1983.
Tommy S. Joseph, 56, senior vice president - manufacturing, technology, EH&S and global sourcing since January 2010. Mr. Joseph 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 Holding S.A., a Swiss Holding Company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Joseph joined International Paper in 1983.
Thomas G. Kadien, 59, senior vice president - human resources, government relations & global citizenship, since November 1, 2014. Mr. Kadien previously served as senior vice president - consumer packaging and IP Asia from January 2010 to October 31, 2014, and senior vice president and president - xpedx from 2005 until 2009. Mr. Kadien serves on the board of directors of The Sherwin-Williams Company. Mr. Kadien joined International Paper in 1978.
Glenn R. Landau, 47, senior vice president - president, IP Latin America since November 1, 2014. Mr. Landau previously served as vice president - president IP Latin America from 2013 to October 31, 2014, vice president - investor relations from 2011 to 2013, and vice president and general manager, containerboard and recycling from 2007 to 2011. Mr. Landau joined International Paper in 1991.
Timothy S. Nicholls, 54, senior vice president - industrial packaging since November 1, 2014. Mr. Nicholls previously served as senior vice president - printing and communications papers of the Americas from November 2011 to October 31, 2014, senior vice president and chief financial officer from 2007 until 2011, vice president and executive project leader of IP Europe during 2007, and vice president and chief financial officer - IP Europe from 2005 until 2007. Mr. Nicholls joined International Paper in 1991.
Jean-Michel Ribieras, 53, senior vice president - president, IP Europe, Middle East, Africa & Russia since June 2013. Mr. Ribieras previously served as president - IP Latin America from 2009 until 2013. Mr. Ribieras is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ribieras joined International Paper in 1993.
Carol L. Roberts, 56, senior vice president & chief financial officer since November 2011. Ms. Roberts previously served as senior vice president - industrial packaging from 2008 until 2011 and senior vice president - IP packaging solutions from 2005 until 2008. Ms. Roberts serves on the board of directors of
 
Alcoa Inc. Ms. Roberts joined International Paper in 1981.
Sharon R. Ryan, 56, 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.

RAW MATERIALS
Raw materials essential to our businesses include wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch. Information concerning fiber supply purchase agreements that were entered into in connection with the Company’s 2006 Transformation Plan and the CBPR acquisition in 2008 is presented in Note 11 Commitments and Contingent Liabilities on page 61 of Item 8. Financial Statements and Supplementary Data.
FORWARD-LOOKING STATEMENTS

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


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manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; (vii) the execution of a definitive agreement to sell our corrugated box business in China and Southeast Asia, and the successful closing of the transaction within the estimated timeframe; and (viii) our ability to achieve the benefits we expect from strategic acquisitions, divestitures and restructurings. These and other factors that could cause or contribute to actual results differing materially from such forward looking statements are discussed in greater detail below in “Item 1A. Risk Factors.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

ITEM 1A. RISK FACTORS
In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), or in the Company’s other filings with the Securities and Exchange Commission, the following are some important factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement.
RISKS RELATING TO INDUSTRY CONDITIONS
CHANGES IN THE COST OR AVAILABILITY OF RAW MATERIALS, ENERGY AND TRANSPORTATION COULD AFFECT OUR PROFITABILITY. We rely heavily on the use of certain raw materials (principally virgin wood fiber, recycled fiber, caustic soda and starch), energy sources (principally natural gas, coal and fuel oil) and third-party companies that transport our goods. The market price of virgin wood fiber varies based upon availability and source. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause an occasional tightening in the supply of recycled fiber. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future. Our profitability has been, and will continue to be, affected by changes
 
in the costs and availability of such raw materials, energy sources and transportation sources.
THE INDUSTRIES IN WHICH WE OPERATE EXPERIENCE BOTH ECONOMIC CYCLICALITY AND CHANGES IN CONSUMER PREFERENCES. FLUCTUATIONS IN THE PRICES OF, AND THE DEMAND FOR, OUR PRODUCTS COULD MATERIALLY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. In addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. These consumer preferences affect the prices of our products. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products.
COMPETITION IN THE UNITED STATES AND INTERNATIONALLY COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate in a 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 printing and advertising activity, white-collar employment levels and consumer confidence, all of which impact demand for our products. In addition, volatility in the capital and credit markets, which impacts interest rates, currency exchange rates and the availability of credit, could have a material adverse effect on our business, financial condition and our results of operations.
THE LEVEL OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS. As of December 31, 2015, International Paper had approximately $9.3 billion of outstanding indebtedness, including $9.3 billion of indebtedness outstanding under our floating and fixed rate notes. There was no indebtedness outstanding under our


7

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credit facilities as of December 31, 2015. The level of our indebtedness could have important consequences to our financial condition, operating results and business, including the following:
it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, dividends, share repurchases, debt service requirements, acquisitions and general corporate or other purposes;
a portion of our cash flows from operations will be dedicated to payments on indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities;
the debt service requirements of our indebtedness could make it more difficult for us to satisfy other obligations;
our indebtedness that is subject to variable rates of interest exposes us to increased debt service obligations in the event of increased interest rates;
it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt; and
it may increase our vulnerability to a downturn in general economic conditions or in our business, and may make us unable to carry out capital spending that is important to our growth.
In addition, we are subject to agreements that require meeting and maintaining certain financial ratios and covenants. A significant or prolonged downturn in general business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests and could require us to take action to reduce our debt or to act in a manner contrary to our current business objectives.
CHANGES IN CREDIT RATINGS ISSUED BY NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS COULD ADVERSELY AFFECT OUR COST OF FINANCING AND HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SECURITIES. Maintaining an investment-grade credit rating is an important element of our financial strategy, and a downgrade of the Company’s ratings below investment grade may limit our access to the capital markets, have an adverse effect on the market price of our securities, increase our cost of borrowing and require us to post collateral for derivatives in a net liability position. The Company’s desire to maintain its investment grade rating may cause the Company to take certain actions designed to improve its cash flow, including sale of assets, suspension or reduction of our
 
dividend and reductions in capital expenditures and working capital.
Under the terms of the agreements governing approximately $2.5 billion of our debt as of December 31, 2015, the applicable interest rate on such debt may increase upon each downgrade in our credit rating. As a result, a downgrade in our credit rating may lead to an increase in our interest expense. There can be no assurance that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Any such downgrade of our credit ratings could adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in 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 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 $840 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 12, Variable Interest Entities, on pages 64 through 66, and Note 10, Income Taxes, on pages 59 through 61, in Item 8. Financial Statements and Supplementary Data for further information.
OUR PENSION AND HEALTH CARE COSTS ARE SUBJECT TO NUMEROUS FACTORS WHICH COULD CAUSE THESE COSTS TO CHANGE. We have defined benefit pension plans covering substantially all U.S. salaried employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. We provide retiree health care benefits to certain of our U.S. salaried and certain hourly employees. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.


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Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could increase pension costs.  Health care reform under the Patient Protection and Affordable Care Act of 2010 could also increase costs with respect to medical coverage of the Company’s full-time employees. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations.
OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE MAY BE REQUIRED TO MAKE CASH PAYMENTS TO THE PLANS, REDUCING THE CASH AVAILABLE FOR OUR BUSINESS. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation – Retirement Benefits,” at December 31, 2015 was $3.6 billion. The amount and timing of future contributions will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates. As described elsewhere in this Annual Report on Form 10-K, during the first half of 2016, former employees who are participants in our pension plan will be able to request early payment of their entire plan benefit in the form of a single lump sum payment. While all payments will be made from the plan's trust assets, the target population has a total liability of $3.0 billion. For further information, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources on page 34.
CHANGES IN INTERNATIONAL CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operating results and business prospects could be substantially affected by risks related to the countries outside the United States in which we have manufacturing facilities or sell our products. Specifically, Russia, Brazil, Poland, India, and Turkey, where we have substantial manufacturing facilities, are countries that are exposed to economic and political instability in their respective regions of the world. Fluctuations in the value of local currency versus the U.S. dollar, downturns in economic activity, adverse tax consequences, nationalization or any change in social, political or labor conditions in any of these countries or regions could negatively affect our financial results. Trade protection measures in favor of local producers of competing products, including governmental subsidies, tax benefits and other measures giving local producers a competitive
 
advantage over International Paper, may also adversely impact our operating results and business prospects in these countries. In addition, our international operations are subject to regulation under U.S. law and other laws related to operations in foreign jurisdictions. For example, the Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. Failure to comply with domestic or foreign laws could result in various adverse consequences, including the imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations.
RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS

WE ARE SUBJECT TO A WIDE VARIETY OF LAWS, REGULATIONS AND OTHER GOVERNMENT REQUIREMENTS THAT MAY CHANGE IN SIGNIFICANT WAYS, AND THE COST OF COMPLIANCE WITH SUCH REQUIREMENTS COULD IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operations are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and other government requirements -- including, among others, those relating to the environment, health and safety, labor and employment 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. There can be no assurance that future remediation requirements and compliance with existing and new laws and requirements, including with global climate change laws and regulations, Boiler MACT and NAAQSs, will not require significant expenditures, or that existing reserves for specific matters will be adequate to cover future costs. We could also incur substantial fines or sanctions, enforcement actions (including orders limiting our operations or requiring corrective measures), natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws, regulations, codes and common law. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, liability may be imposed without regard to contribution or to whether we knew of, or caused, the release of hazardous substances. As another example, we are subject to a number of labor


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and employment laws and regulations that could significantly increase our operating costs and reduce our operational flexibility.

RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS. The costs and other effects of pending litigation against us cannot be determined with certainty. Although we do not believe that the outcome of any pending or threatened lawsuits or claims will have a material effect on our business or consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claim will be as expected.
RISKS RELATING TO OUR OPERATIONS
MATERIAL DISRUPTIONS AT ONE OF OUR MANUFACTURING FACILITIES COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at our corporate headquarters or one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial condition. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
fires, floods, earthquakes, hurricanes or other catastrophes;
the effect of a drought or reduced rainfall on its water supply;
the effect of other severe weather conditions on equipment and facilities;
terrorism or threats of terrorism;
domestic and international laws and regulations applicable to our Company and our business partners, including joint venture partners, around the world;
unscheduled maintenance outages;
prolonged power failures;
an equipment failure;
a chemical spill or release;
explosion of a boiler;
damage or disruptions caused by third parties operating on or adjacent to one of our manufacturing facilities;
 
disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;
widespread outbreak of an illness or any other communicable disease, or any other public health crisis;
labor difficulties; and
other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and having a negative effect on our business and financial results.
WE ARE SUBJECT TO INFORMATION TECHNOLOGY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY USED TO MANAGE OPERATIONS AND OTHER BUSINESS PROCESSES. Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation, updating and independent third party verification, our information technology systems, and those of our third party providers, could become subject to employee error or malfeasance, cyber attacks, or natural disasters. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to, interruption to systems availability, denial of access to and misuse of applications required by our customers to conduct business with International Paper. Access to internal applications required to plan our operations, source materials, manufacture and ship finished goods and account for orders could be denied or misused. Theft of intellectual property or trade secrets, and inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result in lost sales, business delays, negative publicity and could have a material effect on our business.
CERTAIN OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT. Certain operations in Russia are carried on by a joint venture, Ilim. In joint ventures, we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources


10

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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 that we do not receive all the benefits from our successful joint ventures.
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS FROM STRATEGIC ACQUISITIONS, JOINT VENTURES, DIVESTITURES AND OTHER CORPORATE TRANSACTIONS. Our strategy for long-term growth, productivity and profitability depends, in part, on our ability to accomplish prudent strategic acquisitions, joint ventures, divestitures and other corporate transactions and to realize the benefits we expect from such transactions, and we are subject to the risk that we may not achieve the expected benefits. Among the benefits we expect from potential as well as completed acquisitions and joint ventures are synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers placing higher strategic value on such businesses and assets than does International Paper.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM  2. PROPERTIES
FORESTLANDS
As of December 31, 2015, the Company owned or managed approximately 335,000 acres of forestlands in Brazil, and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. All owned lands in Brazil are independently third-party certified for sustainable forestry under the Brazilian National Forest Certification Program (CERFLOR) and the Forest Stewardship Council (FSC).

 
MILLS AND PLANTS
A listing of our production facilities by segment, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference.
The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities.
CAPITAL INVESTMENTS AND DISPOSITIONS
Given the size, scope and complexity of our business interests, we continually examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about the level of planned capital investments for 2016 on page 33 and 34, and dispositions and restructuring activities as of December 31, 2015, on pages 20 through 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on page 54 and pages 56 and 57 of Item 8. Financial Statements and Supplementary Data.
ITEM 3. LEGAL PROCEEDINGS
Information concerning the Company’s legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 61 through 64 of Item  8. Financial Statements and Supplementary Data.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Dividend per share data on the Company’s common stock and the high and low sales prices for the Company’s common stock for each of the four quarters in 2015 and 2014 are set forth on page 83 of Item 8. Financial Statements and Supplementary Data. As of

 
the filing of this Annual Report on Form 10-K, the Company’s common shares are traded on the New York Stock Exchange. As of February 19, 2016, there were approximately 12,705 record holders of common stock of the Company.
The table below presents information regarding the Company’s purchase of its equity securities for the time periods presented.


PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Period
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)
October 1, 2015 - October 31, 2015


$—


$1.13
November 1, 2015 - November 30, 2015
2,028,004

41.05

2,027,636

1.05

December 1, 2015 - December 31, 2015
404,562

41.80

402,163

1.03

Total
2,432,566

 
 
 

(a)
2,767 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. The remainder were purchased under a share repurchase program that was approved by our Board of Directors and announced on July 8, 2014.  Through this program, which does not have an expiration date, we were authorized to purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $1.5 billion of shares of our common stock.  As of February 19, 2016, approximately $933 million of shares of our common stock remained authorized for purchase under our share repurchase programs.






















 























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PERFORMANCE GRAPH
The performance graph shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
The following graph compares a $100 investment in Company stock on December 31, 2010 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, 2010. The graph portrays total return, 2010–2015, assuming reinvestment of dividends.



Note 1: The companies included in the ROIC Peer Group are Domtar Inc., Fibria Celulose S.A., Klabin S.A., Metsa Board Corporation, Mondi Group, Packaging Corporation of America, Smurfit Kappa Group, Stora Enso Group, and UPM-Kymmene Corp. MeadWestvaco Corp. and Rock-Tenn Company are included in the ROIC Peer Group results through 2014.
Note 2: Returns are calculated in $USD.

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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY (a)
Dollar amounts in millions, except per share amounts and stock prices
2015
 
2014
 
2013
 
2012
 
2011
 
RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Net sales
$
22,365

  
$
23,617

  
$
23,483

  
$
21,852

  
$
19,464

  
Costs and expenses, excluding interest
20,544

  
22,138

  
21,643

  
20,214

  
17,528

  
Earnings (loss) from continuing operations before income taxes and equity earnings
1,266

(b)  
872

(d) 
1,228

(g)  
967

(j) 
1,395

(m)  
Equity earnings (loss), net of taxes
117

  
(200
)
  
(39
)
 
61

  
140

  
Discontinued operations, net of taxes


(13
)
(e) 
(309
)
(h) 
77

(k) 
82

(n) 
Net earnings (loss)
917

(b-c)  
536

(d-f)  
1,378

(g-i) 
799

(j-l)  
1,336

(m-o)  
Noncontrolling interests, net of taxes
(21
)
  
(19
)
  
(17
)
  
5

  
14

  
Net earnings (loss) attributable to International Paper Company
938

(b-c)  
555

(d-f) 
1,395

(g-i) 
794

(j-l)  
1,322

(m-o)  
FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
Current assets less current liabilities
$
2,553

  
$
3,050

  
$
3,898

  
$
3,907

  
$
5,718

  
Plants, properties and equipment, net
11,980

  
12,728

  
13,672

  
13,949

  
11,817

  
Forestlands
366

  
507

  
557

  
622

  
660

  
Total assets
30,587

  
28,684

  
31,528

  
32,153

  
27,018

  
Notes payable and current maturities of long-term debt
426

  
742

  
661

  
444

  
719

  
Long-term debt
8,900

  
8,631

  
8,827

  
9,696

  
9,189

  
Total shareholders’ equity
3,884

  
5,115

  
8,105

  
6,304

  
6,645

  
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
2.25

  
$
1.33

  
$
3.85

  
$
1.65

 
$
2.87

  
Discontinued operations

  
(0.03
)
  
(0.70
)
  
0.17

 
0.19

 
Net earnings (loss)
2.25

  
1.30

  
3.15

  
1.82

 
3.06

 
DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
2.23

  
$
1.31

  
$
3.80

  
$
1.63

 
$
2.84

  
Discontinued operations

  
(0.02
)
  
(0.69
)
  
0.17

 
0.19

 
Net earnings (loss)
2.23

  
1.29

  
3.11

  
1.80

 
3.03

  
Cash dividends
1.640

  
1.450

  
1.250

  
1.088

  
0.975

  
Total shareholders’ equity
9.43

  
12.18

  
18.57

  
14.33

  
15.21

  
COMMON STOCK PRICES
 
 
 
 
 
 
 
 
 
 
High
$
57.90

  
$
55.73

  
$
50.33

  
$
39.88

  
$
33.01

  
Low
36.76

  
44.24

  
39.47

  
27.29

  
21.55

  
Year-end
37.70

  
53.58

  
49.03

  
39.84

  
29.60

  
FINANCIAL RATIOS
 
 
 
 
 
 
 
 
 
 
Current ratio
1.7

  
1.6

  
1.8

  
1.8

  
2.2

  
Total debt to capital ratio
0.71

  
0.65

  
0.54

  
0.62

  
0.60

  
Return on shareholders’ equity
20.0
%
(b-c)  
7.7
%
(d-f)  
20.2
%
(g-i) 
11.6
%
(j-l) 
17.9
%
(m-o)  
CAPITAL EXPENDITURES
$
1,487

  
$
1,366

  
$
1,198

  

$1,383

  

$1,159

  
NUMBER OF EMPLOYEES
56,000

  
58,000

  
64,000

  
65,000

  
56,000

  







 









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FINANCIAL GLOSSARY
Current ratio—
current assets divided by current liabilities.
Total debt to capital ratio—
long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt and total shareholders’ equity.
Return on shareholders’ equity—
net earnings attributable to International Paper Company divided by average shareholders’ equity (computed monthly).
FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY
 
(a)
All periods presented have been restated to reflect the xpedx business and the Temple-Inland Building Products business as discontinued operations, if applicable.

2015:

(b) Includes the following pre-tax charges (gains):
In millions
 
2015
Riegelwood mill conversion costs, net of proceeds from sale of Carolina Coated Bristols brand
 
$
8

Timber monetization restructuring
 
16

Early debt extinguishment costs
 
207

IP-Sun JV impairment
 
174

Brazil Packaging impairment
 
137

Legal liability reserve adjustment
 
15

Refund of state tax credits
 
(4
)
Other items
 
6

Total
 
$
559


(c) Includes the following tax expenses (benefits):
In millions
 
2015
IP-Sun JV impairment
 
$
(67
)
Cash pension contribution
 
23

Other items
 
7

Total
 
$
(37
)











 
2014:
(d) Includes the following pre-tax charges (gains):
In millions
 
2014
Temple-Inland integration
 
$
16

Courtland mill shutdown
 
554

Early debt extinguishment costs
 
276

India legal contingency resolution
 
(20
)
Multi-employer pension plan withdrawal liability
 
35

Foreign tax amnesty program
 
32

Asia Industrial Packaging goodwill impairment
 
100

Loss on sale by investee and impairment of investment
 
47

Other items
 
12

Total
 
$
1,052

(e) Includes the after-tax operating earnings of the xpedx business prior to the spin-off and the following after-tax charges (gains):
In millions
 
2014
xpedx spinoff
 
$
16

Building Products divestiture
 
9

xpedx restructuring
 
(1
)
Total
 
$
24

(f) Includes the following tax expenses (benefits):
In millions
 
2014
State legislative tax change
 
$
10

Internal restructuring
 
(90
)
Other items
 
(1
)
Total
 
$
(81
)

2013:

(g) Includes the following pre-tax charges (gains):
In millions
 
2013
Temple-Inland integration
 
$
62

Courtland mill shutdown
 
118

Early debt extinguishment costs
 
25

Insurance reimbursement related to legal settlement
 
(30
)
Shut down of paper machine at Augusta mill
 
45

India Papers tradename and goodwill impairment
 
127

Fair value adjustment of company airplanes
 
9

Cass Lake environmental reserve
 
6

Bargain purchase adjustment - Turkey
 
(13
)
Other items
 
(5
)
Total
 
$
344




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(h) Includes the after-tax operating earnings of the xpedx business for the full year and the Temple-Inland Building Products business through the date of sale in July 2013. Also includes the following after-tax charges (gains):
In millions
 
2013
xpedx spinoff
 
$
14

xpedx goodwill impairment
 
366

Building Products divestiture
 
19

xpedx restructuring
 
19

Total
 
$
418

(i) Includes the following tax expenses (benefits):
In millions
 
2013
Settlement of U.S. federal tax audits
 
$
(744
)
Income tax reserve release
 
(31
)
Other items
 
1

Total
 
$
(774
)

2012:

(j) Includes the following pre-tax charges (gains):
In millions
 
2012
Temple-Inland integration
 
$
164

Early debt extinguishment costs
 
48

EMEA packaging business restructuring
 
17

Temple-Inland inventory fair value adjustment
 
20

Hueneme mill long-lived asset fair value adjustment
 
62

Containerboard mill divestitures
 
29

Total
 
$
340


(k) Includes the after-tax operating earnings of the xpedx business and the Temple-Inland Building Products business for the full year. Also includes the following after-tax charges (gains):
In millions
 
2012
Building Products divestiture
 
$
9

xpedx restructuring
 
28

Total
 
$
37


(l) Includes the following tax expenses (benefits):
In millions
 
2012
Internal restructuring
 
$
14

Deferred tax asset adjustment related to Medicare Part D reimbursement
 
5

Total
 
$
19


 
2011:
(m) Includes the following pre-tax charges (gains):
In millions
 
2011
Temple-Inland acquisition costs
 
$
20

Early debt extinguishment costs
 
32

APPM acquisition costs
 
18

Reversal of environmental and other reserves related to repurposing at Franklin mill
 
(24
)
Cass Lake environmental reserve
 
27

North American Shorewood business fixed asset impairment
 
129

Shorewood business impairment
 
78

Inverurie, Scotland mill asset impairment
 
11

Total
 
$
291

(n) Includes the following after-tax charges (gains):
In millions
 
2011
Gain for earnout provision - sale of Kraft Papers business
 
$
(30
)
Tax benefit - Brazilian Coated Papers business sale
 
(15
)
Interest income on tax benefit - Brazilian Coated Papers business sale
 
(4
)
xpedx restructuring
 
34

Total
 
$
(15
)

 (o) Includes the following tax expenses (benefits):
In millions
 
2011
Internal restructuring
 
$
24

Tax benefit related to reduction of the carrying value of the Shorewood business and write-off of the associated deferred tax liability
 
(222
)
Tax expense for APPM acquisitions costs
 
9

Release of deferred tax asset valuation allowance
 
13

Other items
 
2

Total
 
$
(174
)



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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY

Operating Earnings (a non-GAAP measure) is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. International Paper generated Operating Earnings per diluted share attributable to common shareholders of $3.65 in 2015, compared with $3.00 in 2014, and $3.06 in 2013. Diluted earnings (loss) per share attributable to common shareholders were $2.23 in 2015, compared with $1.29 in 2014 and $3.11 in 2013.

International Paper delivered solid results during 2015 driven by strong margins and earnings in our North American Industrial Packaging business and record performance from the Ilim joint venture. We generated $1.8 billion of free cash flow which enabled the Company to return cash to our shareholders in the form of approximately $500 million in share repurchases and a 10% increase in the quarterly dividend beginning with the 2015 fourth quarter dividend payment. During 2015, we successfully completed the restructuring of the 2006 timber monetization to achieve our objectives of reducing risk and preserving financial flexibility, while maintaining the deferral of $1.4 billion of deferred income taxes. Finally, with respect to our balanced use of cash, we completed a $2 billion bond issue and related tender offer along with making a $750 million voluntary pension contribution.

Our 2015 results reflect the benefits of favorable input costs offset by price and mix declines across our North American businesses. Volumes were generally flat compared to 2014 except for lower volumes in our North American Industrial Packaging business due to lower containerboard export tons. Input costs decreased versus 2014 largely due to lower energy, chemicals and freight costs. Price declined relative to 2014 driven mainly by lower pricing in our North American Industrial Packaging and Printing Papers and Pulp businesses. Our Ilim joint venture generated record results in 2015 driven by improved operations and increased margins. The positive results were partially offset by the unfavorable impact of non-cash foreign currency movements associated with Ilim’s US dollar denominated debt. Finally, during 2015 we completed the divestiture of our interest in the IP-Sun joint venture, generating $23 million in cash proceeds and removing approximately $400 million of debt from our balance sheet upon completion of the deal.

Overall, 2015 reflects solid performance in what continues to be a challenging economic environment. We once again generated returns in excess of our cost of capital while returning cash to our shareholders in the
 
form of increased dividends and share repurchases. Our focus on maximizing free cash flow generation and deploying capital in a way that creates additional value for our shareholders has positioned us for another successful year in 2016.

Looking ahead to the 2016 first quarter, we expect seasonally lower volumes in our North American Industrial Packaging business, with some offset from higher export volume which carries a lower margin. Additionally, we expect seasonally lower volumes in our Brazilian Printing Papers business as the fourth quarter historically represents the strongest volume quarter for this business. Pricing is expected to be lower for our North American Printing Papers and Pulp business, primarily driven by lower pulp prices. Additionally, pricing is expected to be lower in our North American Industrial Packaging business due to lower export pricing and price index changes. We expect price improvements in our EMEA Printing Papers business, including Russia, and Brazilian Printing Papers business following announced price increases although these will be largely offset by inflationary cost pressures. We expect operating performance to be in line with the 2015 fourth quarter with some modest improvement in our North American Industrial Packaging business. Planned maintenance downtime costs should increase, primarily driven by outages in our North American Industrial Packaging and Printing Papers businesses, including costs associated with the Riegelwood mill conversion. Equity earnings from our Ilim joint venture are expected to benefit from strong operations offset by softwood pulp price pressure and normal seasonality. Additionally, we expect Ilim’s earnings to be impacted by the absence of the positive impact from foreign currency movements driven by Ilim’s U.S. dollar denominated debt as we assume no change in foreign currency rates in our outlook.

For the 2016 full year, we continue to face an uncertain macroeconomic environment but believe we are well positioned to deal with whatever the market brings. We will continue to improve our North American Industrial Packaging business by further realizing optimization opportunities during 2016. We expect to complete the Riegelwood mill conversion during first half of 2016 and be fully ramped by the 2016 fourth quarter, initially producing softwood market pulp. Additionally, we will continue executing against our plan to drive profitable growth following the recent expansion within the Foodservice business as well as optimizing commercial opportunities and mix within the North American Printing Papers portfolio. Finally, we will remain focused on maximizing free cash flow generation and deploying that capital in a way that creates additional value for our shareholders.






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Free cash flow (a non-GAAP measure) of $1.8 billion generated in 2015 was lower than the $2.1 billion generated in 2014 and even with the $1.8 billion generated in 2013 (see reconciliation on page 30).
Operating Earnings per share attributable to common shareholders of $0.87 in the 2015 fourth quarter were lower than the $0.97 in the 2015 third quarter, but higher than the $0.53 in the 2014 fourth quarter. Diluted earnings (loss) per share attributable to common shareholders were $0.43 in the 2015 fourth quarter, compared with $0.53 in the 2015 third quarter and $0.32 in the 2014 fourth quarter.
Free cash flow of $501 million generated in the 2015 fourth quarter was lower than the $512 million generated in the 2015 third quarter and the $739 million generated in the 2014 fourth quarter (see reconciliation on page 30).
Operating Earnings and Operating Earnings Per Share are non-GAAP measures. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most directly comparable GAAP measure. The Company calculates Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, non-operating pension expense and discontinued operations. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most directly comparable GAAP measure, provides for a more complete analysis of the results of operations. The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders. 
 
2015
2014
2013
Operating Earnings (Loss) Per Share Attributable to Shareholders
$
3.65

$
3.00

$
3.06

Non-operating pension expense
(0.38
)
(0.30
)
(0.44
)
Special items
(1.04
)
(1.39
)
1.18

Diluted Earnings (Loss) Per Share from Continuing Operations
2.23

1.31

3.80

Discontinued operations

(0.02
)
(0.69
)
Diluted Earnings (Loss) Per Share Attributable to Shareholders
$
2.23

$
1.29

$
3.11

 
 
 
Three Months Ended December 31, 2015
 
Three Months Ended September 30, 2015
 
Three Months Ended December 31, 2014
Operating Earnings (Loss) Per Share Attributable to Shareholders
 
$
0.87

 
$
0.97

 
$
0.53

Non-operating pension expense
 
(0.09
)
 
(0.11
)
 
(0.07
)
Special items
 
(0.35
)
 
(0.33
)
 
(0.12
)
Diluted Earnings (Loss) Per Share from Continuing Operations
 
0.43

 
0.53

 
0.34

Discontinued operations
 

 

 
(0.02
)
Diluted Earnings (Loss) Per Share Attributable to Shareholders
 
$
0.43

 
$
0.53

 
$
0.32

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



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The following table presents a reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit:
 
In millions
2015
2014
2013
Net Earnings (Loss) Attributable to International Paper Company
$
938

$
555

$
1,395

Deduct – Discontinued operations:
 
 
 
(Earnings) from operations

(11
)
(109
)
Special items (gain) loss

24

418

Earnings (Loss) From Continuing Operations Attributable to International Paper Company
938

568

1,704

Add back (deduct):
 
 
 
Income tax provision
466

123

(498
)
Equity (earnings) loss, net of taxes
(117
)
200

39

Net earnings (loss) attributable to noncontrolling interests
(21
)
(19
)
(17
)
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings
1,266

872

1,228

Interest expense, net
555

601

612

Noncontrolling interests / equity earnings included in operations
8

2

(1
)
Corporate items
36

51

61

Special items:
 
 
 
Restructuring and other charges
238

282

10

Net losses (gains) on sales and impairments of businesses

38


Non-Operating Pension Expense
258

212

323

 
$
2,361

$
2,058

$
2,233

Industry Segment Operating Profit
 
 
 
Industrial Packaging
$
1,853

$
1,896

$
1,801

Printing Papers
533

(16
)
271

Consumer Packaging
(25
)
178

161

Total Industry Segment Operating Profit
$
2,361

$
2,058

$
2,233

Industry segment operating profits in 2015 included a net loss from special items of $321 million compared with $732 million in 2014 and $336 million in 2013. Operationally, compared with 2014, the benefit from lower input costs ($232 million) was offset by lower average sales price realizations and mix ($226 million), lower sales volumes ($38 million), higher operating costs ($16 million), higher maintenance outage costs ($37 million) and higher other costs ($23 million).
 
The principal changes in operating profit by segment were as follows:
 
Industrial Packaging’s profits of $1.9 billion were $43 million lower than in 2014 as the benefit of lower input costs was offset by lower average sales price realizations and mix, lower sales volumes, higher operating costs and higher maintenance outage costs. In addition, 2015 operating profits included a goodwill and trade name impairment charge of $137 million related to our Brazil Packaging business. Operating profits in 2014 included $16 million of costs associated with the integration of Temple-Inland, a goodwill impairment charge of $100 million related to our Asia Industrial Packaging business, a charge of $35 million for costs associated with a multi-employer pension plan withdrawal liability and a net charge of $7 million for other items.

Printing Papers’ profits of $533 million represented a $549 million increase in operating profits from 2014. The benefits from lower input costs, lower costs associated with the closure of our Courtland, Alabama mill and lower foreign exchange impact were offset by lower average sales price realizations and mix, lower sales volumes, higher operating costs and higher maintenance outage costs. The 2014 operating loss included a special items charge of $554 million for costs associated with the shutdown of our Courtland, Alabama mill, a gain of $20 million for the resolution of a legal contingency in India and a charge of $32 million for costs associated with a foreign tax amnesty program.

Consumer Packaging’s operating loss of $25 million represented a $203 million reduction in operating profits from 2014. The benefits from higher sales volumes, lower planned maintenance downtime costs and lower input costs were offset by lower average sales price realizations and mix, higher operating costs, and higher foreign exchange and other expenses. In addition, 2015 operating profits included an asset impairment charge of $174 million


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related to the sale of our 55% equity share of the IP-Sun JV in Asia, a net cost of $8 million related to costs to convert our Riegelwood mill to 100% pulp production, net of proceeds from the sale of the Carolina Coated Bristols brand, and $2 million of sheet plant closure costs. Operating profits in 2014 included $8 million of sheet plant closure costs.

Corporate items, net, of $36 million of expense in 2015 were lower than the $51 million of expense in 2014 due to the absence of a one-time non-cash foreign exchange charge related to the administrative restructuring of some international entities in 2014. The decrease in 2014 from the expense of $61 million in 2013 is due to lower pension costs partially offset by the one-time non-cash foreign exchange charge.
Corporate special items, including restructuring and other items and net losses on sales and impairments of businesses were a loss of $238 million in 2015 compared with a loss of $320 million in 2014 and a loss of $4 million in 2013. The loss in 2015 is due to debt premium costs, costs associated with the restructure of our timber monetization and a legal liability reserve adjustment. The loss in 2014 is primarily due to debt extinguishment costs and a loss on the sale of a business by ASG, which was formerly referred to as AGI-Shorewood and in which we hold an investment, and the subsequent partial impairment of our ASG investment.
Interest expense, net, was $555 million in 2015 compared with $607 million ($601 million excluding special items net interest expense reported in the Printing Papers business segment) in 2014 and $612 million in 2013. The decrease in 2015 compared with 2014 is due to lower average interest rates. The decrease in 2014 compared with 2013 also reflects lower average interest rates.
A net income tax provision of $466 million was recorded for 2015, including a tax benefit of $62 million related to internal restructurings, an expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a tax expense of $2 million for other items. The 2014 income tax provision of $123 million includes a tax benefit of $90 million related to internal restructurings and a net tax expense of $9 million for other items. The 2013 income tax benefit of $498 million includes a tax benefit of $770 million associated with the settlement of tax audits and a net tax benefit of $4 million for other items.
Discontinued Operations

2014: On July 1, 2014, International Paper completed the spinoff of its distribution business, xpedx, which subsequently merged with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv). The xpedx business had historically represented the Company's Distribution reportable segment.

 
The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received payments of approximately $411 million, financed with new debt in Veritiv's capital structure.

2013: On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. to joint venture partner Deltic Timber Corporation for $20 million in assumed liabilities and cash.

On July 19, 2013 the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash.

Liquidity and Capital Resources
For the year ended December 31, 2015, International Paper generated $2.6 billion of cash flow from operations compared with $3.1 billion in 2014 and $3.0 billion in 2013. Cash flow from operations included $750 million, $353 and $31 million of cash pension contributions in 2015, 2014 and 2013, respectively. Capital spending for 2015 totaled $1.5 billion, or 115% of depreciation and amortization expense. Net decreases in debt totaled $74 million. Our liquidity position remains strong, supported by approximately $2.1 billion of credit facilities that we believe are adequate to meet future liquidity requirements. Maintaining an investment-grade credit rating for our long-term debt continues to be an important element in our overall financial strategy.
We expect to generate strong free cash flow again in 2016 and will continue our balanced use of cash through investments in capital projects, the reduction of total debt, including the Company’s unfunded pension obligation, returning value to shareholders and strengthening our businesses through strategic acquisitions, as appropriate.
Capital spending for 2016 is targeted at $1.3 billion, or about 100% of depreciation and amortization.
Legal
See Note 11 Commitments and Contingent Liabilities on pages 61 through 64 of Item 8. Financial Statements and Supplementary Data for a discussion of legal matters.
CORPORATE OVERVIEW
While the operating results for International Paper’s various business segments are driven by a number of business-specific factors, changes in International Paper’s operating results are closely tied to changes in general economic conditions in North America, Europe, Russia, Latin America, Asia, Africa and the Middle East. Factors that impact the demand for our products include


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industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels, and movements in currency exchange rates.
Product prices are affected by general economic trends, inventory levels, currency exchange rate movements and worldwide capacity utilization. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood, recycled fiber and chemical costs; energy costs; freight costs; salary and benefits costs, including pensions; and manufacturing conversion costs.
The following is a discussion of International Paper’s results of operations for the year ended December 31, 2015, and the major factors affecting these results compared to 2014 and 2013.
RESULTS OF OPERATIONS
For the year ended December 31, 2015, International Paper reported net sales of $22.4 billion, compared with $23.6 billion in 2014 and $23.5 billion in 2013. International net sales (including U.S. exports) totaled $7.8 billion or 35% of total sales in 2015. This compares with international net sales of $9.3 billion in 2014 and $9.5 billion in 2013.
Full year 2015 net earnings attributable to International Paper Company totaled $938 million ($2.23 per share), compared with net earnings of $555 million ($1.29 per share) in 2014 and $1.4 billion ($3.11 per share) in 2013. Amounts in all periods include the results of discontinued operations.
Earnings from continuing operations attributable to International Paper Company after taxes in 2015 were $938 million, including $439 million of net special items charges and $157 million of non-operating pension expense compared with $568 million, including $599 million of net special items charges and $129 million of non-operating pension expense in 2014, and $1.7 billion, including $528 million of net special items gains and $197 million of non-operating pension expense in 2013. Compared with 2014, the benefits from lower input costs, lower corporate and other costs and lower interest expense were offset by lower average sales price realizations and mix, lower sales volumes, higher operating costs, higher maintenance outage costs, and higher tax expense. In addition, 2015 results included higher equity earnings, net of taxes, relating to the Company’s investment in Ilim Holdings, SA.
 
See Industry Segment Results on pages 25 through 30 for a discussion of the impact of these factors by segment.
Discontinued Operations
2014:
In 2014, $24 million of net income adjustments were recorded relating to discontinued businesses, including $16 million of costs associated with the spin-off of the xpedx business and $9 million of costs associated with the divestiture of the Temple-Inland Building Products business. Also included are the operating earnings of the xpedx business prior to the spin-off on July 1, 2014.
2013:
In 2013, $418 million of net income adjustments were recorded relating to discontinued businesses, including goodwill impairment charges of $366 million associated with the xpedx business, $19 million for costs associated with the restructuring of the xpedx business, $14 million for costs associated with the spin-off of the xpedx business and $19 million for costs associated with the sale of the Temple-Inland Building Products business. Also included are the operating profits for the xpedx business for the full year and for the Temple-Inland Building Products business through the date of sale of July 19, 2013.
Income Taxes
A net income tax provision of $466 million was recorded for 2015, including a tax benefit of $62 million related to internal restructurings, a tax expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a $2 million tax expense for other items. Excluding these items, an $83 million net tax benefit for other special items and a $101 million tax benefit related to non-operating pension expense, the tax provision was $687 million, or 33% of pre-tax earnings before equity earnings.
A net income tax provision of $123 million was recorded for 2014 including a tax benefit of $90 million related to internal restructurings and a net $9 million tax expense for other items. Excluding these items, a $372 million


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net tax benefit for other special items and a $83 million tax benefit related to non-operating pension expense, the tax provision was $659 million, or 31% of pre-tax earnings before equity earnings.
A net income tax benefit of $498 million was recorded for 2013, including a tax benefit of $770 million related to the settlement of tax audits and a net benefit of $4 million for other items. Excluding these items, a $95 million net tax benefit for other special items and a $126 million tax benefit related to non-operating pension expense, the tax provision was $497 million, or 26% of pre-tax earnings before equity earnings.
Equity Earnings, Net of Taxes
Equity earnings, net of taxes in 2015, 2014 and 2013 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see page 30).
Corporate Items and Interest Expense
Corporate items totaled $36 million of expense for the year ended December 31, 2015 compared with $51 million in 2014 and $61 million in 2013. The decrease in 2015 from 2014 reflects the absence of a one-time non-cash foreign exchange charge related to the administrative restructuring of some international entities that occurred in 2014. The decrease in 2014 from 2013 reflects lower pension expenses partially offset by a one-time non-cash foreign exchange charge related to the administrative restructuring of some international entities.
Net corporate interest expense totaled $555 million in 2015, $601 million in 2014 and $612 million in 2013. The decrease in 2015 compared with 2014 reflects lower average interest rates. The decrease in 2014 compared with 2013 also reflects lower average interest rates.
Net earnings attributable to noncontrolling interests totaled a loss of $21 million in 2015 compared with a loss of $19 million in 2014 and a loss of $17 million in 2013. The decrease in 2015 reflects the sale of our equity share of the IP-Sun JV and lower earnings for the Shandong IP & Sun Food Packaging Co., Ltd joint venture in China prior to its divestiture. The decrease in 2014 compared with 2013 reflects the impact of the acquisition of the remaining 25% share of Orsa IP from the joint venture partner.

Special Items
Restructuring and Other Charges
International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) rationalize and realign capacity to operate fewer facilities with the same
 
revenue capability and close high cost facilities, and (c) reduce costs. Annually, strategic operating plans are developed by each of our businesses. If it subsequently becomes apparent that a facility’s plan will not be achieved, a decision is then made to (a) invest additional capital to upgrade the facility, (b) shut down the facility and record the corresponding charge, or (c) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the assets have occurred. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. It is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur.
2015: During 2015, corporate restructuring and other charges totaling $242 million before taxes ($155 million after taxes) were recorded. These charges included:
a $207 million charge before taxes ($133 million after taxes) for premiums paid on a cash tender offer on outstanding debt (see Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data),
a $16 million charge before taxes ($10 million after taxes) for costs related to the restructuring of our 2006 timber monetization,
a $15 million charge before taxes ($9 million after taxes) for legal reserve adjustments, and
a $4 million charge before taxes ($3 million after taxes) for other items.
In addition, restructuring and other charges totaling $10 million before taxes ($6 million after taxes) were recorded in the Consumer Packaging industry segment including:
an $8 million net charge before taxes ($4 million after taxes) related to costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production, net of proceeds from the sale of the Carolina Coated Bristols brand, and
a $2 million charge (before and after taxes) for other items.
2014: During 2014, corporate restructuring and other charges totaling $277 million before taxes ($169 million after taxes) were recorded. These charges included:
 
a $276 million charge before taxes ($169 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data)


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In addition, restructuring and other charges totaling $569 million before taxes ($349 million after taxes) were recorded in the Industrial Packaging, Printing Papers and Consumer Packaging industry segments including:

a $554 million charge before taxes ($338 million after taxes) for costs related to the shutdown of the Courtland, Alabama mill, and
a $15 million charge before taxes ($11 million after taxes) for other items.
2013: During 2013, corporate restructuring and other charges totaling a gain of $5 million before taxes ($3 million after taxes) were recorded. These charges included:
 
a $25 million charge before taxes ($16 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data), and
a $30 million gain before taxes ($19 million after taxes) for insurance reimbursements related to the Guaranty Bank legal settlement.

In addition, restructuring and other charges totaling $161 million before taxes ($101 million after taxes) were recorded in the Industrial Packaging, Printing Papers and Consumer Packaging industry segments including:

a $118 million charge before taxes ($72 million after taxes) for costs related to the shutdown of the Courtland, Alabama mill,
a $45 million charge before taxes ($28 million after taxes) for costs related to the shutdown of a paper machine at the Augusta, Georgia mill, and
a $2 million gain before taxes (loss of $1 million after taxes) for other items.
Impairments of Goodwill

In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business using the discounted future cash flows and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash flows of the business caused by the continued decline of the overall Brazilian economy.

In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated
 
fair value of its Asia Industrial Packaging business using expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business.

In the fourth quarter of 2013, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its India Papers business using the discounted future cash flows and determined that all of the goodwill of this business, totaling $112 million, should be written off. The decline in the fair value of the India Papers reporting unit and resulting impairment charge was due to a change in the strategic outlook for the India Papers operations.

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

Also during 2013, the Company recorded a pre-tax charge of $15 million ($7 million after taxes and noncontrolling interest) for the impairment of a trade name intangible asset related to our India Papers business.
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 $174 million ($113 million after taxes) in 2015, a pre-tax loss of $38 million ($31 million after taxes) in 2014 and a pre-tax loss of $3 million ($1 million after taxes) in 2013. The principal components of these losses were:
2015: On October 13, 2015, the Company finalized the sale of its 55% interest in IP Asia Coated Paperboard (IP-Sun JV) business, within the Company's Consumer Packaging segment, to its Chinese coated board joint venture partner, Shandong Sun Holding Group Co., Ltd. for RMB 149 million (approximately USD $23 million). During the third quarter of 2015, a determination was made that the current book value of the asset group exceeded its estimated fair value of $23 million, which was the agreed upon selling price. The 2015 loss includes the pre-tax impairment charge of $174 million ($113 million after taxes). A pre-tax charge of $186


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million was recorded during the third quarter in the Company's Consumer Packaging segment to write down the long-lived assets of this business to their estimated fair value. In the fourth quarter of 2015, upon the sale and corresponding deconsolidation of IP-Sun JV from the Company's consolidated balance sheet, final adjustments were made resulting in a reduction of the impairment of $12 million. The amount of pre-tax losses related to noncontrolling interest of the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 were $19 million, $12 million and $8 million, respectively. The amount of pre-tax losses related to the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 were $226 million, $51 million and $41 million, respectively.

The net 2015 loss totaling $174 million related to the impairment of Sun-JV is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.
2014: During 2014, the Company recorded net pre-tax charges of $47 million ($36 million after taxes) for a loss on the sale of a business by ASG (formerly referred to as AGI-Shorewood), in which we hold an investment and the subsequent partial impairment of our ASG investment, and a pre-tax gain of $9 million ($5 million after taxes) related to the sale of an investment.
2013: During 2013, the Company recorded net pre-tax charges of $3 million ($1 million after taxes) for adjustments related to the divestiture of three containerboard mills in 2012 and the sale of the Shorewood business.
Industry Segment Operating Profits
Industry segment operating profits of $2.4 billion in 2015 decreased from $2.1 billion in 2014. The benefit from lower input costs ($232 million) was offset by lower average sales price realizations and mix ($226 million), lower sales volumes ($38 million), higher operating costs ($16 million), higher maintenance outage costs ($37 million) and higher other costs ($23 million).
Special items were a $321 million net loss in 2015 compared with a net loss of $732 million in 2014.
Market-related downtime in 2015 increased to approximately 440,000 tons from approximately 281,000 tons in 2014.

 
DESCRIPTION OF INDUSTRY SEGMENTS

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

Industrial Packaging

International Paper is the largest manufacturer of containerboard in the United States. Our U.S. production capacity is over 13 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is converted domestically into corrugated boxes and other packaging by our 165 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 18 recycling plants. In EMEA, our operations include two recycled fiber containerboard mills in Morocco and Turkey and 26 container plants in France, Italy, Spain, Morocco and Turkey. In Brazil our operations include three containerboard mills and four box plants. In Asia, our operations include 16 container plants in China and additional container plants in Indonesia, Malaysia, Singapore, and Thailand. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives.

Printing Papers

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

Uncoated Papers: This business produces papers for use in copiers, desktop and laser printers and digital imaging. End use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. Uncoated papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms and file folders. Uncoated papers are sold under private label and International Paper brand names that include Hammermill, Springhill, Williamsburg, Postmark, Accent, Great White, Chamex, Ballet, Rey, Pol, and Svetocopy. The mills producing uncoated papers are located in the United States, France, Poland, Russia, Brazil and India. The mills have uncoated paper production capacity of approximately 4 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 335,000 acres of forestlands in Brazil.



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Pulp: Pulp is used in the manufacture of printing, writing and specialty papers, towel and tissue products and filtration products. Pulp is also converted into products such as diapers and sanitary napkins. Pulp products include fluff, and southern softwood pulp, as well as southern and birch hardwood paper pulps. These products are produced in the United States, France, Poland, Russia, and Brazil and are sold around the world. International Paper facilities have annual dried pulp capacity of about 1.8 million tons.

Consumer Packaging

International Paper is one of the world’s largest producers of solid bleached sulfate board with annual U.S. production capacity of about 1.2 million tons (reduced from about 1.6 million tons) after initiating the conversion of the Riegelwood Mill to 100% pulp production in late December of 2015. Our coated paperboard business produces high quality coated paperboard for a variety of packaging and foodservice end uses. Our Everest®, Fortress®, and Starcote® brands are used in packaging applications for everyday products such as food, cosmetics, pharmaceuticals and tobacco products. The Carolina® brand, which was sold to MeadWestvaco Corporation in April 2015, was used in commercial printing end uses. Our U.S. capacity is supplemented by about 379,000 tons of capacity at our mills producing coated board in Poland and Russia and, prior to its sale in October 2015, by our International Paper & Sun Cartonboard Co., Ltd. joint venture in China which had an annual capacity of 1.4 million tons.

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

Ilim Holding S.A.

In October 2007, International Paper and Ilim Holding S.A. (Ilim) completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills located in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 3.4 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.8 million acres (6.0 million hectares).

Products and brand designations appearing in italics are trademarks of International Paper or a related company.


 
INDUSTRY SEGMENT RESULTS
Industrial Packaging
Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production, as well as with demand for processed foods, poultry, meat and agricultural products. In addition to prices and volumes, major factors affecting the profitability of Industrial Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.
Industrial Packaging net sales for 2015 decreased 3% to $14.5 billion compared with $14.9 billion in 2014, and 2% compared with $14.8 billion in 2013. Operating profits were 2% lower in 2015 than in 2014 and 3% higher than in 2013. Excluding costs associated with the acquisition and integration of Temple-Inland, goodwill impairment charges, costs associated with a multi-employer pension liability and other special items, operating profits in 2015 were 3% lower than in 2014 and 8% higher than in 2013. Benefits from lower input costs ($175 million) were offset by lower average sales price realizations and mix ($144 million), lower sales volumes ($36 million), higher operating costs ($43 million) and higher maintenance outage costs ($16 million). Additionally, operating profits in 2015 include a goodwill and trade name impairment charge associated with our Brazil Packaging business ($137 million). Operating profits in 2014 include a goodwill impairment charge of $100 million related to our Asia Industrial Packaging business, costs of $16 million associated with the integration of Temple-Inland, a charge of $35 million associated with a multi-employer pension plan withdrawal liability and a net charge of $7 million for other items. Operating profits in 2013 include costs of $62 million associated with the integration of Temple-Inland, a gain of $13 million related to a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey, and a net gain of $1 million for other items.
Industrial Packaging
 
 
 
In millions
2015
2014
2013
Sales
$
14,484

$
14,944

$
14,810

Operating Profit
1,853

1,896

1,801

North American Industrial Packaging net sales were $12.5 billion in 2015 compared with $12.7 billion in 2014 and $12.5 billion in 2013. Operating profits in 2015 were $2.0 billion compared with $2.0 billion (both including and excluding costs associated with the integration of Temple-Inland, a multi-employer pension withdrawal liability and other special items) in 2014 and $1.8 billion (both including and excluding costs associated with the integration of Temple-Inland and other special items in 2013.


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Sales volumes decreased in 2015 compared with 2014 reflecting slightly lower box shipments and lower shipments of containerboard to export markets. In 2015, the business took about 814,000 tons of total downtime of which about 363,000 were market-related and 451,000 were maintenance downtime. The business took about 622,000 tons of total downtime in 2014 of which 240,000 were market-related and 382,000 were maintenance downtime. Average sales price realizations were lower mostly for Euro-denominated shipments of containerboard to export markets. Input costs were lower, primarily for energy. Distribution costs were flat as lower freight fuel surcharges offset rate increases. Planned maintenance downtime costs were $15 million higher than in 2014. Manufacturing operating costs decreased, but were more than offset by wage and benefit inflation. Depreciation costs were lower.
Looking ahead to the first quarter of 2016, compared with the fourth quarter of 2015, sales volumes for boxes are expected to be seasonally lower, while shipments of containerboard to export markets should increase. Input costs are expected to be higher for energy and wood, but lower for waste fiber. Planned maintenance downtime spending is expected to be about $21 million higher. Manufacturing operating costs are expected to improve.
EMEA Industrial Packaging net sales were $1.1 billion in 2015 compared with $1.3 billion in 2014 and $1.3 billion in 2013. Operating profits in 2015 were $13 million compared with $25 million ($31 million excluding restructuring costs) in 2014 and $43 million ($32 million excluding a gain on a bargain purchase price adjustment on the acquisition of a majority share of our operations in Turkey and restructuring costs) in 2013.
Sales volumes in 2015 were higher than in 2014 reflecting improved market demand and strong commercial initiatives in the Eurozone throughout the year and growth in Morocco and Turkey in the fourth quarter. Net sales decreased primarily due to the negative impact of foreign exchange rates. Higher board costs also contributed to lower average sales margins. Other input costs, primarily for energy, were lower. Operating earnings in 2015 also included a gain of $4 million related to the change in ownership of our OCC collection operations in Turkey.
Entering the first quarter of 2016, compared with the fourth quarter of 2015 sales volumes are expected to be flat. Average sales margins are expected to be favorably impacted by higher box sales prices, lower board costs in Turkey and a favorable mix. Input costs for energy should be slightly higher.
Brazilian Industrial Packaging net sales were $228 million in 2015 compared with $349 million in 2014 and $335 million in 2013. Operating profits in 2015 were a loss
 
of $163 million (a loss of $26 million excluding goodwill and trade name impairment charges) compared with a loss of $3 million (a loss of $4 million excluding a net gain related to acquisition and integration costs) in 2014 and a loss of $2 million (a gain of $2 million excluding acquisition and integration costs) in 2013.
Sales volumes in 2015 decreased compared with 2014 due to overall weak economic conditions and lower box consumption in the product segments of some of our key customers. Average sales price realizations for boxes were lower. Input costs were slightly higher. Operating costs also increased. Planned maintenance downtime costs were $1 million lower in 2015 compared with 2014.
Looking ahead to the first quarter of 2016, compared with the fourth quarter of 2015 sales volumes are expected to be seasonally lower. Average sales margins should improve reflecting a previously announced sales price increase for boxes. Input costs are expected to be stable and operating costs should reflect the benefits of cost savings initiatives.
Asian Industrial Packaging net sales were $601 million in 2015 compared with $625 million in 2014 and $685 million in 2013. Operating profits were a loss of $6 million in 2015 compared with a loss of $112 million (a loss of $5 million excluding goodwill impairment charges and restructuring costs) in 2014 and a loss of $2 million (a gain of $2 million excluding restructuring costs) in 2013. Compared with 2014, sales volumes for boxes in 2015 were lower and average sales margins decreased due to competitive price pressures and an unfavorable sales mix. However, operating costs were lower.
Looking ahead to the first quarter of 2016, sales volumes are expected to be seasonally lower. On October 8, 2015, the Company announced that it was pursuing strategic options for its corrugated box business in China and Southeast Asia and had signed a non-binding letter of intent with a prospective buyer.
Printing Papers
Demand for Printing Papers products is closely correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated cut-size products, with changes in white-collar employment levels that affect the usage of copy and laser printer paper. Pulp is further affected by changes in currency rates that can enhance or disadvantage producers in different geographic regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs.
Printing Papers net sales for 2015 decreased 12% to $5.0 billion compared with $5.7 billion in 2014 and 19%


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compared with $6.2 billion in 2013. Operating profits in 2015 were significantly higher than in both 2014 and 2013. Excluding facility closure costs, impairment costs and other special items, operating profits in 2015 were 3% lower than in 2014 and 4% higher than in 2013. Benefits from lower input costs ($18 million), lower costs associated with the closure of our Courtland, Alabama mill ($44 million) and favorable foreign exchange ($33 million) were offset by lower average sales price realizations and mix ($52 million), lower sales volumes ($16 million), higher operating costs ($18 million) and higher planned maintenance downtime costs ($26 million). In addition, operating profits in 2014 include special items costs of $554 million associated with the closure of our Courtland, Alabama mill. During 2013, the Company accelerated depreciation for certain Courtland assets, and evaluated certain other assets for possible alternative uses by one of our other businesses. The net book value of these assets at December 31, 2013 was approximately $470 million. In the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $464 million of accelerated depreciation related to these assets in 2014. Operating profits in 2014 also include a charge of $32 million associated with a foreign tax amnesty program, and a gain of $20 million for the resolution of a legal contingency in India, while operating profits in 2013 included costs of $118 million associated with the announced closure of our Courtland, Alabama mill and a $123 million impairment charge associated with goodwill and a trade name intangible asset in our India Papers business.
Printing Papers
 
 
 
In millions
2015
2014
2013
Sales
$
5,031

$
5,720

$
6,205

Operating Profit (Loss)
533

(16
)
271

North American Printing Papers net sales were $1.9 billion in 2015, $2.1 billion in 2014 and $2.6 billion in 2013. Operating profits in 2015 were $179 million compared with a loss of $398 million (a gain of $156 million excluding costs associated with the shutdown of our Courtland, Alabama mill) in 2014 and a gain of $36 million ($154 million excluding costs associated with the Courtland mill shutdown) in 2013.
Sales volumes in 2015 decreased compared with 2014 primarily due to the closure of our Courtland mill in 2014. Shipments to the domestic market increased, but export shipments declined. Average sales price realizations decreased, primarily in the domestic market. Input costs were lower, mainly for energy. Planned maintenance downtime costs were $12 million higher in 2015. Operating profits in 2014 were negatively impacted by costs associated with the shutdown of our Courtland, Alabama mill.
 
Entering the first quarter of 2016, sales volumes are expected to be up slightly compared with the fourth quarter of 2015. Average sales margins should be about flat reflecting lower average sales price realizations offset by a more favorable product mix. Input costs are expected to be stable. Planned maintenance downtime costs are expected to be about $14 million lower with an outage scheduled in the 2016 first quarter at our Georgetown mill compared with outages at our Eastover and Riverdale mills in the 2015 fourth quarter.
In January 2015, the United Steelworkers, Domtar Corporation, Packaging Corporation of America, Finch Paper LLC and P. H. Glatfelter Company (the Petitioners) filed an anti-dumping petition before the United States International Trade Commission (ITC) and the United States Department of Commerce (DOC) alleging that paper producers in China, Indonesia, Australia, Brazil, and Portugal are selling uncoated free sheet paper in sheet form (the Products) in violation of international trade rules. The Petitioners also filed a countervailing-duties petition with these agencies regarding imports of the Products from China and Indonesia. In January 2016, the DOC announced its final countervailing duty rates on imports of the Products to the United States from certain producers from China and Indonesia. Also, in January 2016, the DOC announced its final anti-dumping duty rates on imports of the Products to the United States from certain producers from Australia, Brazil, China, Indonesia and Portugal. In February 2016, the ITC concluded its anti-dumping and countervailing duties investigations and made a final determination that the U.S. market had been injured by imports of the Products. Accordingly, the DOC’s previously announced countervailing duty rates and anti-dumping duty rates will be in effect for a minimum of five years. We do not believe the impact of these rates will have a material, adverse effect on our consolidated financial statements.
Brazilian Papers net sales for 2015 were $878 million compared with $1.1 billion in 2014 and $1.1 billion in 2013. Operating profits for 2015 were $186 million compared with $177 million ($209 million excluding costs associated with a tax amnesty program) in 2014 and $210 million in 2013.
Sales volumes in 2015 were lower compared with 2014 reflecting weak economic conditions and the absence of 2014 one-time events. Average sales price realizations improved for domestic uncoated freesheet paper due to the realization of price increases implemented in the second half of 2015. Margins were unfavorably affected by an increased proportion of sales to the lower-margin export markets. Raw material costs increased for energy and wood. Operating costs were higher than in 2014, while planned maintenance downtime costs were $4 million lower.


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Looking ahead to 2016, compared with the fourth quarter of 2015 sales volumes in the first quarter are expected to decrease due to seasonally weaker customer demand for uncoated freesheet paper. Average sales price improvements are expected to reflect the partial realization of announced sales price increases in the Brazilian domestic market for uncoated freesheet paper. Input costs are expected to be slightly higher for chemicals and electricity.
European Papers net sales in 2015 were $1.2 billion compared with $1.5 billion in 2014 and $1.5 billion in 2013. Operating profits in 2015 were $133 million compared with $140 million in 2014 and $167 million in 2013.
Compared with 2014, sales volumes for uncoated freesheet paper in 2015 were slightly lower in both Russia and Europe. Average sales price realizations for uncoated freesheet paper increased in Russia, but remained flat in Europe, reflecting tight demand and supply conditions in the first half of the year. Input costs increased slightly as higher costs for wood, chemicals and energy in Russia were largely offset by lower costs in Europe. Planned maintenance downtime costs were $11 million higher in 2015 than in 2014.
Entering 2016, domestic sales volumes in the first quarter are expected to be seasonally weaker in Russia, and stable in Europe. Average sales price realizations for uncoated freesheet paper are expected to reflect the impact of announced price increases in both Europe and Russia. Input costs should be slightly higher for wood and chemicals. Planned maintenance downtime costs should be $1 million lower than in the fourth quarter of 2015.
Indian Papers net sales were $172 million in 2015, $178 million in 2014 and $185 million ($174 million excluding excise duties which were included in net sales in 2013 and prior periods) in 2013. Operating profits were a loss of $11 million in 2015, compared with a gain of $8 million (a loss of $12 million excluding a gain related to the resolution of a legal contingency) in 2014 and a loss of $145 million (a loss of $22 million excluding goodwill and trade name impairment charges) in 2013.
Average sales price realizations decreased in 2015 compared with 2014 reflecting soft market demand. Sales volumes increased, primarily to export markets. Input costs were lower for wood and chemicals. Operating costs were higher in 2015, but planned maintenance downtime costs were even with 2014. Looking ahead to the first quarter of 2016, sales volumes are expected to be seasonally higher. Average sales price realizations are expected to be stable.
U.S. Pulp net sales were $844 million in 2015 compared with $895 million in 2014 and $815 million in 2013.
 
Operating profits were $46 million in 2015 compared with $57 million in 2014 and $2 million in 2013.
Sales volumes in 2015 decreased from 2014 with lower softwood pulp volumes being partially offset by higher fluff pulp volumes. Average sales price realizations were lower for both fluff pulp and softwood market pulp. Input costs decreased primarily for energy. Operating costs were higher, but distribution costs were lower. Planned maintenance downtime costs were $4 million lower in 2015 than in 2014.
Compared with the fourth quarter of 2015, sales volumes in the first quarter of 2016 are expected to be stable. Average sales price realizations are expected to be lower for fluff pulp and softwood market pulp. Input costs should be higher for fuels and utilities. Planned maintenance downtime costs should be about $45 million higher than in the fourth quarter of 2015 including outage costs associated with the conversion of our Riegelwood mill to 100% pulp production.
Consumer Packaging
Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of Consumer Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.
Consumer Packaging net sales in 2015 decreased 14% from 2014, and decreased 14% from 2013. Operating profits decreased 114% from 2014 and decreased 116% from 2013. Excluding the cost associated with the conversion of our Riegelwood, North Carolina mill to 100% pulp production, net of the proceeds from the sale of the Carolina Coated Bristols brand, costs associated with the impairment of goodwill and other assets of the IP-Sun JV, costs associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill and other special items, 2015 operating profits were 15% lower than in 2014, and 24% lower than in 2013. Benefits from higher sales volumes ($14 million), lower planned maintenance downtime costs ($5 million) and lower input costs ($39 million) were offset by lower average sales price realizations and mix ($30 million), higher operating costs ($44 million), and higher foreign exchange and other costs ($11 million). In addition, operating profits in 2015 include a charge of $174 million for the impairment of goodwill and other assets for the IP-Sun JV, an $8 million cost related to the conversion of our Riegelwood mill to 100% pulp production, net of the proceeds from the sale of the Carolina Coated Bristols brand, and $2 million of costs associated with sheet plant closures, while operating profits in 2014 include $8 million of costs associated with sheet plant closures. Operating profits in 2013 include costs of $45 million related to the permanent shutdown of a paper machine at our


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Augusta, Georgia mill and $2 million of costs associated with the sale of the Shorewood business.
Consumer Packaging
 
 
 
In millions
2015
2014
2013
Sales
$
2,940

$
3,403

$
3,435

Operating Profit (Loss)
(25
)
178

161

North American Consumer Packaging net sales were $1.9 billion in 2015 compared with $2.0 billion in 2014 and $2.0 billion in 2013. Operating profits were $81 million ($91 million excluding the cost associated with the planned conversion of our Riegelwood mill to 100% pulp production, net of proceeds from the sale of the Carolina Coated Bristols brand, and sheet plant closure costs) in 2015 compared with $92 million ($100 million excluding sheet plant closure costs) in 2014 and $63 million ($110 million excluding paper machine shutdown costs and costs related to the sale of the Shorewood business) in 2013.
Coated Paperboard sales volumes in 2015 were lower than in 2014 reflecting weaker market demand. The business took about 77,000 tons of market-related downtime in 2015 compared with about 41,000 tons in 2014. Average sales price realizations increased modestly year over year as competitive pressures in the current year only partially offset the impact of sales price increases implemented in 2014. Input costs decreased for energy and chemicals, but wood costs increased. Planned maintenance downtime costs were $10 million lower in 2015. Operating costs were higher, mainly due to inflation and overhead costs.
Foodservice sales volumes increased in 2015 compared with 2014 reflecting strong market demand. Average sales margins increased due to lower resin costs and a more favorable mix. Operating costs and distribution costs were both higher.
Looking ahead to the first quarter of 2016, Coated Paperboard sales volumes are expected to be slightly lower than in the fourth quarter of 2015 due to our exit from the coated bristols market. Average sales price realizations are expected to be flat, but margins should benefit from a more favorable product mix. Input costs are expected to be higher for wood, chemicals and energy. Planned maintenance downtime costs should be $4 million higher with a planned maintenance outage scheduled at our Augusta mill in the first quarter. Foodservice sales volumes are expected to be seasonally lower. Average sales margins are expected to improve due to a more favorable mix. Operating costs are expected to decrease.
European Consumer Packaging net sales in 2015 were $319 million compared with $365 million in 2014 and $380 million in 2013. Operating profits in 2015 were $87 million compared with $91 million in 2014 and $100 million in 2013. Sales volumes in 2015 compared with
 
2014 increased in Europe, but decreased in Russia. Average sales margins improved in Russia due to slightly higher average sales price realizations and a more favorable mix. In Europe average sales margins decreased reflecting lower average sales price realizations and an unfavorable mix. Input costs were lower in Europe, primarily for wood and energy, but were higher in Russia, primarily for wood.
Looking forward to the first quarter of 2016, compared with the fourth quarter of 2015, sales volumes are expected to be stable. Average sales price realizations are expected to be slightly higher in both Russia and Europe. Input costs are expected to be flat, while operating costs are expected to increase.
Asian Consumer Packaging The Company sold its 55% equity share in the IP-Sun JV in October 2015. Net sales and operating profits presented below include results through September 30, 2015. Net sales were $682 million in 2015 compared with $1.0 billion in 2014 and $1.1 billion in 2013. Operating profits in 2015 were a loss of $193 million (a loss of $19 million excluding goodwill and other asset impairment costs) compared with losses of $5 million in 2014 and $2 million in 2013.
Sales volumes and average sales price realizations were lower in 2015 due to over-supplied market conditions and competitive pressures. Average sales margins were also negatively impacted by a less favorable mix. Input costs and freight costs were lower and operating costs also decreased.

On October 13, 2015, the Company finalized the sale of its 55% interest in IP Asia Coated Paperboard (IP-Sun JV) business, within the Company's Consumer Packaging segment, to its Chinese coated board joint venture partner, Shandong Sun Holding Group Co., Ltd. for RMB 149 million (approximately USD $23 million). During the third quarter of 2015, a determination was made that the current book value of the asset group exceeded its estimated fair value of $23 million, which was the agreed upon selling price. The 2015 loss includes the net pre-tax impairment charge of $174 million ($113 million after taxes). A pre-tax charge of $186 million was recorded during the third quarter in the Company's Consumer Packaging segment to write down the long-lived assets of this business to their estimated fair value. In the fourth quarter of 2015, upon the sale and corresponding deconsolidation of IP-Sun JV from the Company's consolidated balance sheet, final adjustments were made resulting in a reduction of the impairment of $12 million. The amount of pre-tax losses related to noncontrolling interest of the IP-Sun JV included in the Company's consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 were $19 million, $12 million and $8 million, respectively. The amount of pre-tax losses related to the IP-Sun JV included in the Company's


29

Table of Contents

consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 were $226 million, $51 million and $41 million, respectively.
Equity Earnings, Net of Taxes – Ilim Holding S.A.
International Paper accounts for its investment in Ilim Holding S.A. (Ilim), a separate reportable industry segment, using the equity method of accounting.
The Company recorded equity earnings, net of taxes, related to Ilim of $131 million in 2015 compared with a loss of $194 million in 2014 and a loss of $46 million in 2013. Operating results recorded in 2015 included an after-tax non-cash foreign exchange loss of $75 million compared with an after-tax foreign exchange loss of $269 million in 2014 and an after-tax foreign exchange loss of $32 million in 2013 primarily on the remeasurement of Ilim's U.S. dollar-denominated net debt.
Sales volumes for the joint venture increased year over year for shipments to China of hardwood pulp and softwood pulp, but decreased for linerboard. Sales volumes in the domestic Russian market increased for hardwood pulp and paper, but decreased for softwood pulp and linerboard. Average sales price realizations were higher in 2015 for sales of hardwood pulp to export markets and linerboard to the domestic market, but were offset by lower average sales price realizations for sales of softwood pulp to export markets. Input costs increased year-over-year for wood, chemicals, fuel and energy. Freight costs also increased. The Company received cash dividends from the joint venture of $35 million in 2015 and $56 million in 2014. No dividends were paid in 2013.
Entering the first quarter of 2016, sales volumes are expected to be seasonally lower than in the fourth quarter of 2015 due to the January holidays in Russia. Average sales price realizations are expected to decrease for exported hardwood pulp, softwood pulp and containerboard, slightly offset by higher average sales price realizations for paper in the domestic market. Input costs for energy, chemicals and wood should be higher and distribution costs are also expected to increase.

LIQUIDITY AND CAPITAL RESOURCES
Overview
A major factor in International Paper’s liquidity and capital resource planning is its generation of operating cash flow, which is highly sensitive to changes in the pricing and demand for our major products. While changes in key cash operating costs, such as energy, raw material and transportation costs, do have an effect on operating cash generation, we believe that our focus
 
on pricing and cost controls has improved our cash flow generation over an operating cycle.
Cash uses during 2015 were primarily focused on working capital requirements, capital spending, debt reductions and returning cash to shareholders.
Cash Provided by Operating Activities
Cash provided by operations totaled $2.6 billion in 2015 compared with $3.1 billion for 2014 and $3.0 billion for 2013.
The major components of cash provided by operations are earnings from operations adjusted for non-cash income and expense items, cash pension contributions and changes in working capital. Earnings from operations, adjusted for non-cash income and expense items and cash pension contributions decreased by $433 million in 2015 versus 2014 driven mainly by increased cash pension contributions in 2015. Cash used for working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, interest payable and other totaled $222 million in 2015, compared with a cash use of $158 million in 2014 and a cash use of $486 million in 2013.
The Company generated free cash flow of approximately $1.8 billion, $2.1 billion and $1.8 billion in 2015, 2014 and 2013, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by operations. Management uses free cash flow as a liquidity metric because it measures the amount of cash generated that is available to maintain our assets, make investments or acquisitions, pay dividends and reduce debt. The following are reconciliations of free cash flow to cash provided by operations: 
In millions
2015
2014
2013
Cash provided by operations
$
2,580

$
3,077

$
3,028

(Less)/Add:
 
 
 
Cash invested in capital projects
(1,487
)
(1,366
)
(1,198
)
Cash contribution to pension plan
750

353

31

Insurance reimbursement for Guaranty Bank settlement


(30
)
Free Cash Flow
$
1,843

$
2,064

$
1,831

In millions
Three Months Ended December 31, 2015
Three Months Ended September 30, 2015
Three Months Ended December 31, 2014
Cash provided by operations
$
990

$
837

$
1,144

(Less)/Add:
 
 
 
Cash invested in capital projects
(489
)
(325
)
(405
)
Free Cash Flow
$
501

$
512

$
739






30

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Alternative Fuel Mixture Credit

On July 19, 2011, the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non-taxable income. The amended position has been accepted by the Internal Revenue Service (IRS) in the closing of the IRS tax audit for the years 2006 - 2009. As a result, during 2013, the Company recognized an income tax benefit of $753 million related to the non-taxability of the alternative fuel mixture tax credits.

Investment Activities
Investment activities in 2015 were up from 2014 reflecting an increase in capital spending and the use of $198 million of cash in conjunction with the timber monetization restructuring (see Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data) in 2015. In addition, 2014 investment activity includes the receipt of approximately $400 million in connection with the spin-off of the xpedx distribution business. The Company maintains an average capital spending target around depreciation or amortization levels or modestly above due to strategic plans over the course of an economic cycle. Capital spending was $1.5 billion in 2015, or 115% of depreciation and amortization, compared with $1.4 billion in 2014, or 97% of depreciation and amortization, and $1.2 billion, or 77% of depreciation and amortization in 2013. Across our businesses, capital spending as a percentage of depreciation and amortization ranged from 118% to 100% in 2015.
The following table shows capital spending for operations by business segment for the years ended December 31, 2015, 2014 and 2013.
 
In millions
2015
2014
2013
Industrial Packaging
$
858

$
754

$
629

Printing Papers
361

318

294

Consumer Packaging
216

233

208

Distribution


9

Subtotal
1,435

1,305

1,140

Corporate and other
52

61

58

Total
$
1,487

$
1,366

$
1,198

Capital expenditures in 2016 are currently expected to be about $1.3 billion, or 100% of depreciation and amortization.
Acquisitions and Joint Ventures

OLMUKSAN

2014: In May 2014, the Company conducted a voluntary tender offer for the remaining outstanding
 
12.6% public shares of Olmuksan. The Company also purchased outstanding shares of Olmuksan outside of the tender offer. As of December 31, 2014 and 2015, the Company owned 91.7% of Olmuksan's outstanding and issued shares.

2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S., now called Olmuksan International Paper Ambalaj Sanayi ve Ticaret A.S. (Olmuksan), for a purchase price of $56 million. The acquired shares represented 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.

Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. As a result, the 12.6% owned by other parties were considered non-controlling interests. Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date which International Paper obtained majority control of the entity.

Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, from accumulated other comprehensive income.

The final purchase price allocation indicated that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest was less than the fair value of the underlying assets by $21 million, resulting in a bargain purchase price gain being recorded on this transaction. The aforementioned remeasurement of equity interest gain, the cumulative translation adjustment to expense, and the bargain purchase gain are included in the Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations.

ORSA

2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalangens S.A. (Orsa IP) from its joint venture


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partner, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, for approximately $127 million, of which $105 million was paid in cash with the remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. International Paper will release the amount held back, or any amount for which we have not notified Jari of a claim, by March 30, 2016. An additional $11 million, which was not included in the purchase price, was placed in an escrow account pending resolution of certain open matters. During 2014, these open matters were successfully resolved, which resulted in $9 million paid out of escrow to Jari and correspondingly added to the final purchase consideration. The remaining $2 million was released back to the Company. As a result of this transaction, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet. The net difference between the Redeemable noncontrolling interest balance plus $14 million of currency translation adjustment reclassified out of Other comprehensive income less the 25% purchase price was reflected as an increase to Retained earnings on the consolidated balance sheet.

2013: On January 14, 2013, International Paper and Jari formed Orsa IP with International Paper holding a 75% stake. The value of International Paper's investment in Orsa IP was approximately $471 million. Because International Paper acquired a majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013. The 25% owned by Jari was considered a redeemable noncontrolling interest and met the requirements to be classified outside permanent equity. As such, the Company reported $163 million in Redeemable noncontrolling interest in the December 31, 2013 consolidated balance sheet.
Financing Activities
Amounts related to early debt extinguishment during the years ended December 31, 2015, 2014 and 2013 were as follows:
In millions
2015
2014
2013
Debt reductions (a)
$
2,151

$
1,625

$
574

Pre-tax early debt extinguishment costs (b)
207

276

25

(a)
Reductions related to notes with interest rates ranging from 2.00% to 9.38% with original maturities from 2014 to 2031 for the years ended December 31, 2015, 2014 and 2013. Includes the $630 million payment for a portion of the Special Purpose Entity Liability (see Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data ).
(b)
Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.

 
2015: Financing activities during 2015 included debt issuances of $6.9 billion and retirements of $6.9 billion for a net decrease of $74 million.

During 2015, the Company restructured the timber monetization which resulted in the use of $630 million in cash to pay down a portion of the third party bank loans and refinance the loans on nonrecourse terms. (see Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data).

International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2015, International Paper had interest rate swaps with a total notional amount of $17 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 67 through 71 of Item 8. Financial Statements and Supplementary Data). During 2015, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 5.9% to an effective rate of 5.8%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 5.1%.

In 2015, International Paper issued $700 million of 3.80% senior unsecured notes with a maturity date in 2026, $600 million of 5.00% senior unsecured notes with a maturity date in 2035, and $700 million of 5.15% senior unsecured notes with a maturity date in 2046. The proceeds from this borrowing were used to repay approximately $1.0 billion of notes with interest rates ranging from 4.75% to 9.38% and original maturities from 2018 to 2022, along with $211 million of cash premiums associated with the debt repayments. Additionally, the proceeds from this borrowing were used to make a $750 million voluntary cash contribution to the Company's pension plan. Pre-tax early debt retirement costs of $207 million related to the debt repayments, including the $211 million of cash premiums, are included in restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2015.

Other financing activities during 2015 included the net repurchase of approximately 8.0 million shares of treasury stock, including restricted stock withholding, and the issuance of 62,000 shares of common stock for various plans, including stock options exercises that generated approximately $2.4 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $604.6 million, including $522.6 million related to shares repurchased under the Company's share repurchase program.


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In October 2015, International Paper announced that the quarterly dividend would be increased from $0.40 per share to $0.44 per share, effective for the 2015 fourth quarter.
2014: Financing activities during 2014 included debt issuances of $2.0 billion and retirements of $2.1 billion, for a net decrease of $113 million.
International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2014, International Paper had interest rate swaps with a total notional amount of $230 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 67 through 71 of Item 8. Financial Statements and Supplementary Data). During 2014, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.8% to an effective rate of 6.7%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.3%.
During the second quarter of 2014, International Paper issued $800 million of 3.65% senior unsecured notes with a maturity date in 2024 and $800 million of 4.80% senior unsecured notes with a maturity date in 2044. The proceeds from this borrowing were used to repay approximately $960 million of notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019. Pre-tax early debt retirement costs of $262 million related to these debt repayments, including $258 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2014.
Other financing activities during 2014 included the net repurchase of approximately 17.9 million shares of treasury stock, including restricted stock withholding, and the issuance of 1.6 million shares of common stock for various plans, including stock options exercises that generated approximately $66 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.06 billion, including $983 million related to shares repurchased under the Company's share repurchase program.
In September 2014, International Paper announced that the quarterly dividend would be increased from $0.35 per share to $0.40 per share, effective for the 2014 fourth quarter.
2013: Financing activities during 2013 included debt issuances of $241 million and retirements of $845 million, for a net decrease of $604 million.
International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2013, International Paper had interest rate swaps with a total
 
notional amount of $175 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 67 through 71 of Item 8. Financial Statements and Supplementary Data). During 2013, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.7% to an effective rate of 6.5%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.2%.
Other financing activities during 2013 included the net repurchase of approximately 10.9 million shares of treasury stock, including restricted stock withholding, and the issuance of 7.3 million shares of common stock for various plans, including stock options exercises that generated approximately $298 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $512 million, including $461 million related to shares repurchased under the Company's share repurchase program.
In September 2013, International Paper announced that the quarterly dividend would be increased from $0.30 per share to $0.35 per share, effective for the 2013 fourth quarter.
Variable Interest Entities
Information concerning variable interest entities is set forth in Note 12 Variable Interest Entities on pages 64 through 66 of Item 8. Financial Statements and Supplementary Data for discussion.
Liquidity and Capital Resources Outlook for 2016
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 2016 through current cash balances and cash from operations. Additionally, the Company has existing credit facilities totaling $2.1 billion available at December 31, 2015.
The Company was in compliance with all its debt covenants at December 31, 2015. The Company’s financial covenants require the maintenance of a minimum net worth 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 Nonrecourse Financial Liabilities of Special Purpose Entities. The total debt-to-capital ratio is defined as total debt divided by the sum of total debt plus net worth. At December 31, 2015, International Paper’s net worth was $14.1 billion, and the total-debt-to-capital ratio was 39.8%.


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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.
Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2015, 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, 2015, were as follows: 
In millions
2015
2016
2017
2018
2019
Thereafter
Maturities of long-term debt (a)
$
426

$
43

$
811

$
427

$
183

$
7,436

Lease obligations
118

95

72

55

41

128

Purchase obligations (b)
3,001

541

447

371

358

1,579

Total (c)
$
3,545

$
679

$
1,330

$
853

$
582

$
9,143

(a)
Total debt includes scheduled principal payments only.
(b)
Includes $2.1 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.
(c)
Not included in the above table due to the uncertainty as to the amount and timing of the payment are unrecognized tax benefits of approximately $101 million.
We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2015, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2015, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $600 million. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
Pension Obligations and Funding
At December 31, 2015, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $3.5 billion higher than the fair value of plan assets. Approximately $3.2 billion of this amount relates to plans that are subject to minimum funding requirements. Under current IRS funding rules, the calculation of minimum funding requirements differs from the calculation of the present value of plan benefits
 
(the projected benefit obligation) for accounting purposes. In December 2008, the Worker, Retiree and Employer Recovery Act of 2008 (WERA) was passed by the U.S. Congress which provided for pension funding relief and technical corrections. Funding contributions depend on the funding method selected by the Company, and the timing of its implementation, as well as on actual demographic data and the targeted funding level. The Company continually reassesses the amount and timing of any discretionary contributions and elected to make contributions totaling $750 million and $353 million for the years ended December 31, 2015 and 2014, respectively. At this time, we do not expect to have any required contributions to our plans in 2016, 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. International Paper has announced a voluntary, limited-time opportunity for former employees who are participants in the Retirement Plan of International Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. Eligible participants who wish to receive the lump sum payment must make an election between February 29 and April 29, 2016, and payment is scheduled to be made on or before June 30, 2016. All payments will be made from the Pension Plan trust assets. The target population has a total liability of $3.0 billion. The amount of the total payments will depend on the participation rate of eligible participants, but is expected to be approximately $1.5 billion. Based on the expected level of payments, settlement accounting rules will apply in the period in which the payments are made.  This will result in a plan remeasurement and the recognition in earnings of a pro-rata portion of unamortized net actuarial loss.
Ilim Holding S.A. Shareholder’s Agreement
In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement was amended on May 7, 2014. Pursuant to the amended agreement, beginning on January 1, 2017, either the Company or its partners may commence certain procedures specified under the deadlock provisions. If these or any other deadlock provisions are commenced, 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 antitrust authorities. Any such purchase by International Paper would result in the consolidation of Ilim’s financial position and results of operations in all subsequent periods.


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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include the accounting for contingencies, impairment or disposal of long-lived assets and goodwill, pensions and postretirement benefit obligations, stock options and income taxes. The Company has discussed the selection of critical accounting policies and the effect of significant estimates with the Audit and Finance Committee of the Company’s Board of Directors.
Contingent Liabilities
Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs.
Impairment of Long-Lived Assets and Goodwill
An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through cash flows from future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating economic factors. As these
 
key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections.
Under the provisions of Accounting Standards Codification (ASC) 350, “Intangibles – Goodwill and Other,” the testing of goodwill for possible impairment is a two-step process. In the first step, the fair value of the Company’s reporting units is compared with their carrying value, including goodwill. If fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then step two is performed to measure the amount of the goodwill impairment loss for the reporting unit. This analysis requires the determination of the fair value of all of the individual assets and liabilities of the reporting unit, including any currently unrecognized intangible assets, as if the reporting unit had been purchased on the analysis date. Once these fair values have been determined, the implied fair value of the unit’s goodwill is calculated as the excess, if any, of the fair value of the reporting unit determined in step one over the fair value of the net assets determined in step two. The carrying value of goodwill is then reduced to this implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through a goodwill impairment charge.
The impairment analysis requires a number of judgments by management. In calculating the estimated fair value of its reporting units in step one, the Company uses the projected future cash flows to be generated by each unit over the estimated remaining useful operating lives of the unit’s assets, discounted using the estimated cost-of-capital discount rate for each reporting unit. These calculations require many estimates, including discount rates, future growth rates, and cost and pricing trends for each reporting unit. Subsequent changes in economic and operating conditions can affect these assumptions and could result in additional interim testing and goodwill impairment charges in future periods. Upon completion, the resulting estimated fair values are then analyzed for reasonableness by comparing them to earnings multiples for historic industry business transactions, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares outstanding to the Company’s market price per share on the analysis date.

In the fourth quarter of 2015, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Brazil Packaging business using the discounted future cash flows and determined that all of the goodwill in the business, totaling $137 million, should be written off. The decline in the fair value of the Brazil Packaging business and resulting impairment charge was due to the negative impacts on the cash


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flows of the business caused by the continued decline of the overall Brazilian economy.

In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using the discounted future cash flows and determined that all of the goodwill in this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business.

In the fourth quarter of 2013, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its India Papers business using the discounted future cash flows and determined that all of the goodwill of this business, totaling $112 million, should be written off. The decline in the fair value of the India Papers reporting unit and resulting impairment charge was due to a change in the strategic outlook for the India Papers operations.

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

As a result, during the fourth quarter of 2013, the Company recorded a total goodwill impairment charge of $512 million ($485 million after taxes and a gain of $3 million related to noncontrolling interest), representing all of the recorded goodwill of the xpedx business and the India Papers business.

Also during 2013, the Company recorded a pre-tax charge of $15 million ($7 million after taxes and noncontrolling interest) for the impairment of a trade name intangible asset related to our India Papers business.
Pension and Postretirement Benefit Obligations
The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates.
 
The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount rate used to calculate plan liabilities, the projected rate of future compensation increases and health care cost trend rates.
Benefit obligations and fair values of plan assets as of December 31, 2015, for International Paper’s pension and postretirement plans were as follows: 
In millions
Benefit
Obligation
Fair Value of
Plan Assets
U.S. qualified pension
$
14,092

$
10,923

U.S. nonqualified pension
347


U.S. postretirement
275


Non-U.S. pension
204

155

Non-U.S. postretirement
45


The table below shows assumptions used by International Paper to calculate U.S. pension obligations for the years shown:
 
2015
2014
2013
Discount rate
4.40
%
4.10
%
4.90
%
Rate of compensation increase
3.75
%
3.75
%
3.75
%
Additionally, health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were:
 
2015
2014
Health care cost trend rate assumed for next year
7.00
%
7.00
%
Rate that the cost trend rate gradually declines to
5.00
%
5.00
%
Year that the rate reaches the rate it is assumed to remain
2022

2022


International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. The discount rate assumption was determined based on a hypothetical settlement portfolio selected from a universe of high quality corporate bonds.

The expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year ended December 31, 2015 was 7.75%.
Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2016 pension expense by


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approximately $27 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $36 million. The effect on net postretirement benefit cost from a 1% increase or decrease in the annual health care cost trend rate would be approximately $1 million.
Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were: 
Year
Return
Year
Return
2015
1.3
%
2010
15.1
 %
2014
6.4
%
2009
23.8
 %
2013
14.1
%
2008
(23.6
)%
2012
14.1
%
2007
9.6
 %
2011
2.5
%
2006
14.9
 %
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 7.5% and 7.0% for the past five and ten years, respectively. The following graph shows the growth of a $1,000 investment in International Paper’s U.S. Pension Plan Master Trust. The graph portrays the time-weighted rate of return from 2005 – 2015.
ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains and losses in subsequent years. The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost for the U.S. pension plans over the next fiscal year are $374 million and $41 million, respectively.
 
Net periodic pension and postretirement plan expenses, calculated for all of International Paper’s plans, were as follows: 
In millions
2015
2014
2013
2012
2011
Pension expense
 
 
 
 
 
U.S. plans (non-cash)
$
461

$
387

$
545

$
342

$
195

Non-U.S. plans
6


5

3

1

Postretirement expense
 
 
 
 
 
U.S. plans
8

7

(1
)
(4
)
7

Non-U.S. plans
5

7

7

1

2

Net expense
$
480

$
401

$
556

$
342

$
205

The increase in 2015 U.S. pension expense principally reflects a decrease in the discount rate, updated mortality assumptions, higher amortization of unrecognized actuarial losses and a settlement charge in 2015.
Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2015, projected future net periodic pension and postretirement plan expenses would be as follows: 
In millions
2017 (1)
2016 (1)
Pension expense
 
 
U.S. plans (non-cash)
$
278

$
364

Non-U.S. plans
4

5

Postretirement expense
 
 
U.S. plans
14

14

Non-U.S. plans
8

5

Net expense
$
304

$
388


(1)
Based on assumptions at December 31, 2015.
The Company estimates that it will record net pension expense of approximately $364 million for its U.S. defined benefit plans in 2016, with the decrease from expense of $461 million in 2015 reflecting an increase in the assumed discount rate to 4.40% in 2016 from 4.10% in 2015, updated demographic assumptions and lower unrecognized losses.
The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2015 totaled approximately $10.9 billion, consisting of approximately 48% equity securities, 33% debt securities, 10% real estate and 9% other assets. Plan assets include an immaterial amount of International Paper common stock.
The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company,


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and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make voluntary contributions in the future. There are no required contributions to the U.S. qualified plan in 2016. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $62 million for the year ended December 31, 2015.
Accounting for Stock-Based Compensation

The Company has a Performance Share Plan, which grants performance-based restricted stock units that are paid out in stock when the awards are earned. Such incentive compensation plans are accounted for under ASC 718, “Compensation - Stock Compensation.” This standard requires that the value of shares to be issued under this plan be recognized as compensation over the period in which the awards are earned based on the fair value of the awards, and requires the use of a number of judgments and assumptions in determining the timing and amount of such charges. Additionally, since a component of these awards is based on the Company’s performance over a specified period compared to other companies, the amount of expense recorded for a given period could require adjustments after the end of the period.
Income Taxes
International Paper records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering technical merits of the position based on specific tax regulations and facts of each matter. Changes to recorded liabilities are only made when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a recent court case that addresses the matter.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies.
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.
The Company’s effective income tax rates, before equity earnings and discontinued operations, were 37%, 14% and (41)% for 2015, 2014 and 2013, respectively. These effective tax rates include the tax effects of certain special items that can significantly affect the effective income tax rate in a given year, but may not recur in subsequent years. Management believes that the effective tax rate computed after excluding these special items may provide a better estimate of the rate that might be expected in future years if no additional special items were to occur in those years. Excluding these special items, the effective income tax rate for 2015 was 33% of pre-tax earnings compared with 31% in 2014 and 26% in 2013. We estimate that the 2016 effective income tax rate will be approximately 34% based on expected earnings and business conditions.
RECENT ACCOUNTING DEVELOPMENTS
There were no new accounting pronouncements issued or effective during the fiscal year which have had or are expected to have a material impact on the Company’s consolidated financial statements. See Note 2 Recent Accounting Developments on pages 51 and 52 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.
LEGAL PROCEEDINGS
Information concerning the Company’s environmental and legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 61 through 64 of Item  8. Financial Statements and Supplementary Data.
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
International Paper has operations in a number of countries. Its operations in those countries also export to, and compete with, imports from other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars and the remeasurement


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impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of imports into, and exports out of, the United States (and the impact on local currency pricing of products that are traded internationally). In general, a weaker U.S. dollar and stronger local currency is beneficial to International Paper. The currencies that have the most impact are the Euro, the Brazilian real, the Polish zloty and the Russian ruble.
MARKET RISK
We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper’s debt obligations is included in Note 13 Debt and Lines of Credit on pages 66 and 67 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 14 Derivatives and Hedging Activities on pages 67 through 71 of Item 8. Financial Statements and Supplementary Data.
The fair value of our debt and financial instruments varies due to changes in market interest and foreign currency rates and commodity prices since the inception of the related instruments. We assess this market risk utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices.
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, 2015 and 2014 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 consistent with International Paper’s targeted capital structure, while at the same time taking advantage of market opportunities to reduce interest expense as appropriate. Derivative instruments, such as interest rate swaps, may be used to implement this capital structure. At December 31, 2015 and 2014, the net fair
 
value liability of financial instruments with exposure to interest rate risk was approximately $9.3 billion and $9.8 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $565 million and $410 million at December 31, 2015 and 2014, respectively.
Commodity Price Risk
The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap or forward purchase contracts may be used to manage risks associated with market fluctuations in energy prices. The net fair value of such outstanding energy hedge contracts at December 31, 2015 and 2014 was approximately a $7 million and a $2 million liability, respectively. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would have been approximately $1 million at December 31, 2015 and 2014, respectively.

Foreign Currency Risk
International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis by financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the operation’s functional currency, or by entering into cross-currency and interest rate swaps, or foreign exchange contracts. At December 31, 2015 and 2014, the net fair value of financial instruments with exposure to foreign currency risk was approximately a $4 million and a $1 million asset, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would have been approximately $30 million and $52 million at December 31, 2015 and 2014, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the preceding discussion and Note 14 Derivatives and Hedging Activities on pages 67 through 71 of Item 8. Financial Statements and Supplementary Data.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON:

Financial Statements

The management of International Paper Company is responsible for the preparation of the consolidated financial statements in this annual report and for establishing and maintaining adequate internal controls over financial reporting. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances to present fairly the Company’s consolidated financial position, results of operations and cash flows on a consistent basis. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements.

As can be expected in a complex and dynamic business environment, some financial statement amounts are based on estimates and judgments. Even though estimates and judgments are used, measures have been taken to provide reasonable assurance of the integrity and reliability of the financial information contained in this annual report. We have formed a Disclosure Committee to oversee this process.

The accompanying consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP. During its audits, Deloitte & Touche LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders and the board of directors and all committees of the board. Management believes that all representations made to the independent auditors during their audits were valid and appropriate.

Internal Control Over Financial Reporting

The management of International Paper Company is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control
 
system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified.

The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2015. 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, 2015, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public 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 42 and 43.
Internal Control Environment And Board Of Directors Oversight

Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may anonymously report suspected violations of law or International Paper’s policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout International Paper, and an extensive program of internal audits with management follow-up.

The Board of Directors, assisted by the Audit and Finance Committee (Committee), monitors the integrity of the Company’s financial statements and financial reporting procedures, the performance of the Company’s internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists of independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. The Committee’s Charter takes into account the New York Stock Exchange rules relating to Audit Committees and


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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, 2015, including critical accounting policies and significant management judgments, with management and the independent auditors. The Committee’s report recommending the inclusion of such financial statements in this Annual Report on Form 10-K will be set forth in our Proxy Statement. 


MARK S. SUTTON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
 


CAROL L. ROBERTS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors and Shareholders of International Paper Company:

We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company's


 
internal control over financial reporting.

Memphis, Tennessee
February 25, 2016



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of International Paper Company:
We have audited the internal control over financial reporting of International Paper Company and subsidiaries (the "Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material 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.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with


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generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.

Memphis, Tennessee
February 25, 2016


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CONSOLIDATED STATEMENT OF OPERATIONS
 
In millions, except per share amounts, for the years ended December 31
2015
2014
2013
NET SALES
$
22,365

$
23,617

$
23,483

COSTS AND EXPENSES
 
 
 
Cost of products sold
15,468

16,254

16,282

Selling and administrative expenses
1,645

1,793

1,796

Depreciation, amortization and cost of timber harvested
1,294

1,406

1,531

Distribution expenses
1,406

1,521

1,583

Taxes other than payroll and income taxes
168

180

178

Restructuring and other charges
252

846

156

Impairment of goodwill and other intangibles
137

100

127

Net (gains) losses on sales and impairments of businesses
174

38

3

Net bargain purchase gain on acquisition of business


(13
)
Interest expense, net
555

607

612

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY EARNINGS