# International Paper Co: Form 10-K for the period ended Dec 31, 2013 - Company: [International Paper Co](/companies/ip.md) (CIK 51434) - Form: 10-K - Filed: 2014-02-27 - Accepted by EDGAR: Feb 27, 2014, 19:31 ET - Period: 2013-12-31 - Accession: 0000051434-14-000003 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143414000003/ip10-k123113.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143414000003/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2013-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2013-10-02 to 2013-12-31 | $7.25bn | us-gaap:SalesRevenueNet | | Revenue | 12 months, 2013-01-01 to 2013-12-31 | $29.08bn | us-gaap:SalesRevenueNet | | Gross profit | 3 months, 2013-10-02 to 2013-12-31 | $1.97bn | us-gaap:GrossProfit | | Gross profit | 12 months, 2013-01-01 to 2013-12-31 | $7.86bn | us-gaap:GrossProfit | | Selling, general and administrative | 12 months, 2013-01-01 to 2013-12-31 | $2.21bn | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2013-01-01 to 2013-12-31 | $1.84bn | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2013-01-01 to 2013-12-31 | $669.0m | us-gaap:InterestExpense | | Income tax | 12 months, 2013-01-01 to 2013-12-31 | −$523.0m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2013-10-02 to 2013-12-31 | $436.0m | us-gaap:NetIncomeLoss | | Net income | 12 months, 2013-01-01 to 2013-12-31 | $1.40bn | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2013-10-02 to 2013-12-31 | $0.98 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2013-01-01 to 2013-12-31 | $3.11 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2013-10-02 to 2013-12-31 | $0.99 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2013-01-01 to 2013-12-31 | $3.15 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2013-01-01 to 2013-12-31 | 448,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2013-01-01 to 2013-12-31 | $3.03bn | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2013-01-01 to 2013-12-31 | $1.20bn | us-gaap:PaymentsToAcquireProductiveAssets | | Dividends paid | 12 months, 2013-01-01 to 2013-12-31 | $554.0m | us-gaap:PaymentsOfDividends | | Share repurchases | 12 months, 2013-01-01 to 2013-12-31 | $512.0m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2013-12-31 | $1.80bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2013-12-31 | $9.03bn | us-gaap:AssetsCurrent | | Total assets | at 2013-12-31 | $31.53bn | us-gaap:Assets | | Current liabilities | at 2013-12-31 | $5.13bn | us-gaap:LiabilitiesCurrent | | Long-term debt | at 2013-12-31 | $8.83bn | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2013-12-31 | $661.0m | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2013-12-31 | $8.11bn | us-gaap:StockholdersEquity | ## Business As filed, 29,724 characters. ### 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 that is complemented by an extensive North American merchant distribution system, 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, 2013, the Company operated 25 pulp, paper and packaging mills, 181 converting and packaging plants, 18 recycling plants and three bag facilities. Production facilities at December 31, 2013 in Europe, Asia, Africa, India, Latin America and South America included 16 pulp, paper and packaging mills, 72 converting and packaging plants, and two recycling plants. We distribute printing, packaging, graphic arts, maintenance and industrial products principally through over 81 distribution branches in the United States and 17 distribution branches located in Mexico and Asia. At December 31, 2013, we owned or managed approximately 332,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. For management and financial reporting purposes, our businesses are separated into four segments: Industrial Packaging; Printing Papers; Consumer Packaging; and Distribution. A description of these business segments can be found on pages 27 through 29 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. On January 28, 2014, we announced that International Paper, xpedx Holding Company (“SpinCo”), a company we recently formed to hold xpedx, the business of which comprises our Distribution segment, UWW Holdings, Inc. (“Unisource”) and related entities had entered into a merger agreement, a contribution and distribution agreement and related agreements, providing for the pro rata, tax-free, spin-off distribution of shares of common stock of SpinCo to International Paper’s shareholders and the merger of Unisource with and into SpinCo with SpinCo as the surviving company in the merger. As a result of the spin-off distribution and the merger, International Paper’s shareholders will own approximately 51%, and the sole shareholder of Unisource will own approximately 49%, of the shares of common stock of SpinCo on a fully diluted basis. We anticipate that the spin-off distribution and the merger will be completed in mid-2014. You can find discussions of the transaction in Item 1A. Risk Factors - Risks Relating to Our Operations and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Description of Industry Segments. From 2009 through 2013, International Paper’s capital expenditures approximated $5.0 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs, maintain reliability of operations and improve forestlands. Capital spending for continuing operations in 2013 was approximately $1.2 billion and is expected to be approximately $1.4 billion in 2014. You can find more information about capital expenditures on page 35 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Discussions of acquisitions can be found on pages 35 through 37 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 25 through 27 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 89 through 91 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 91 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 and 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 20 through 34 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II. ### MARKETING AND DISTRIBUTION The Company sells paper, packaging products and other products directly to end users and converters, as well as through agents, resellers and paper distributors. We own a large merchant distribution business that sells products made both by International Paper and by other companies making paper, paperboard, packaging, graphic arts supplies and maintenance and industrial products. Sales offices are located throughout the United States as well as internationally. ### DESCRIPTION OF PRINCIPAL PRODUCTS The Company’s principal products are described on pages 27 through 29 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 2013, 2012 and 2011 were as follows: ### Sales Volumes by Product (1) *In thousands of short tons* | Industrial Packaging | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | North American Corrugated Packaging (2) | **10,393** | 10,523 | 7,424 | | North American Containerboard (2) | **3,273** | 3,228 | 2,371 | | North American Recycling | **2,379** | 2,349 | 2,435 | | North American Saturated Kraft | **176** | 166 | 161 | | North American Gypsum/Release Kraft (2) | **157** | 135 | — | | North American Bleached Kraft | **132** | 114 | 95 | | EMEA Industrial Packaging (3) | **1,342** | 1,032 | 1,047 | | Asian Box | **416** | 410 | 444 | | Brazilian Packaging (4) | **297** | — | — | | Industrial Packaging | **18,565** | 17,957 | 13,977 | | Printing Papers | | | | | U.S. Uncoated Papers | **2,508** | 2,617 | 2,616 | | European and Russian Uncoated Papers | **1,413** | 1,286 | 1,218 | | Brazilian Uncoated Papers | **1,150** | 1,165 | 1,141 | | Indian Uncoated Papers | **232** | 246 | 49 | | Uncoated Papers | **5,303** | 5,314 | 5,024 | | Market Pulp (5) | **1,711** | 1,593 | 1,410 | | Consumer Packaging | | | | | North American Consumer Packaging | **1,556** | 1,507 | 1,560 | | European and Russian Coated Paperboard | **355** | 372 | 332 | | Asian Coated Paperboard | **1,430** | 1,059 | 998 | | Consumer Packaging | **3,341** | 2,938 | 2,890 | *(1) Includes third-party and inter-segment sales and excludes sales of equity investees.* #### (2) Includes Temple-Inland volumes from date of acquisition in February 2012. *(3) Includes Turkish box plants beginning in Q1 2013 when a majority ownership was acquired.* #### (4) Includes Brazil Packaging from date of acquisition in mid- January 2013. #### (5) Includes internal sales to mills. ### 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 $18 million in 2013, $13 million in 2012 and $13 million in 2011. 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 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 $61 million in 2013 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend approximately $140 million in 2014 for similar capital projects, including expenditures associated with the U.S. Environmental Protection Agency's (EPA) Boiler MACT (maximum achievable control technology) regulations. Capital expenditures for 2015 environmental capital projects are anticipated to be approximately $160 million, including Boiler MACT costs. Capital expenditures for 2016 environmental capital projects are estimated to be $110 million, including Boiler MACT costs. On January 31, 2013, the EPA issued the final Boiler MACT suite of 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. As such, the projected capital expenditures for environmental capital projects represent our current best estimate of future expenditures with the recognition that the Boiler MACT regulations are subject to change. In the U.S., air quality regulations finalized by the EPA during 2013 are not expected to have a material impact on the Company. To date, 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 have not had a material impact on the Company. Regulations addressing specific implementation issues related to the SO2 NAAQS are being developed by the EPA and are expected to be finalized during the next two years. Potentially material capital investment might be required in response to these emerging requirements. ### 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 might have a material impact on the Company in the future. ### International Efforts In 1997, the Kyoto Protocol established emission reduction obligations for certain countries where the Company had and continues to have operations. Though the Kyoto Protocol expired in 2012, several countries, and most notably the European Union (EU), extended their emissions commitments until 2020. A successor program to the Kyoto Protocol is the subject of on-going international negotiations. It is not yet clear if these negotiations will result in a new International Climate Change Agreement and, if so, what form it will take. Due to this uncertainty, it is not possible at this time to estimate the potential impacts of future international agreements on the Company. To assist member countries in meeting obligations under the Kyoto Protocol, the EU established and continues to operate an Emissions Trading System (EU ETS). Currently, we have two sites directly subject to regulation under Phase III of the EU ETS, one in Poland and one in France. Other sites that we operate in the EU experience indirect impacts of the EU ETS through purchased power pricing. Neither the direct nor indirect impacts of the EU ETS have been material to the company, but they could be material to the company in the future depending on how allocation of and market prices for greenhouse gas (GHG) credits evolve over the coming years. ### National Efforts In the U.S., the Kyoto Protocol was not ratified and Congress has not passed GHG legislation. The U.S. EPA has acted regulatorily to control GHGs from mobile sources (through transportation fuel efficiency standards) and requires reporting of GHGs from sources of GHGs greater than 25,000 tons per year. In 2013, the Company reported to EPA the GHG emissions from 23 of our U.S. manufacturing sites and 7 landfills. In 2010, EPA issued GHG regulations for new and modified sources under the New Source Review and Title V Operating Permit programs. However, EPA deferred the applicability of these GHGs regulations to biomass emissions until the summer of 2014 to allow a Science Advisory Board (SAB) to provide input to EPA on how to incorporate the concept of carbon neutrality for biomass into their regulatory processes. Before EPA could act on the SAB report, the U.S. Court of Appeals for the District of Columbia ruled that the EPA could not administratively defer regulation of biomass GHG emissions. The mandate for the biomass deferral vacature has yet to be acted upon and thus it is unclear how EPA will incorporate the decision into climate change regulations. EPA has also issued final regulations establishing New Source Performance Standards (NSPS) for new Electrical Generating Units (EGUs). This regulation is the first of several expected NSPSs that EPA will implement over the coming years. Currently, the EPA has not identified the pulp and paper industry in the first phase of sectors to be covered by the new standards. However, we anticipate that at some future time pulp and paper sources will be subject to new GHG NSPS rules. It is unclear what impacts, if any, future GHG NSPS rules will have on the Company’s operations. ### State, Regional and Local Measures A few U.S. states have enacted or are considering legal measures to require the reduction of emissions of greenhouse gases by companies and public utilities, primarily through the development of greenhouse gas emission inventories or regional GHG cap-and-trade programs. One such state is California. The Company does not have any sites currently subject to California's GHG regulatory plan. There may be indirect impacts from changing input costs (such as electricity) at some of our California converting operations but these have yet to manifest themselves in material impacts. Although we are monitoring proposed programs in other states, it is unclear what impacts, if any, state level GHG rules will have on the Company’s operations. ### Summary Regulation of greenhouse gases continues to evolve in various countries in which we do business. While it is likely that there will be increased governmental action regarding greenhouse gases and climate change, at this time it is not reasonably possible to estimate either a timetable for the implementation of any new regulations or our costs of compliance. In addition to possible direct impacts, future legislation and regulation could have indirect impacts on International Paper, such as higher prices for transportation, energy and other inputs, as well as more protracted air permitting processes, causing delays and higher costs to implement capital projects. International Paper has controls and procedures in place to stay adequately 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, including our emissions for 2013, are 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, 2013, we had approximately 69,000 employees, 39,000 of whom were located in the United States. Of the U.S. employees, approximately 26,000 are hourly, with unions representing approximately 15,500 employees. Approximately 12,000 of the union employees are represented by the United Steel Workers (USW). International Paper and the USW have negotiated two master agreements covering our USW represented mills and converting facilities, respectively. 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 18 of our U. S. pulp, paper, and packaging mills; the converting agreement includes 63 of our converting facilities. In addition, International Paper is party to a master agreement with District Council 2, International Brotherhood of Teamsters, covering 16 additional converting facilities. During 2013, 36 local labor agreements were negotiated at 13 mills, 21 converting facilities and two distribution facilities. In 2014, 50 labor agreements are scheduled to be negotiated, including seven mills, 30 converting facilities and 13 distribution facilities. Thirty-one 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 **John V. Faraci,** 64, chairman and chief executive officer since 2003. Mr. Faraci joined International Paper in 1974. **C. Cato Ealy,** 57, 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,** 57, 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, and vice president, Wood Products, from 2000 until 2004. Mr. Hoel joined International Paper in 1983. **Tommy S. Joseph,** 54, senior vice president - manufacturing, technology, EHS&S and global sourcing since January 2010. Mr. Joseph previously served as senior vice president - manufacturing, technology, EHS&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,** 57, senior vice president - consumer packaging and IP Asia since January 2010. Mr. Kadien previously served as senior vice president and president - xpedx from 2005 until 2009. Mr. Kadien joined International Paper in 1978. Mr. Kadien serves on the board of directors of The Sherwin-Williams Company. **Paul J. Karre,** 61, senior vice president - human resources and communications since May 2009. Mr. Karre previously served as vice president - human resources from 2000 until 2009. Mr. Karre joined International Paper in 1974. **Mary A. Laschinger,** 53, senior vice president since 2007 and president - xpedx since January 2010. Ms. Laschinger previously served as president - IP Europe, Middle East, Africa and Russia from 2005 until 2010. Ms. Laschinger joined International Paper in 1992. Ms. Laschinger serves on the board of directors of the Kellogg Company. **Tim S. Nicholls,** 52, senior vice president - printing and communications papers of the Americas since November 2011. Mr. Nicholls previously served as senior vice president and chief financial officer from 2007 until 2011 and vice president and executive project leader of IP Europe during 2007. Mr. Nicholls served as vice president and chief financial officer - IP Europe from 2005 until 2007. Mr. Nicholls joined International Paper in 1991. **Jean-Michel Ribieras,** 51, senior vice president and president - IP Europe, Middle East, Africa and 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,** 54, senior vice president and 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. and Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Ms. Roberts joined International Paper in 1981. **Sharon R. Ryan,** 54, senior vice president, general counsel and corporate secretary since November 2011. Ms. Ryan previously served as senior vice president, acting general counsel and corporate secretary from May 2011 until November 2011, and as vice president from March 2011 until May 2011. Ms. Ryan served as associate general counsel, chief ethics and compliance officer from 2009 until 2011, and as associate general counsel from 2006 until 2011. Ms. Ryan joined International Paper in 1988. **Mark S. Sutton,** 52, senior vice president - industrial packaging since November 2011. Mr. Sutton previously served as senior vice president - printing and communications papers of the Americas from 2010 until 2011, senior vice president - supply chain from 2008 to 2009, and vice president - supply chain from 2007 until 2008. Mr. Sutton served as vice president - strategic planning from 2005 until 2007. Mr. Sutton joined International Paper in 1984. ### 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 68 and 69 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 increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; (vii) the receipt of governmental and other approvals and favorable rulings associated with the agreed-upon transaction combining xpedx with Unisource, the successful fulfillment or waiver of all other closing conditions for the transaction without unexpected delays or conditions, and the successful closing of the transaction within the estimated timeframe; and (viii) our ability to achieve the benefits we expect from all 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. Ilim management has indicated that the financial information was prepared in accordance with International Financial Reporting Standards and extracted from Ilim’s financial statements, but International Paper has not verified or audited any of this information. Any projected financial information and statistical measures reflect the current views of Ilim management and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such projections. ## Risk factors As filed, 25,042 characters. 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. Increased demand for biomass to meet a growing number of government mandates and incentives to promote the use of biomass for renewable electrical energy generation may also impact pricing and availability of virgin wood fiber. 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 CON- **DITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS.** As of December 31, 2013, International Paper had approximately $9.5 billion of outstanding indebtedness, including $0 of indebtedness outstanding under our credit facilities and $8.8 billion of indebtedness outstanding under our floating and fixed rate notes. 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 $4.3 billion of our debt as of December 31, 2013, 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 the Company in connection with our 2006 and Temple-Inland's 2007 sales of forestlands may be downgraded below a required rating. Since 2006, 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 deferred taxes if a replacement bank cannot be obtained. See Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 72 through 75 of 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. 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 and health care reform could also increase pension and health care costs. 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, 2013 was $2.2 billion. This includes liability for the International Paper Company pension plans as well as the Temple-Inland Retirement Plan, for which we have responsibility in connection with the Temple-Inland acquisition. The amount and timing of future contributions will depend upon a number of factors, principally the actual earnings and changes in values of plan assets and changes in interest rates. **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, Brazil, Russia, Poland, China, 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. Downturns in economic activity, adverse tax consequences, fluctuations in the value of local currency versus the U.S. dollar, 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 and to labor and employment. 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 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 believe that the outcome of any pending or threatened lawsuits or claims, or all of them combined, will not 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; - 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 CYBER-SECURITY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY THAT MANAGES OPERATIONS AND OTHER BUSINESS PROCESSES.** International Paper 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 cyber attacks. 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. **SEVERAL OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT.** Several operations, particularly in emerging markets, are carried on by joint ventures such as the Ilim joint venture in Russia. In joint ventures, we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures. **THE AGREED-UPON TRANSACTION COMBINING XPEDX WITH UNISOURCE MAY NOT BE COMPLETED WITHIN THE EXPECTED TIMEFRAME, OR AT ALL, AND WE MAY NOT ACHIEVE THE EXPECTED BENEFITS FROM THIS DIVESTITURE OR FROM OTHER STRATEGIC ACQUISITIONS, JOINT VENTURES AND DIVESTITURES.** On January 28, 2014, we announced that xpedx Holding Company (SpinCo) and Unisource will merge under the terms of a definitive agreement that will result in the creation of a new publicly traded company. The transaction will be accomplished through a Reverse Morris Trust structure in which International Paper will indirectly contribute the assets of xpedx to a newly formed wholly owned subsidiary, SpinCo, in exchange for shares of common stock of SpinCo, a special payment of $400 million, subject to adjustments, expected to be financed with new debt in SpinCo's capital structure, as well as the potential for an additional cash payment pursuant to an "earn-out" provision. International Paper will distribute shares of SpinCo to International Paper shareholders on a pro rata basis in a manner intended to be tax-free to International Paper and its shareholders. The transaction is expected to be completed in mid-2014. Completion of the transaction is subject to the satisfaction (or waiver) of a number of important conditions that are beyond our control and may prevent, delay or otherwise negatively affect its completion. The success of the transaction will depend, in part, on the ability of the combined company to realize anticipated growth opportunities, cost savings and other synergies. SpinCo's success in realizing these growth opportunities, cost savings and other synergies, and the timing of this realization, depends on the successful integration of xpedx’s business and operations with Unisource’s business and operations. Even if the combined company is able to integrate the xpedx and Unisource businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth opportunities, cost savings and other synergies currently expected from this integration within the anticipated time frame or at all. Moreover, substantial expenses will be incurred in connection with the transaction and with the integration of xpedx’s business with Unisource’s business. Such expenses are difficult to estimate accurately and may exceed current estimates. Accordingly, the benefits from the transaction may be offset by costs or delays incurred in integrating the businesses. More broadly, our strategy for long-term growth, productivity and profitability depends, in part, on our ability to accomplish prudent strategic acquisitions, joint ventures and divestitures 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 recently 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. **IF THE SPIN-OFF DOES NOT QUALIFY AS A TAX-FREE SPIN-OFF UNDER SECTION 355 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, INCLUDING AS A RESULT OF SUBSEQUENT ACQUISITIONS OF STOCK OF INTERNATIONAL PAPER OR SPINCO, THEN INTERNATIONAL PAPER AND/OR THE INTERNATIONAL PAPER SHAREHOLDERS MAY BE REQUIRED TO PAY SUBSTANTIAL U.S. FEDERAL INCOME TAXES.** The spin-off and the merger are conditioned upon International Paper’s receipt of a private letter ruling from the U.S. Internal Revenue Service (“IRS”) to the effect that the spin-off and certain related transactions will qualify as tax-free to International Paper and the International Paper shareholders for U.S. federal income tax purposes. Although a private letter ruling from the IRS generally is binding on the IRS, the IRS ruling does not rule that the spin-off satisfies every requirement for a tax-free spin-off under Section 355 of the Code, and the parties will rely solely on the opinion of counsel for comfort that such additional requirements are satisfied. If the spin-off does not qualify as a tax-free spin-off under Section 355 of the Code, then the receipt of SpinCo common stock would be taxable to the International Paper shareholders, International Paper might recognize a substantial gain on the spin-off, and SpinCo may be required to indemnify International Paper for the tax on such gain pursuant to a tax matters agreement. There can be no assurance that SpinCo would have the resources or liquidity required to indemnify International Paper for any such taxable gain. In addition, the spin-off will be taxable to International Paper pursuant to Section 355(e) of the Code if there is a 50% or more change in ownership of either International Paper or SpinCo, directly or indirectly, as part of a plan or series of related transactions that include the spin-off. Because the International Paper shareholders will collectively own more than 50% of our common stock following the merger, the merger alone will not cause the spin-off to be taxable to International Paper under Section 355(e) of the Code. However, Section 355(e) of the Code might apply if other acquisitions of stock of International Paper before or after the merger, or of SpinCo after the merger, are considered to be part of a plan or series of related transactions that include the spin-off. ## Properties As filed, 1,457 characters. ### FORESTLANDS As of December 31, 2013, the Company owned or managed approximately 332,000 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 CERFLOR and 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 2014 on page 38, and dispositions and restructuring activities as of December 31, 2013, on pages 25 through 27 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 59 and 60 and pages 63 and 64 of Item 8. Financial Statements and Supplementary Data. ## Legal proceedings As filed, 187 characters. Information concerning the Company’s legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 68 through 72 of Item 8. Financial Statements and Supplementary Data. ## Management's discussion and analysis As filed, 116,168 characters. ### 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 $3.16 in 2013, compared with $2.65 in 2012, and $3.12 in 2011. Diluted earnings (loss) per share attributable to common shareholders were $3.11 in 2013, compared with $1.80 in 2012 and $3.03 in 2011. International Paper delivered strong results during 2013, driven by margin expansion across many of our businesses. Year-over-year revenues grew despite a challenging economic environment. We generated record cash flow from operations of $3 billion. Strong free cash flow enabled the Company to return cash to our shareholders in the form of a share buy-back program instituted during the 2013 third quarter and a 17% increase in the quarterly dividend beginning with the 2013 fourth quarter dividend payment. Our 2013 results reflect the significant progress we made on the pricing front particularly in our North American Industrial Packaging business along with solid manufacturing operations. Year-over-year sales volumes were down but we managed to offset some of this decline as the year progressed, mainly through our North American Industrial Packaging business. Input costs were a headwind in 2013, as expected, largely driven by increased fiber costs in the second half of the year. We made decisions during 2013 to rationalize capacity in our Consumer Packaging and North American Printing Papers businesses through the shutdown of a paper machine at our Augusta facility and initiating the closure of our Courtland mill, respectively. Also during the year, we finalized acquisitions in Turkey and Brazil and completed the sale of the Temple-Inland Building Products business. There was steady progress in the ramp-ups of the two capital projects at our Ilim joint venture in Russia but the operational benefits were offset by higher costs of the start-ups and unfavorable foreign currency movements driven by Ilim’s U.S. dollar denominated debt. Finally, we made significant progress during 2013 towards the spin-off of the xpedx distribution business to our shareholders culminating in the signing of a definitive merger agreement in January 2014. Overall, 2013 reflects our successful efforts to drive margin growth through greater price realizations coupled with solid operational performance. We generated returns in excess of our cost of capital while further strengthening our balance sheet through debt pay downs and favorable movements in our net pension liability. We exited 2013 with significant momentum with the expectation that we will continue to generate a stronger performance in the business in 2014. Looking ahead to the 2014 first quarter, seasonally lower sales volumes in the Brazilian and European Printing Papers businesses combined with the impact from the full shutdown at Courtland and the coated paperboard project at our Kwidzyn will more than offset the volume benefits from two additional shipping days in our North American Industrial Packaging business. Additionally, the severe weather events impacting much of the U.S. in early 2014 will further negatively impact volumes. The full implementation of the cutsize price increase in the 2013 fourth quarter will improve pricing for our North American Printing Papers business. Sales margins in the North American and Brazilian Industrial Packaging businesses are expected to reflect more favorable mix and pricing. The negative impact from input costs in the 2014 first quarter will be significant due in large part to the extreme temperatures affecting much of the U.S. both in terms of unit cost pressure and higher consumption. Planned maintenance downtime costs should increase in North America as we pull more outages into the 2014 first quarter while costs in our European Printing Papers business should be lower. Equity earnings from our Ilim joint venture are expected to be relatively flat with 2013 fourth quarter results absent any negative impact from foreign currency movements driven by Ilim’s U.S. dollar denominated debt. For the 2014 full year, we do not anticipate macroeconomic conditions significantly better than those experienced during 2013. Even in light of this, we expect a meaningful increase in year-over-year earnings. There are significant optimization opportunities in our North American Industrial Packaging business which we expect to further realize during 2014. Additionally, the Ilim project and cost synergy projects at Orsa will provide opportunities to increase earnings during 2014. We expect input cost inflation similar to that experienced during 2013. The 2014 tax rate should return to a more normal level due to the non-repeat of benefits recognized in 2013. Finally, free cash flow generation should continue to grow which will enable us to continue a balanced approach to cash allocation and to return a significant amount of cash to our shareholders. Free cash flow (a non-GAAP measure) of $1.8 billion generated in 2013 was higher than the $1.6 billion generated in 2012 and the $1.7 billion generated in 2011 (see reconciliation on page 35). Operating Earnings per share attributable to common shareholders of $0.83 in the fourth quarter of 2013 were lower than the $1.05 in the 2013 third quarter and higher than the $0.69 in the 2012 fourth quarter. Diluted earnings (loss) per share attributable to common shareholders were $0.98 in the fourth quarter of 2013, compared with $0.85 in the third quarter of 2013 and $0.53 in the fourth quarter of 2012. Free cash flow of $595 million generated in the 2013 fourth quarter was higher than the $454 million generated in the 2013 third quarter and the $384 million generated in the 2012 fourth quarter (see reconciliation on page 35). Operating Earnings is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most direct 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 discontinue 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 direct 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. | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | **Operating Earnings (Loss) Per Share Attributable to Shareholders** | **$3.16** | $2.65 | $3.12 | | Non-operating pension expense | **(0.44)** | (0.26) | (0.06) | | Special items | **0.29** | (0.69) | (0.14) | | **Diluted Earnings (Loss) Per Share from Continuing Operations** | **3.01** | 1.70 | 2.92 | | Discontinued operations | **0.10** | 0.10 | 0.11 | | **Diluted Earnings (Loss)Per Share Attributable to Shareholders** | **$3.11** | $1.80 | $3.03 | | | Three Months Ended December 31, 2013 | Three Months Ended September 30, 2013 | Three Months Ended December 31, 2012 | | --- | ---: | ---: | ---: | | **Operating Earnings (Loss) Per Share Attributable to Shareholders** | **$0.83** | $1.05 | $0.69 | | Non-operating pension expense | **(0.11)** | (0.11) | (0.07) | | Special items | **0.25** | (0.07) | (0.11) | | **Diluted Earnings (Loss) Per Share from Continuing Operations** | **0.97** | 0.87 | 0.51 | | Discontinued operations | **0.01** | (0.02) | 0.02 | | **Diluted Earnings (Loss) Per Share Attributable to Shareholders** | **$0.98** | $0.85 | $0.53 | ### 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 four segments: Industrial Packaging, Printing Papers, Consumer Packaging and Distribution. The following table presents a reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit: *In millions* | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | **Net Earnings (Loss) Attributable to International Paper Company** | **$1,395** | $794 | $1,322 | | Deduct – Discontinued operations: | | | | | (Earnings) from operations | **(64)** | (54) | — | | (Gain) loss on sales or impairment | **19** | 9 | (49) | | **Earnings (Loss) From Continuing Operations Attributable to International Paper Company** | **1,350** | 749 | 1,273 | | Add back (deduct): | | | | | Income tax provision | **(523)** | 331 | 311 | | Equity (earnings) loss, net of taxes | **39** | (61) | (140) | | Net earnings attributable to noncontrolling interests | **(17)** | 5 | 14 | | **Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings** | **849** | 1,024 | 1,458 | | Interest expense, net | **612** | 672 | 541 | | Noncontrolling interests / equity earnings included in operations | **(1)** | — | (10) | | Corporate items | **29** | 51 | 102 | | Special items: | | | | | Restructuring and other charges | **32** | 51 | 82 | | Net losses (gains) on sales and impairments of businesses | **—** | (2) | — | | Non-Operating Pension Expense | **323** | 159 | 43 | | | **$1,844** | $1,955 | $2,216 | | **Industry Segment Operating Profit** | | | | | Industrial Packaging | **$1,801** | $1,066 | $1,147 | | Printing Papers | **271** | 599 | 872 | | Consumer Packaging | **161** | 268 | 163 | | Distribution | **(389)** | 22 | 34 | | **Total Industry Segment Operating Profit** | **$1,844** | $1,955 | $2,216 | Industry segment operating profits in 2013 included a net loss from special items of $772 million compared with $335 million in 2012 and $253 million in 2011. Operationally, compared with 2012, the net benefit of higher average sales price realizations and an unfavorable mix ($653 million) were offset by lower sales volumes ($76 million), higher operating costs ($16 million), higher input costs ($207 million), and higher other costs ($28 million). The principal changes in operating profit by segment were as follows: - Industrial Packaging’s profits of $1.8 billion were $735 million higher than in 2012 as the net benefit of higher average sales price realizations and unfavorable mix were partially offset by lower sales volumes, higher operating costs and higher maintenance outage costs. In addition, 2013 operating profits included $62 million of costs associated with the integration of Temple-Inland and a $13 million gain for a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey. Operating profits in 2012 included $184 million of costs associated with the integration of Temple-Inland, a $62 million charge to adjust the long-lived assets of the Hueneme mill to their fair value, and $29 million of costs associated with the divestiture of three containerboard mills. - Printing Papers’ profits of $271 million were $328 million lower than in 2012. The benefits of lower operating costs and maintenance outage costs were more than offset by lower average sales price realizations, lower sales volumes, higher input costs and higher other costs. Operating profits in 2013 included $118 million of costs associated with the announced shutdown of our Courtland, Alabama mill and net charges of $123 million for the impairment of the goodwill and a trade name intangible asset of the Company's India Papers business. - Consumer Packaging’s profits of $161 million were $107 million lower than in 2012. The benefits from higher sales volumes were more than offset by lower average sales price realizations, an unfavorable mix, higher operating costs and higher input costs. Operating profits in 2013 included costs of $45 million associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill. - Distribution’s loss of $389 million was lower than the operating profit of $22 million in 2012. The benefits from lower operating costs were more than offset by lower sales volumes and lower average sales price realizations. Operating profits in 2013 included a $400 million charge for the impairment of goodwill in the Company's xpedx business. In addition, reorganization expenses were $32 million in 2013 and $49 million in 2012. Corporate items, net, of $29 million of expense in 2013 were lower than the $51 million of expense in 2012 due to lower supply chain initiative expenses. The decrease in 2012 from the expense of $102 million in 2011 primarily reflects lower supply chain initiative expenses. Corporate special items, including restructuring and other items and net losses on sales and impairments of businesses were a loss of $32 million in 2013 compared with a loss of $49 million in 2012 and a loss of $76 million in 2011. Interest expense, net, was $612 million in 2013 compared with $672 million in 2012 and $541 million in 2011. The decrease in 2013 compared with 2012 reflects lower average debt levels and the reversal of interest reserves related to U.S. federal income tax audits. The increase in 2012 compared with 2011 is due to interest expense associated with the Temple-Inland acquisitions. A net income tax benefit of $523 million was recorded for 2013, including a tax benefit of $770 million associated with the settlement of tax audits and a net tax benefit of $4 million for other items. The 2012 income tax provision of $331 million includes a net expense of $14 million related to internal restructurings and an expense of $5 million to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements). The 2011 income tax provision of $311 million includes a tax benefit of $222 million related to the reduction of the carrying value of the Shorewood business and the write-off of a deferred tax liability associated with Shorewood, a $24 million expense related to internal restructurings, a $9 million expense for costs associated with our acquisition of a majority interest in Andhra Pradesh Paper Mills Limited, a $13 million benefit related to the release of a deferred tax asset valuation allowance and a $2 million expense for other items. ### Discontinued Operations In 2013, $64 million of operating profits for the Temple-Inland Building Products business were recorded in discontinued operations. In addition, $19 million of after-tax expenses associated with the divestiture of this business were included. In 2012, $54 million of operating profits for the Temple-Inland Building Products business were recorded in discontinued operations. In addition, $9 million of after- tax expenses associated with pursuing the divestiture of this business were included. In 2011, $49 million of net income adjustments were recorded relating to prior sales of discontinued businesses. ### Liquidity and Capital Resources For the year ended December 31, 2013, International Paper generated $3.0 billion of cash flow from continuing operations compared with $3.0 billion in 2012. Capital spending for 2013 totaled $1.2 billion, or 77% of depreciation and amortization expense. Cash expenditures for acquisitions totaled $505 million, while net decreases in debt totaled $604 million. Our liquidity position remains strong, supported by approximately $2.0 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 2014 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 acquisitions, as appropriate. Capital spending for 2014 is targeted at $1.4 billion, or about 95% of depreciation and amortization. ### Critical Accounting Policies and Significant Accounting Estimates Accounting policies that may have a significant effect on our reported results of operations and financial position, and that can require judgments by management in their application, include accounting for contingent liabilities, impairments of long-lived assets and goodwill, pension and postretirement benefit obligations, stock options and income taxes. See pages 39 through 42 for a discussion of the Company’s critical accounting policies and significant accounting estimates. ### Legal See Note 11 Commitments and Contingent Liabilities on pages 68 through 72 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 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 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, 2013, and the major factors affecting these results compared to 2012 and 2011. ### RESULTS OF OPERATIONS For the year ended December 31, 2013, International Paper reported net sales of $29.1 billion, compared with $27.8 billion in 2012 and $26.0 billion in 2011. International net sales (including U.S. exports) totaled $9.6 billion or 33% of total sales in 2013. This compares with international net sales of $8.5 billion in 2012 and $8.7 billion in 2011. Full year 2013 net earnings attributable to International Paper Company totaled $1.4 billion ($3.11 per share), compared with net earnings of $794 million ($1.80 per share) in 2012 and $1.3 billion ($3.03 per share) in 2011. Amounts in all periods include the results of discontinued operations. Earnings from continuing operations attributable to International Paper Company after taxes in 2013 were $1.4 billion, including $129 million of net special items gains and $197 million of non-operating pension expense compared with income of $749 million, including $305 million of net special items charges and $113 million of non-operating pension expense in 2012, and $1.3 billion, including $63 million of net special items charges and $29 million of non-operating pension expense in 2011. Compared with 2012, the net benefit from higher average sales price realizations and unfavorable mix, lower corporate and other costs, lower interest expense, and lower tax expense were offset by lower sales volumes, higher operating costs and higher input costs In addition, 2013 results included lower equity earnings, net of taxes, relating to the Company’s investment in Ilim Holdings, SA. See Industry Segment Results on pages 29 through 34 for a discussion of the impact of these factors by segment. ### Discontinued Operations ### 2013: In 2013, $45 million of net income adjustments were recorded relating to discontinued businesses, including $19 million of costs associated with the sale of the Temple-Inland Building Products business. Also included are the operating profits for the Temple-Inland Building Products business through the date of sale of July 19, 2013. ### 2012: In 2012, $45 million of net income adjustments were recorded relating to discontinued businesses, including $9 million of costs associated with the announced agreement to sell the Temple-Inland Building Products business. Also included are the operating profits for the Temple-Inland Building Products business. ### 2011: In 2011, $49 million of net income adjustments were recorded relating to prior sales of discontinued businesses, including a $30 million earnout payment received by the Company in 2011 associated with the sale of the Kraft Papers businesses in 2007 and a $15 million tax benefit for the reversal of local country tax contingency reserves, for which the related statute of limitations has now expired, plus associated interest income of $4 million recorded in 2011 related to the 2006 sale of the Brazilian Coated Papers business. ### Income Taxes A net income tax benefit of $523 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 $150 million net tax benefit for other special items and a $126 million tax benefit related to non-operating pension expense, the tax provision was $527 million, or 27% of pre-tax earnings before equity earnings. A net income tax provision of $331 million was recorded for 2012, including a net tax expense of $14 million related to internal restructurings and a $5 million expense to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements). Excluding these items, a $98 million net tax benefit for other special items and a $46 million tax benefit related to non-operating pension expense, the tax provision was $456 million, or 29% of pre-tax earnings before equity earnings. A net income tax provision of $311 million was recorded for 2011, including a tax benefit of $222 million related to the reduction of the carrying value of the Shorewood business and the write-off of a deferred tax liability associated with Shorewood, a $24 million expense related to internal restructurings, a $9 million expense for costs associated with our acquisition of a majority share of Andhra Pradesh Paper Mills Limited in India, a $13 million benefit related to the release of a deferred tax asset valuation allowance and a $2 million expense for other items. Excluding these items, a $66 million net tax benefit for other special items and $14 million tax benefit related to non-operating pension expense, the tax provision was $591 million, or 32% of pre-tax earnings before equity earnings. ### Equity Earnings, Net of Taxes Equity earnings, net of taxes in 2013, 2012 and 2011 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see pages 34). ### Corporate Items and Interest Expense Corporate items totaled $29 million of expense for the year ended December 31, 2013 compared with $51 million in 2012 and $102 million in 2011. The decrease in 2013 from 2012 reflects lower supply chain initiative expenses, partially offset by higher pension expense. The decrease in 2012 from 2011 reflects lower supply chain initiative expenses. Net interest expense totaled $612 million in 2013, $672 million in 2012 and $541 million in 2011. The decrease in 2013 compared with 2012 reflects lower average debt levels and the reversal of interest reserves related to U.S. federal income tax audits. The increase in 2012 compared with 2011 is due to interest expense associated with the Temple-Inland acquisition. Net earnings attributable to noncontrolling interests totaled a loss of $17 million in 2013 compared with earnings of $5 million in 2012 and $14 million in 2011. The decrease in 2013 primarily reflects lower earnings for the Shandong IP & Sun Food Packaging Co., Ltd. joint venture in China due to competitive pressures on sales prices and higher pulp costs. In addition, 2013 includes a $15 million pre-tax charge for the impairment of a tradename intangible asset related to our India Papers business which has a net $3 million impact on noncontrolling interest. The decrease in 2012 primarily reflects lower earnings for the Shandong IP & Sun Food Packaging Co., Ltd. joint venture in China due to start-up costs associated with a new paper machine. ### 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 asset value of the facility has occurred. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. It is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur. ***2013:*** During 2013, corporate restructuring and other charges totaling $17 million before taxes ($11 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 75 and 76 of Item 8. Financial Statements and Supplementary Data), - a $22 million charge before taxes ($14 million after taxes) for costs associated with the evaluation of the spin-off of our xpedx operations, 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 $193 million before taxes ($120 million after taxes) were recorded in the Industrial Packaging, Printing Papers, Consumer Packaging and Distribution 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 $32 million charge before taxes ($19 million after taxes) for restructuring costs related to the Company's xpedx business, - 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. ***2012:*** During 2012, corporate restructuring and other charges totaling $51 million before taxes ($35 million after taxes) were recorded. These charges included: - a $48 million charge before taxes ($30 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 75 and 76 of Item 8. Financial Statements and Supplementary Data), and - a $3 million charge before taxes ($5 million after taxes) for other items. In addition, restructuring and other charges totaling $58 million before taxes ($39 million after taxes) were recorded in the Industrial Packaging. Consumer Packaging and Distribution industry segments including: - a $17 million charge before taxes ($12 million after taxes) related to the restructuring of our Packaging business in EMEA, - a $44 million charge before taxes ($28 million after taxes) for restructuring costs related to the Company's xpedx business, and - a $3 million gain before taxes ($1 million after taxes) for other items. ***2011:*** During 2011, corporate restructuring and other charges totaling $55 million before taxes ($33 million after taxes) were recorded. These charges included: - a $32 million charge before taxes ($19 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 75 and 76 of Item 8. Financial Statements and Supplementary Data), - an $18 million charge before taxes ($12 million after taxes) related to International Paper's acquisition of a majority share of APPM in India, and - a $5 million charge before taxes ($2 million after taxes) for other items. In addition, restructuring and other charges totaling $47 million before taxes ($33 million after taxes) were recorded in the Industrial Packaging, Printing Papers, Consumer Packaging and Distribution industry segments including: - a $20 million charge before taxes ($12 million after taxes) for costs associated with the signing of an agreement to acquire Temple-Inland, - a $24 million gain before taxes ($15 million after taxes) related to a change in the estimate of closure costs related to the Franklin, Virginia mill due to the Company’s decision to repurpose a portion of the mill to produce fluff pulp, - a $49 million charge before taxes ($34 million after taxes) for restructuring costs related to the Company’s xpedx business, and - a $2 million charge before taxes ($2 million after taxes) for other items. #### Impairments of Goodwill 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 expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $112 million, should be written off. 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, 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. No goodwill impairment charges were recorded in 2012 or 2011. #### Net Losses (Gains) on Sales and Impairments of Businesses Net losses (gains) on sales and impairments of businesses included in special items totaled a pre-tax loss of $3 million ($1 million after taxes) in 2013, a pre-tax loss of $86 million ($87 million after taxes) in 2012 and a pre-tax loss of $218 million (a gain of $36 million after taxes and noncontrolling interest) in 2011. The principal components of these gains/losses were: ***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. ***2012:*** As referenced in Note 6 Acquisitions and Joint Ventures on pages 60 through 63 in Item. 8 Financial Statements and Supplementary Data, on July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. During 2012, the Company recorded pre-tax charges of $29 million ($55 million after taxes) for costs associated with the divestitures of these mills. Also during 2012, in anticipation of the divestiture of the Hueneme mill, a pre-tax charge of $62 million ($38 million after taxes) was recorded to adjust the long-lived assets of the mill to their fair value. ***2011:*** On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings. As a result, during 2011, net pre-tax charges of $207 million (after a $246 million tax benefit and a gain of $8 million related to a noncontrolling interest, a net gain of $47 million) were recorded to reduce the carrying value of the Shorewood business to fair market value. As part of the transaction, International Paper retained a minority interest of approximately 40% in the newly combined AGI-Shorewood business outside the U.S. Since the interest retained represents significant continuing involvement in the operations of the business, the operating results of the Shorewood business were included in continuing operations in the accompanying consolidated statement of operations instead of Discontinued operations. The sale of the U.S. portion of the Shorewood business to Atlas Holdings closed on December 31, 2011. The sale of the remainder of the Shorewood business occurred during January 2012. Also during 2011, the Company recorded charges totaling $11 million (before and after taxes) to further write down the long-lived assets of its Inverurie, Scotland mill to their estimated fair value. #### Industry Segment Operating Profits Industry segment operating profits of $1.8 billion in 2013 decreased from $2.0 billion in 2012. The net benefit from higher average sales price realizations and an unfavorable mix ($653 million) were offset by lower sales volumes ($76 million), higher operating costs ($16 million), higher input costs ($207 million) and higher other costs ($28 million). Special items were a $772 million net loss in 2013 compared with a net loss of $335 million in 2012. Market-related downtime in 2013 decreased to approximately 484,000 tons from approximately 692,000 tons in 2012. Looking ahead to the first quarter of 2014, sales volumes are expected to improve for North American packaging due to two additional shipping days for boxes. North American paper sales volumes should decline as a result of the repositioning related to the shutdown of our Courtland mill. Demand is expected to be seasonally lower in EMEA and Brazil, but stable in Asia. Average sales price realizations in North America are expected to increase in the domestic paper market, and sales margins in the packaging markets are expected to reflect a more favorable mix. Average sales prices in Europe are likely to be steady for both paper and packaging. In Brazil, paper prices are expected to increase in both the Brazilian domestic and the Latin American export markets, while packaging prices should be stable. Input costs in North America are expected to increase for energy and to reflect the impact of the unusually cold weather. Planned maintenance downtime costs should increase in North America, while costs in Europe and Brazil should be lower. Earnings from our xpedx distribution business are expected to be flat despite seasonally lower sales volumes. Equity earnings from our Ilim joint venture are expected to be stable. ### 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 production capacity is about 13 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is converted domestically into corrugated boxes and other packaging by our 172 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 20 recycling plants. In EMEA, our operations include three recycled fiber containerboard mills in Morocco and Turkey and 28 container plants in France, Italy, Spain, Morocco and Turkey. In Brazil our operations include three containerboard mills and four box plants. In Asia, our operations include 17 container plants in China and additional container plants in Indonesia, Malaysia, Singapore, and Thailand. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. ### Printing Papers International Paper is one of the world’s leading producers of printing and writing papers. Products in this segment include uncoated and coated papers, uncoated bristols 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 5 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 332,000 acres of forestlands in Brazil. **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 1.7 million tons. ### Consumer Packaging International Paper is the world’s largest producer of solid bleached sulfate board with annual U.S. production capacity of about 1.6 million tons. Our coated paperboard business produces high quality coated paperboard for a variety of packaging and commercial printing end uses. Our *Everest®, Fortress®*, and *Starcote®* brands are used in packaging applications for everyday products such as food, cosmetics, pharmaceuticals, computer software and tobacco products. Our *Carolina®* brand is used in commercial printing end uses such as greeting cards, paperback book covers, lottery tickets, direct mail and point-of-purchase advertising. Our U.S. capacity is supplemented by about 371,000 tons of capacity at our mills producing coated board in Poland and Russia and by our International Paper & Sun Cartonboard Co., Ltd. joint venture in China which has 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. ### Distribution *xpedx*, our North American merchant distribution business, distributes products and services to a number of customer markets including: commercial printers with printing papers and graphic pre-press, printing presses and post-press equipment; building services and away-from-home markets with facility supplies; manufacturers with packaging supplies and equipment; and to a growing number of customers, we exclusively provide distribution capabilities including warehousing and delivery services. *xpedx* is a leading wholesale distribution marketer in these customer and product segments in North America, operating 86 distribution centers in the U.S. and Mexico. On January 28, 2014, International Paper, SpinCo, a company we recently formed to hold xpedx, Unisource and related entities entered into a merger agreement, a contribution and distribution agreement and related agreements, providing for the pro rata, tax-free, spin-off distribution of shares of common stock of SpinCo to International Paper’s shareholders and the merger of Unisource with and into SpinCo with SpinCo as the surviving company in the merger. As a result of the spin-off distribution and the merger, International Paper’s shareholders will own approximately 51%, and the sole shareholder of Unisource will own approximately 49%, of the shares of common stock of SpinCo on a fully diluted basis. We anticipate that the spin-off distribution and the merger will be completed in mid-2014. You can find discussions of the transaction in Item 1A, Risk Factors - Risks Relating to Our Operations. ### 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 2.6 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.1 million acres (5.7 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 and operating profits include the results of the Temple-Inland packaging operations from the date of acquisition in February 2012 and the results of the Brazil Packaging business from the date of acquisition in January 2013. In addition, due to the acquisition of a majority share of Olmuksa International Paper Sabanci Ambalaj Sanayi Ve Ticaret A.S., (now called Olmuksan International Paper or Olmuksan) net sales for our corrugated packaging business in Turkey are included in the business segment totals beginning in the first quarter of 2013 and the operating profits reflect a higher ownership percentage than in previous years. Net sales for 2013 increased 12% to $14.8 billion compared with $13.3 billion in 2012, and 42% compared with $10.4 billion in 2011. Operating profits were 69% higher in 2013 than in 2012 and 57% higher than in 2011. Excluding costs associated with the acquisition and integration of Temple-Inland, the divestiture of three containerboard mills and other special items, operating profits in 2013 were 36% higher than in 2012 and 59% higher than in 2011. Benefits from the net impact of higher average sales price realizations and an unfavorable mix ($749 million) were offset by lower sales volumes ($73 million), higher operating costs ($64 million), higher maintenance outage costs ($16 million) and higher input costs ($102 million). Additionally, 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, while operating profits in 2012 included costs of $184 million associated with the acquisition and integration of Temple-Inland, mill divestiture costs of $91 million, costs associated with the restructuring of our European Packaging business of $17 million and a $3 million gain for other items. *In millions* | Industrial Packaging | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Sales | **$14,810** | $13,280 | $10,430 | | Operating Profit | **1,801** | 1,066 | 1,147 | **North American Industrial Packaging** net sales were $12.5 billion in 2013 compared with $11.6 billion in 2012 and $8.6 billion in 2011. Operating profits in 2013 were $1.8 billion (both including and excluding costs associated with the integration of Temple-Inland and other special items) compared with $1.0 billion ($1.3 billion excluding costs associated with the acquisition and integration of Temple-Inland and mill divestiture costs) in 2012 and $1.1 billion (both including and excluding costs associated with signing an agreement to acquire Temple-Inland) in 2011. Sales volumes decreased in 2013 compared with 2012 reflecting flat demand for boxes and the impact of commercial decisions. Average sales price realizations were significantly higher mainly due to the realization of price increases for domestic containerboard and boxes. Input costs were higher for wood, energy and recycled fiber. Freight costs also increased. Planned maintenance downtime costs were higher than in 2012. Manufacturing operating costs decreased, but were offset by inflation and higher overhead and distribution costs. The business took about 850,000 tons of total downtime in 2013 of which about 450,000 were market-related and 400,000 were maintenance downtime. In 2012, the business took about 945,000 tons of total downtime of which about 580,000 were market-related and about 365,000 were maintenance downtime. Operating profits in 2013 included $62 million of costs associated with the integration of Temple-Inland. Operating profits in 2012 included $184 million of costs associated with the acquisition and integration of Temple-Inland and $91 million of costs associated with the divestiture of three containerboard mills. Looking ahead to 2014, compared with the fourth quarter of 2013, sales volumes in the first quarter are expected to increase for boxes due to a higher number of shipping days offset by the impact from the severe winter weather events impacting much of the U.S. Input costs are expected to be higher for energy, recycled fiber, wood and starch. Planned maintenance downtime spending is expected to be about $51 million higher with outages scheduled at six mills compared with four mills in the 2013 fourth quarter. Manufacturing operating costs are expected to be lower. However, operating profits will be negatively impacted by the adverse winter weather in the first quarter of 2014. **EMEA Industrial Packaging** net sales in 2013 include the sales of our packaging operations in Turkey which are now fully consolidated. Net sales were $1.3 billion in 2013 compared with $1.0 billion in 2012 and $1.1 billion in 2011. Operating profits in 2013 were $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) compared with $53 million ($72 million excluding restructuring costs) in 2012 and $66 million ($61 million excluding a gain for a bargain purchase price adjustment on an acquisition by our then joint venture in Turkey and costs associated with the closure of our Etienne mill in France in 2009) in 2011. Sales volumes in 2013 were higher than in 2012 reflecting strong demand for packaging in the agricultural markets in Morocco and Turkey. In Europe, sales volumes decreased slightly due to continuing weak demand for packaging in the industrial markets, and lower demand for packaging in the agricultural markets resulting from poor weather conditions. Average sales margins were significantly lower due to input costs for containerboard rising ahead of box sales price increases. Other input costs were also higher, primarily for energy. Operating profits in 2013 and 2012 included net gains of $13 million and $10 million, respectively, for insurance settlements and Italian government grants, partially offset by additional operating costs, related to the earthquakes in Northern Italy in May 2012 which affected our San Felice box plant. Entering the first quarter of 2014, sales volumes are expected to increase slightly reflecting higher demand for packaging in the industrial markets. Average sales margins are expected to gradually improve as a result of slight reductions in material costs and planned box price increases. Other input costs should be about flat. **Brazilian Industrial Packaging** includes the results of Orsa International Paper Embalagens S.A., a corrugated packaging producer in which International Paper acquired a 75% share in January 2013. Net sales were $335 million in 2013. Operating profits in 2013 were a loss of $2 million (a gain of $2 million excluding acquisition and integration costs). Looking ahead to the first quarter of 2014, sales volumes are expected to be seasonally lower than in the fourth quarter of 2013. Average sales margins should improve reflecting the partial implementation of an announced sales price increase and a more favorable product mix. Operating costs and input costs are expected to be lower. **Asian Industrial Packaging** net sales were $400 million in 2013 compared with $400 million in 2012 and $410 million in 2011. Operating profits for the packaging operations were a loss of $5 million in 2013 (a loss of $1 million excluding restructuring costs) compared with gains of $2 million in 2012 and $2 million in 2011. Operating profits were favorably impacted in 2013 by higher average sales margins and slightly higher sales volumes compared with 2012, but these benefits were offset by higher operating costs. Looking ahead to the first quarter of 2014, sales volumes and average sales margins are expected to be seasonally soft. Net sales for the distribution operations were $285 million in 2013 compared with $260 million in 2012 and $285 million in 2011. Operating profits were $3 million in 2013, 2012 and 2011. ### 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 2013 were about flat with both 2012 and 2011. Operating profits in 2013 were 55% lower than in 2012 and 69% lower than in 2011. Excluding facility closure costs and impairment costs, operating profits in 2013 were 15% lower than in 2012 and 40% lower than in 2011. Benefits from lower operating costs ($81 million) and lower maintenance outage costs ($17 million) were more than offset by lower average sales price realizations ($38 million), lower sales volumes ($14 million), higher input costs ($99 million) and higher other costs ($34 million). In addition, operating profits in 2013 included costs of $118 million associated with the announced closure of our Courtland, Alabama mill. During 2013, the Company accelerated depreciation for certain Courtland assets, and diligently 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. During 2014, we have continued our evaluation and expect to conclude as to any uses for these assets during the first quarter of 2014. Operating profits also included a $123 million impairment charge associated with goodwill and a trade name intangible asset in our India Papers business. Operating profits in 2011 included a $24 million gain related to the announced repurposing of our Franklin, Virginia mill to produce fluff pulp and an $11 million impairment charge related to our Inverurie, Scotland mill that was closed in 2009. *In millions* | Printing Papers | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Sales | **$6,205** | $6,230 | $6,215 | | Operating Profit | **271** | 599 | 872 | **North American Printing Papers** net sales were $2.6 billion in 2013, $2.7 billion in 2012 and $2.8 billion in 2011. Operating profits in 2013 were $36 million ($154 million excluding costs associated with the announced shutdown of our Courtland, Alabama mill) compared with $331 million in 2012 and $423 million ($399 million excluding a gain associated with the repurposing of our Franklin, Virginia mill) in 2011. Sales volumes in 2013 decreased compared with 2012. Average sales margins were lower, reflecting lower sales prices in both domestic and export markets. Input costs increased, primarily for wood and chemicals. Planned maintenance downtime costs were lower in 2013. Operating profits in 2013 were also negatively impacted by costs associated with the partial shutdown of our Courtland, Alabama mill. Entering the first quarter of 2014, sales volumes are expected to decrease compared with the fourth quarter of 2013 due to the repositioning of the business related to the Courtland shutdown. Average sales price realizations are expected to be higher as sales price increases announced in the fall of 2013 are fully realized. Input costs should increase for energy and chemicals, but will be partially offset by lower wood costs. Planned maintenance downtime costs are expected to be about $11 million higher with outages scheduled at our Georgetown, Eastover and Riverdale mills. In addition, the severe winter weather in the first quarter of 2014 will adversely impact operating profits. **Brazilian Papers** net sales for 2013 were $1.1 billion compared with $1.1 billion in 2012 and $1.2 billion in 2011. Operating profits for 2013 were $210 million compared with $163 million in 2012 and $169 million in 2011. Sales volumes in 2013 increased in Brazil and across Latin America resulting in reduced exposure to foreign export markets. Average sales price realizations improved for domestic uncoated freesheet paper, but the benefit was partially offset by declining prices for exported paper. Margins were favorably affected by an increased proportion of sales to the higher-margin domestic market. Raw material costs increased for wood, purchased pulp and chemicals, but costs for energy decreased due to the start-up and operation of the biomass boiler in Mogi Guacu. Operating costs and planned maintenance downtime costs were lower than in 2012. Looking ahead to 2014, sales volumes in the first quarter are expected to decrease due to seasonally weaker customer demand for uncoated freesheet paper. Average sales price realizations are expected to increase in the Brazilian domestic market due to the realization of announced sales price increases for uncoated freesheet paper. Input costs are expected to be about flat with higher wood costs offset by lower purchased pulp costs. Planned maintenance outage costs should be $4 million lower with no outages scheduled in the first quarter. **European Papers** net sales in 2013 were $1.5 billion compared with $1.4 billion in 2012 and $1.4 billion in 2011. Operating profits in 2013 were $167 million compared with $179 million in 2012 and $196 million ($207 million excluding asset impairment charges related to our Inverurie, Scotland mill which was closed in 2009) in 2011. Compared with 2012, sales volumes for uncoated freesheet paper in 2013 were higher in Russia, but slightly lower in Europe. Average sales price realizations for uncoated freesheet paper decreased in both Europe and Russia, reflecting weak economic conditions and soft market demand. Input costs for wood and energy were lower in Europe, but higher in Russia. Planned maintenance downtime costs were lower in 2013 because 2012 included an extra once-every-ten-years maintenance outage at the Saillat mill. Manufacturing operating costs were favorable. Entering 2014, sales volumes in the first quarter are expected to be seasonally weaker in Russia, and slightly lower, primarily for pulp, in Europe. Average sales price realizations for uncoated freesheet paper are expected to decrease in Russia, but be about flat in Europe. Input costs should be higher for energy and chemicals. Mill maintenance outage costs should be $14 million lower in the first quarter of 2014. **Indian Papers** includes the results of Andhra Pradesh Paper Mills (APPM) of which a 75% interest was acquired on October 14, 2011. Net sales were $185 million in 2013, $185 million in 2012 and $35 million in 2011. Operating profits were a loss of $145 million (a loss of $22 million excluding the goodwill and trade name impairment charges) in 2013, a loss of $16 million in 2012 and a loss of $3 million in 2011. Average sales price realizations improved significantly in 2013 compared with 2012, although sales volumes decreased. Input costs were higher, primarily for wood. Operating costs and planned maintenance downtime costs were higher in 2013. Looking ahead to the first quarter of 2014, sales volumes are expected to be seasonally higher. Average sales price realizations should continue to increase due to the further realization of price increases announced in the fourth quarter of 2013. **Asian Printing Papers** net sales were $90 million in 2013, $85 million in 2012 and $75 million in 2011. Operating profits were $1 million in both 2013 and 2012 and breakeven in 2011. **U.S. Pulp** net sales were $815 million in 2013 compared with $725 million in 2012 and $725 million in 2011. Operating profits were $2 million in 2013 compared with a loss of $59 million in 2012 and a gain of $87 million in 2011. Sales volumes in 2013 increased from 2012, primarily for fluff pulp, reflecting improved market demand and a change in our product mix with a full year of fluff pulp production at our Franklin, Virginia mill. Average sales price realizations were lower for fluff pulp while prices for market pulp increased. Input costs for wood, fuels and chemicals were higher. Mill operating costs were significantly lower largely due to the absence of costs associated with the start-up of the Franklin mill in 2012. Planned maintenance downtime costs were higher. In the first quarter of 2014, sales volumes are expected to be slightly lower compared with the fourth quarter of 2013. Average sales price realizations are expected to improve, reflecting the further realization of previously announced sales price increases for softwood pulp and fluff pulp. Input costs should be flat. Planned maintenance downtime costs should be about $11 million higher than in the fourth quarter of 2013. Operating profits will also be negatively impacted by the severe winter weather in the first quarter of 2014. ### Consumer Packaging Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of Consumer Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix. **Consumer Packaging** net sales in 2013 increased 8% from 2012, but decreased 7% from 2011. Operating profits decreased 40% from 2012 and 1% from 2011. Net sales and operating profits include the Shorewood business in 2011. Excluding costs associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill and costs associated with the sale of the Shorewood business, 2013 operating profits were 22% lower than in 2012, and 43% lower than in 2011. Benefits from higher sales volumes ($45 million) were offset by lower average sales price realizations and an unfavorable mix ($50 million), higher operating costs including incremental costs resulting from the shutdown of a paper machine at our Augusta, Georgia mill ($46 million) and higher input costs ($6 million). In addition, operating profits in 2013 included restructuring costs of $45 million related to the permanent shutdown of a paper machine at our Augusta, Georgia mill and $2 million of costs associated with the sale of the Shorewood business. Operating profits in 2012 included a gain of $3 million related to the sale of the Shorewood business, while operating profits in 2011 included a $129 million fixed asset impairment charge for the North American Shorewood business and $72 million for other charges associated with the sale of the Shorewood business. *In millions* | Consumer Packaging | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Sales | **$3,435** | $3,170 | $3,710 | | Operating Profit | **161** | 268 | 163 | **North American Consumer Packaging** net sales were $2.0 billion in 2013 compared with $2.0 billion in 2012 and $2.5 billion in 2011. Operating profits were $63 million ($110 million excluding paper machine shutdown costs and costs related to the sale of the Shorewood business) in 2013 compared with $165 million ($162 million excluding charges associated with the sale of the Shorewood business) in 2012 and $35 million ($236 million excluding asset impairment charges and other costs associated with the sale of the Shorewood business) in 2011. Coated Paperboard sales volumes in 2013 were higher than in 2012 reflecting stronger market demand. Average sales price realizations were lower year-over-year despite the realization of price increases in the second half of 2013. Input costs for wood and energy increased, but were partially offset by lower costs for chemicals. Planned maintenance downtime costs were slightly lower. Market-related downtime was about 24,000 tons in 2013 compared with about 113,000 tons in 2012. The permanent shutdown of a paper machine at our Augusta, Georgia mill in the first quarter of 2013 reduced capacity by 140,000 tons in 2013 compared with 2012. Foodservice sales volumes increased slightly in 2013 compared with 2012 despite softer market demand. Average sales margins were higher reflecting lower input costs for board and resins and a more favorable product mix. Operating costs and distribution costs were both higher. The U.S.Shorewood business was sold December 31, 2011 and the non-U.S. business was sold in January 2012. Looking ahead to the first quarter of 2014, Coated Paperboard sales volumes are expected to be seasonally weaker than in the fourth quarter of 2013. Average sales price realizations are expected to be slightly higher, and margins should also benefit from a more favorable product mix. Input costs are expected to be higher for energy, chemicals and wood. Planned maintenance downtime costs should be $8 million lower with a planned maintenance outage scheduled at the Augusta mill in the first quarter. The severe winter weather in the first quarter of 2014 will negatively impact operating profits. Foodservice sales volumes are expected to be seasonally lower. Average sales margins are expected to improve due to the realization of sales price increases effective with our January contract openers and a more favorable product mix. Input costs for board and resin are expected to be flat and operating costs are expected to decrease. **European Consumer Packaging** net sales in 2013 were $380 million compared with $380 million in 2012 and $375 million in 2011. Operating profits in 2013 were $100 million compared with $99 million in 2012 and $93 million in 2011. Sales volumes in 2013 decreased from 2012 in both the European and Russian markets. Average sales price realizations were significantly higher in the Russian market, but were lower in Europe. Input costs were flat year-over-year. Planned maintenance downtime costs were higher in 2013 than in 2012. Looking forward to the first quarter of 2014, sales volumes compared with the fourth quarter of 2013 are expected to be about flat. Average sales price realizations are expected to be higher in both Russia and Europe. Input costs are expected to increase for wood and energy, but decrease for purchased pulp. There are no maintenance outages scheduled for the first quarter, however the Kwidzyn mill will have additional costs associated with the rebuild of a coated board machine. **Asian Consumer Packaging** net sales were $1.1 billion in 2013 compared with $830 million in 2012 and $855 million in 2011. Operating profits in 2013 were a loss of $2 million compared with gains of $4 million in 2012 and $35 million in 2011. Sales volumes increased in 2013 compared with 2012, reflecting the ramp-up of a new coated paperboard machine installed in 2012. However, average sales price realizations were significantly lower, reflecting competitive pressure on sales prices which squeezed margins and created an unfavorable product mix. Lower input costs were offset by higher freight costs. In 2012, start-up costs for the new coated paperboard machine adversely impacted operating profits. In the first quarter of 2014, sales volumes are expected to increase slightly. Average sales price realizations are expected to be flat reflecting continuing competitive pressures. Input costs are expected be higher for pulp, energy and chemicals. The business will drive margin improvement through operational excellence and better mix. ### Distribution *xpedx*, our distribution business, is one of North America’s leading business-to-business distributors to manufacturers, facility managers and printers, providing customized solutions that are designed to improve efficiency, reduce costs and deliver results. Customer demand is generally sensitive to changes in economic conditions and consumer behavior, along with segment specific activity including corporate advertising and promotional spending, government spending and domestic manufacturing activity. Distribution’s margins are relatively stable across an economic cycle. Providing customers with the best choice for value in both products and supply chain services is a key competitive factor. Additionally, efficient customer service, cost-effective logistics and focused working capital management are key factors in this segment’s profitability. *In millions* | Distribution | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Sales | **$5,650** | $6,040 | $6,630 | | Operating Profit | **(389)** | 22 | 34 | **Distribution’s** 2013 annual sales decreased 6% from 2012, and decreased 15% from 2011. Operating profits in 2013 were a loss of $389 million (a gain of $43 million excluding goodwill impairment charges and reorganization costs) compared with $22 million ($71 million excluding reorganization costs) in 2012 and $34 million ($86 million excluding reorganization costs) in 2011. Annual sales of printing papers and graphic arts supplies and equipment totaled $3.2 billion in 2013 compared with $3.5 billion in 2012 and $4.0 billion in 2011 reflecting declining demand and the discontinuation of a distribution agreement with a large manufacturer of graphic supplies. Trade margins as a percent of sales for printing papers were down from both 2012 and 2011. Revenue from packaging products was flat at $1.6 billion in 2013, 2012 and 2011 despite the significant decline of a large high-tech customer's business. Packaging margins remained flat to the 2012 level, and up from 2011. Facility supplies annual revenue was $845 million in 2013, down from $944 million in 2012 and $981 million in 2011. Operating profits in 2013 included a goodwill impairment charge of $400 million and reorganization costs for severance, professional services and asset write-downs of $32 million. Operating profits in 2012 and 2011 included reorganization costs of $49 million and $52 million, respectively. Looking ahead to the 2014 first quarter, operating profits will be seasonally lower, but will continue to reflect the benefits of strategic and other cost reduction initiatives. The severe winter weather in the first quarter of 2014 will have a negative impact on operating profits. ### 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. Prior to 2012, due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reported its share of Ilim’s operating results on a one-quarter lag basis. In 2012, the Company determined that the elimination of the one-quarter lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements. Beginning January 1, 2012, the Company has applied this change in accounting principle retrospectively to all prior financial reporting periods presented. The elimination of the one-quarter reporting lag for Ilim had the following impact: ### Consolidated Statement of Operations *In millions* | | 2011 | | --- | ---: | | Equity earnings (loss), net of taxes | $(19) | | Earnings (loss) from continuing operations | (19) | | Net earnings (loss) attributable to International Paper Company | (19) | | Basic earnings (loss) per share from continuing operations | (0.04) | | Basic net earnings (loss) per share | (0.04) | | Diluted earnings (loss) per share from continuing operations | (0.04) | | Diluted net earnings (loss) per share | (0.04) | The Company recorded equity earnings, net of taxes, related to Ilim of a loss of $46 million in 2013 compared with gains of $56 million in 2012 and $134 million in 2011. Operating results recorded in 2013 included an after-tax foreign exchange loss of $32 million compared with an after-tax foreign exchange gain of $16 million in 2012 on the remeasurement of U.S. dollar-denominated debt. Sales volumes for the joint venture decreased year-over-year for shipments to China as a slight increase for softwood pulp was more than offset by decreases for hardwood pulp and linerboard. Sales volumes in the domestic Russian market also decreased for softwood and hardwood pulp and linerboard. Average sales price realizations were slightly higher in 2013 for pulp and linerboard in the domestic market and considerably higher for pulp and linerboard sales to China. Input costs increased for wood and energy year-over-year. Freight costs also increased. Operating profits were negatively impacted by costs associated with the ramp-up of a new pulp line at the Bratsk mill and a coated and uncoated woodfree paper machine at the Koryazhma mill which were placed in service and began commercial production during 2013. The Company received cash dividends from the joint venture of $86 million in 2011. No dividends were paid in 2013 and 2012. Entering the first quarter of 2014, sales volumes are expected to be higher than in the fourth quarter of 2013 due to increased production from the continuing ramp-up of the new equipment. Average sales price realizations are expected to be higher, primarily for softwood pulp. Input costs should be flat. ### 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 2013 were primarily focused on working capital requirements, capital spending, strategic acquisitions, debt reductions and returning cash to shareholders. ### Cash Provided by Operating Activities Cash provided by continuing operations totaled $3.0 billion in 2013 compared with $3.0 billion for 2012 and $2.7 billion for 2011. The major components of cash provided by continuing operations are earnings from continuing operations adjusted for non-cash income and expense items and changes in working capital. Earnings from continuing operations, adjusted for non-cash income and expense items, increased by $608 million in 2013 versus 2012 driven mainly by the release of tax reserves, partially offset by the impairment of goodwill and other intangible assets. Cash used for working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, interest payable and other totaled $486 million in 2013, compared with cash provided of $84 million in 2012 and a cash use of $505 million in 2011. The Company generated free cash flow of approximately $1.8 billion, $1.6 billion and $1.7 billion in 2013, 2012 and 2011, 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* | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Cash provided by operations | **$2,998** | $2,960 | $2,675 | | (Less)/Add: | | | | | Cash invested in capital projects | **(1,198)** | (1,383) | (1,159) | | Cash contribution to pension plan, net of tax refunds | **31** | 44 | 300 | | Cash (received from) used for European accounts receivable securitization program | **—** | — | 209 | | Tax receivable collected related to pension contributions | **—** | — | (123) | | Cash received from unwinding a timber monetization | **—** | (251) | (175) | | Change in control payments related to Temple-Inland acquisition | **—** | 120 | — | | Insurance reimbursement for Guaranty Bank settlement | **(30)** | 80 | — | | **Free Cash Flow** | **$1,801** | $1,570 | $1,727 | *In millions* | | Three Months Ended December 31, 2013 | Three Months Ended September 30, 2013 | Three Months Ended December 31, 2012 | | --- | ---: | ---: | ---: | | Cash provided by operations | **$1,034** | $725 | $686 | | (Less)/Add: | | | | | Cash invested in capital projects | **(439)** | (271) | (382) | | Cash paid for Guaranty Bank settlement | **—** | — | 80 | | **Free Cash Flow** | **$595** | $454 | $384 | ### 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. During 2009, the Company produced 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company claimed these gallons for the cellulosic bio-fuel credit by amending the Company’s 2009 tax return. The impact of this amendment was included in the Company’s 2010 fourth quarter Income tax provision (benefit), resulting in a $40 million net credit to tax expense. Temple-Inland, Inc. also recognized an income tax benefit of $83 million in 2010 related to cellulosic bio-fuel credits. ### Investment Activities Investment activities in 2013 were down from 2012 reflecting a decrease in capital spending, increased divestiture proceeds following the completion of the Building Products sale in July 2013, and the 2012 acquisition of Temple-Inland. The Company maintains an average capital spending target of $1.0 billion per year over the course of an economic cycle. Capital spending for continuing operations was $1.2 billion in 2013, or 77% of depreciation and amortization, compared with $1.4 billion in 2012, or 93% of depreciation and amortization, and $1.2 billion, or 87% of depreciation and amortization in 2011. Across our businesses, capital spending as a percentage of depreciation and amortization ranged from 56% to 82% in 2013. The following table shows capital spending for continuing operations by business segment for the years ended December 31, 2013, 2012 and 2011. *In millions* | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Industrial Packaging | **$629** | $565 | $426 | | Printing Papers | **294** | 449 | 364 | | Consumer Packaging | **208** | 296 | 310 | | Distribution | **9** | 10 | 8 | | Subtotal | **1,140** | 1,320 | 1,108 | | Corporate and other | **58** | 63 | 51 | | Total from Continuing Operations | **$1,198** | $1,383 | $1,159 | Capital expenditures in 2014 are currently expected to be about $1.4 billion, or 95% of depreciation and amortization. ### Acquisitions **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 or Olmuksan), for a purchase price of $56 million. The acquired shares represent 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 are 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. The fair value was estimated by applying the discounted cash flow approach, using a 13% discount rate, long-term sustainable growth rates ranging from 6% to 9% and a corporate tax rate of 20%. 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 indicates that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest is 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. **2012:** On February 13, 2012, International Paper completed the acquisition of Temple-Inland, Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million of Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity. On July 2, 2012, International Paper sold its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 7 for further details of these divestitures. Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012. **2011:** On October 14, 2011, International Paper completed the acquisition of a 75% stake in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM for a purchase price of $226 million in cash plus assumed debt from private investors. These sellers also entered into a covenant not to compete for which they received a cash payment of $58 million. Additionally, the Company purchased a 21.5% stake of APPM in a public tender offer completed on October 8, 2011 for $105 million in cash. International Paper recognized an unfavorable currency transaction loss of $9 million due to strengthening of the dollar against the Indian Rupee prior to the closing date, resulting from cash balances deposited in Indian Rupee denominated escrow accounts. In November 2011, International Paper appealed a directive from the Securities and Exchange Board of India (SEBI) that would require us to pay to the tendering shareholders the equivalent per share value of the non-compete payment that was paid to the previous controlling shareholders. The Company has deposited approximately $25 million into an escrow account to fund the additional non-compete payments in the event SEBI’s direction is upheld. By an order dated September 12, 2012, the Indian Securities Appellate Tribunal (SAT) upheld the SEBI directive. As a result of this initial unfavorable ruling, International Paper included the $25 million escrowed cash amount in the final purchase price consideration of APPM. On October 8, 2012, International Paper appealed the SAT's decision to the Indian Supreme Court. APPM's results of operations are included in the consolidated financial statements from the date of acquisition on October 14, 2011. ### Joint Ventures **2013:** On January 14, 2013, International Paper and Brazilian corrugated packaging producer, Jari Celulose Papel e Embalagens S.A (Jari), a Grupo Orsa company, formed Orsa International Paper Embalagens S.A. (Orsa IP). The new entity, in which International Paper holds a 75% stake, includes three containerboard mills and four box plants, which make up Jari's former industrial packaging assets. This acquisition supports the Company's strategy of growing its global packaging presence and better serving its global customer base. The value of International Paper's investment in Orsa IP is 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. **2011:** On April 15, 2011, International Paper and Sun Paper Industry Co. Ltd. entered into a Cooperative Joint Venture agreement to establish Shandong IP & Sun Food Packaging Co., Ltd. in China. During December 2011, the business license was obtained and International Paper contributed $55 million in cash for a 55% interest in the joint venture and Sun Paper Industry Co. Ltd. contributed land-use rights valued at approximately $28 million, representing a 45% interest. The purpose of the joint venture is to build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 500,000 tons. The financial position and results of operations of this joint venture have been included in International Paper’s consolidated financial statements from the date of formation in December 2011. Additionally, during 2011 the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations. ### Financing Activities Amounts related to early debt extinguishment during the years ended December 31, 2013, 2012 and 2011 were as follows: *In millions* | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Debt reductions (a) | **$574** | $1,272 | $129 | | Pre-tax early debt extinguishment costs (b) | **25** | 48 | 32 | *(a) Reductions related to notes with interest rates ranging from 1.625% to 9.375% with original maturities from 2012 to 2041 for the years ended December 31, 2013, 2012 and 2011.* *(b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.* **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 76 through 80 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 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. **2012:** Financing activities during 2012 included debt issuances of $2.1 billion and retirements of $2.5 billion, for a net decrease of $356 million. In February 2012, International Paper issued a $1.2 billion term loan with an initial interest rate of LIBOR plus a margin of 138 basis points that varies depending on the credit rating of the Company and a $200 million term loan with an interest rate of LIBOR plus a margin of 175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the acquisition of Temple-Inland. During 2012, International Paper fully repaid the $1.2 billion term loan. International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2012, International Paper had interest rate swaps with a total notional amount of $150 million and maturities in 2013 (see Note 14 Derivatives and Hedging Activities on pages 76 through 80 of Item 8. Financial Statements and Supplementary Data). During 2012, 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 6.6%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.2%. Other financing activities during 2012 included the issuance of approximately 1.9 million shares of treasury stock, net of restricted stock withholding, and 1.0 million shared of common stock for various incentive plans, including stock options exercises that generated approximately $108 million of cash. Payment of restricted stock withholding taxes totaled $35 million. **2011:** Financing activities during 2011 included debt issuances of $1.8 billion and retirements of $517 million, for a net increase of $1.3 billion. In November 2011, International Paper issued $900 million of 4.75% senior unsecured notes with a maturity date in February 2022 and $600 million of 6% senior unsecured notes with a maturity date in November 2041. At December 31, 2011, International Paper had interest rate swaps with a total notional amount of $150 million and maturities in 2013 (see Note 14 Derivatives and Hedging Activities on pages 76 through 80 of Item 8. Financial Statements and Supplementary Data). During 2011, existing swaps decreased the weighted average cost of debt from 7.1% to an effective rate of 6.9%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.26%. Other financing activities during 2011 included the issuance of approximately 0.3 million shares of treasury stock for various incentive plans and the acquisition of 1.0 million shares of treasury stock primarily related to restricted stock withholding taxes. Payments of restricted stock withholding taxes totaled $30 million. #### Off-Balance Sheet Variable Interest Entities Information concerning off-balance sheet variable interest entities is set forth in Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 72 through 75 of Item 8. Financial Statements and Supplementary Data for discussion. ### Liquidity and Capital Resources Outlook for 2014 #### 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 2014 through current cash balances and cash from operations. Additionally, the Company has existing credit facilities totaling $2.0 billion. The Company was in compliance with all its debt covenants at December 31, 2013. 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, 2013, International Paper’s net worth was $15.1 billion, and the total-debt-to-capital ratio was 39%. 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, 2013, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (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, 2013, were as follows: *In millions* | | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Maturities of long-term debt (a) | $661 | $498 | $571 | $285 | $1,837 | $5,636 | | Debt obligations with right of offset (b) | — | — | 5,185 | — | — | — | | Lease obligations | 171 | 133 | 97 | 74 | 59 | 162 | | Purchase obligations (c) | 3,170 | 770 | 642 | 529 | 453 | 2,404 | | Total (d) | $4,002 | $1,401 | $6,495 | $888 | $2,349 | $8,202 | #### (a) Total debt includes scheduled principal payments only. *(b) Represents debt obligations borrowed from non-consolidated variable interest entities for which International Paper has, and intends to effect, a legal right to offset these obligations with investments held in the entities. Accordingly, in its consolidated balance sheet at December 31, 2013, International Paper has offset approximately $5.2 billion of interests in the entities against this $5.2 billion of debt obligations held by the entities (see Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 72 through 75 in Item 8. Financial Statements and Supplementary Data).* *(c) Includes $3.3 billion relating to fiber supply agreements entered into at the time of the 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business.* *(d) 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 $146 million.* We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2013, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2013, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $900 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, 2013, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $2.2 billion higher than the fair value of plan assets. Approximately $1.8 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 $31 million and $44 million for the years ended December 31, 2013 and 2012, respectively. At this time, we expect that required contributions to its plans in 2014 will be approximately $443 million, 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. #### Ilim Holding S.A. Shareholder’s Agreement In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement provides that either the Company or its partners may commence procedures specified under the deadlock provisions. In prior years, had certain procedures been commenced under the deadlock provisions, the Company would have been required to purchase its partners’ 50% interest in Ilim, but those provisions have expired. If deadlock procedures are commenced today, although it is not obligated to do so, the Company may in certain situations, choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant anti-trust authorities. Based on the provisions of the agreement, International Paper estimates that the current purchase price for its partners’ 50% interests would not be material and could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company’s option. Any such purchase by International Paper would result in the consolidation of Ilim’s financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provision of the shareholders’ agreement, although they have the right to do so. ### 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 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. International Paper determines these estimates after a detailed evaluation of each site. ### 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 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. No goodwill impairment charges were recorded in 2012 or 2011. ### 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, 2013, for International Paper’s pension and postretirement plans were as follows: *In millions* | | Benefit Obligation | Fair Value of Plan Assets | | --- | ---: | ---: | | U.S. qualified pension | **$12,496** | **$10,706** | | U.S. nonqualified pension | **407** | **—** | | U.S. postretirement | **322** | **—** | | Non-U.S. pension | **228** | **181** | | Non-U.S. postretirement | **72** | **—** | The table below shows assumptions used by International Paper to calculate U.S. pension obligations for the years shown: | | 2013 | 2012 | 2011 | | --- | ---: | ---: | ---: | | Discount rate | **4.90%** | 4.10% | 5.10% | | Rate of compensation increase | **3.75%** | 3.75% | 3.75% | 40 Additionally, health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were: | | 2013 | 2012 | | --- | ---: | ---: | | Health care cost trend rate assumed for next year | **7.00%** | 7.50% | | 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 | **2017** | 2017 | 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. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2014 pension expense by approximately $25 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $35 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 | | --- | ---: | --- | ---: | | **2013** | **14.1%** | 2008 | (23.6)% | | 2012 | 14.1% | 2007 | 9.6% | | 2011 | 2.5% | 2006 | 14.9% | | 2010 | 15.1% | 2005 | 11.7% | | 2009 | 23.8% | 2004 | 14.1% | The 2012 and 2013 returns above represent weighted averages of International Paper and Temple-Inland asset returns. The annualized time-weighted rate of return earned on U.S. pension plan assets was 13.7% and 8.8% 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 2003 – 2013. 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 $316 million and $30 million, respectively. Net periodic pension and postretirement plan expenses, calculated for all of International Paper’s plans, were as follows: *In millions* | Pension expense | 2013 | 2012 | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | ---: | ---: | | U.S. plans (non-cash) | **$545** | $342 | $195 | $231 | $213 | | Non-U.S. plans | **5** | 3 | 1 | — | 3 | | Postretirement expense | | | | | | | U.S. plans | **(1)** | (4) | 7 | 6 | 27 | | Non-U.S. plans | **7** | 1 | 2 | 1 | 3 | | **Net expense** | **$556** | $342 | $205 | $238 | $246 | The increase in 2013 U.S. pension expense principally reflects a decrease in the discount rate and higher amortization of unrecognized actuarial losses. The increase in 2013 U.S. postretirement expense is principally due to a curtailment gain in 2012 related to the remeasurement of the Temple-Inland Plan. Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2013, projected future net periodic pension and postretirement plan expenses would be as follows: *In millions* | Pension expense | 2015 (1) | 2014 (1) | | --- | ---: | ---: | | U.S. plans (non-cash) | $304 | $366 | | Non-U.S. plans | 3 | 3 | | Postretirement expense | | | | U.S. plans | 8 | 7 | | Non-U.S. plans | 12 | 11 | | **Net expense** | $327 | $387 | #### (1) Based on assumptions at December 31, 2013. The Company estimates that it will record net pension expense of approximately $366 million for its U.S. defined benefit plans in 2014, with the decrease from expense of $545 million in 2013 reflecting an increase in the assumed discount rate to 4.90% in 2014 from 4.10% in 2013, lower unrecognized losses, a higher expected return on assets assumption of 7.00% for Temple-Inland plan assets offset by a lower return on assets assumption of 7.75% for International Paper plan assets. The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2013 totaled approximately $10.7 billion, consisting of approximately 49% equity securities, 32% 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, 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. The required contribution for the U.S. qualified pension plans in 2014 is approximately $443 million. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $28 million for the year ended December 31, 2013. ### Accounting for Stock Options International Paper follows ASC 718, “Compensation – Stock Compensation,” in accounting for stock options. Under this guidance, expense for stock options is recorded over the related service period based on the grant-date fair market value. During each reporting period, diluted earnings per share is calculated by assuming that “in-the-money” options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. At December 31, 2013 and 2012, 1.8 million options, and 9.1 million options, respectively, were outstanding with exercise prices ranging from $38.41 to $48.19 per share for 2013 and $33.74 to $41.26 per share for 2012. ### 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 (62)%, 32% and 21% for 2013, 2012 and 2011, 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 2013 was 27% of pre-tax earnings compared with 29% in 2012 and 32% in 2011. We estimate that the 2014 effective income tax rate will be approximately 33% 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 56 and 57 of ## Market risk As filed, 154 characters. See the preceding discussion and Note 14 Derivatives and Hedging Activities on pages 76 through 80 of Item 8. Financial Statements and Supplementary Data. ## Controls and procedures As filed, 6,593 characters. ### EVALUATION OF CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2013, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 under the Exchange Act. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013. ### MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that: - pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; - provide reasonable assurance that transactions are recorded as necessary to allow for the preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; - provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements; and - provide reasonable assurance as to the detection of fraud. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified. As of December 31, 2013, management has assessed the effectiveness of the Company’s internal control over financial reporting. In a report included on pages 45 and 46, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013. In making this assessment, we used the criteria described in “Internal Control – Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our independent registered public accounting firm, Deloitte & Touche LLP, with direct access to our Board of Directors through our Audit and Finance Committee, has audited the consolidated financial statements prepared by us. Their report on the consolidated financial statements is included in Part II, Item 8 of this Annual Report under the heading “Financial Statements and Supplementary Data”. Deloitte & Touche LLP has issued an attestation report on our internal control over financial reporting. ### MANAGEMENT’S PROCESS TO ASSESS THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we followed a comprehensive compliance process across the enterprise to evaluate our internal control over financial reporting, engaging employees at all levels of the organization. Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of our business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may report suspected violations of law or our policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. Our Board of Directors, assisted by the Audit and Finance Committee, monitors the integrity of our financial statements and financial reporting procedures, the performance of our internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which currently consists of four independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. ### CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company completed the acquisitions of Olmuksan and Orsa IP, both in January 2013. Due to the timing of these acquisitions we have excluded Olmuksan and Orsa IP from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2013, net sales and assets of both Olmuksan and Orsa IP represented approximately 2% of total net sales and 2% of total assets. Filed Feb 27, 2014. Source: SEC EDGAR, the filing index for accession 0000051434-14-000003. Last ingested by Listed: Nov 4, 2026, 18:37 ET. No prices; not investment advice.