News Column

INTERNATIONAL PAPER CO /NEW/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 7, 2014

EXECUTIVE SUMMARY International Paper generated Operating Earnings per share attributable to International Paper common shareholders of $0.61 in the first quarter of 2014, compared with 2013 fourth-quarter earnings of $0.83 and 2013 first-quarter earnings of $0.65. Diluted earnings (loss) per share attributable to International Paper common shareholders were $(0.21) in the first quarter of 2014, compared with $0.98 in the fourth quarter of 2013 and $0.71 in the first quarter of 2013. We delivered solid results in the 2014 first quarter despite the severe weather that significantly impacted our U.S. operations. Considering the impact associated with the severe weather events, our North American Industrial Packaging business generated strong operating results driven by increased price and favorable mix. The first quarter benefited from higher pricing momentum in most of our global businesses. We successfully executed on our planned maintenance outages in what was a sequentially heavier maintenance outage quarter. The first quarter also reflects improved operational performance from the Ilim joint venture associated with the continued progress of the two major capital projects.



The 2014 first quarter included incremental cost associated with significant adverse weather events that impacted much of the U.S., resulting in reduced volumes, disrupted operations and increased energy costs. Prices averaged higher than the previous quarter particularly in our North American Industrial Packaging and North American Printing Papers businesses, driven by further realization of price increases implemented in the prior year. In addition to the impact from weather related events, lower volumes in our North American Printing Papers business reflected the shutdown of the Courtland mill which was completed during the quarter. Volume was seasonally lower in Brazil. Closure and transition costs associated with the Courtland mill drove higher operating cost during the 2014 first quarter. Input costs, particularly for wood and energy, were less favorable as compared to the 2013 fourth quarter. Finally, the Ilim joint venture had a solid quarter operationally driven by higher volumes, increased pulp pricing and improved productivity. Ilim's foreign currency movement was unfavorable in the 2014 second quarter driven by the U.S. dollar denominated debt.

Looking ahead to the 2014 second quarter, we expect a benefit from the absence of the 2014 first quarter adverse weather events which will be positive to volume, operations and input costs. In addition to the positive impacts associated with weather, volume in our North American Industrial Packaging business should increase but with some modest offset as customer mix normalizes. Pricing will improve in our North American Printing Papers and Pulp businesses as we continue to implement previously announced price increases. The Brazil Printing Papers business should also see improved pricing but to a lesser extent. The economic slowdown in Russia will pressure volume and price/mix in our European Printing Papers business. Operations will benefit from lower closure and transition costs associated with the Courtland mill closure. Input costs should be relatively stable in North America with a modest increase in wood costs impacting our European Printing Papers business. Planned maintenance outage costs will be higher with the second quarter being the heaviest maintenance outage quarter in terms of cost. For our Ilim joint venture, we expect the solid operating performance to continue however pulp prices are expected to decline and there is a maintenance outage scheduled in the quarter. Additionally, our 2014 second quarter outlook for the Ilim joint venture assumes a positive impact associated with the non-repeating 2014 first quarter unfavorable currency adjustment. 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 discontinued operations. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most 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

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International Paper Company common shareholders.

Three Months Ended Three Months Ended March 31, December 31, 2014 2013 2013 Operating Earnings (Loss) Per Share Attributable to Shareholders $ 0.61$ 0.65 $ 0.83 Non-operating pension (0.06 ) (0.11 ) (0.11 ) Special items (0.76 ) 0.11 0.25 Diluted Earnings (Loss) Per Share from Continuing Operations (0.21 ) 0.65 0.97 Discontinued operations - 0.06 0.01 Diluted Earnings (Loss) Per Share Attributable to Shareholders $ (0.21 )$ 0.71 $ 0.98 RESULTS OF OPERATIONS For the first quarter of 2014, International Paper Company reported net sales of $7.0 billion, compared with $7.2 billion in the fourth quarter of 2013 and $7.1 billion in the first quarter of 2013. Net earnings attributable to International Paper totaled a loss of $95 million, or $0.21 per share, in the 2014 first quarter. This compared with gains of $318 million, or $0.71 per share, in the first quarter of 2013 and $436 million, or $0.98 per share, in the fourth quarter of 2013. [[Image Removed]] Earnings from continuing operations attributable to International Paper Company were a loss of $93 million in the first quarter of 2014 compared with earnings of $292 million in the first quarter of 2013 and $431 million in the fourth quarter of 2013. The financial impact associated with the adverse weather that affected the U.S. during the first quarter of 2014 has been included within the respective columns in the above table and within the corresponding explanations that follow. Compared with the first quarter of 2013, the 2014 first quarter reflects higher average sales price realizations ($154 million), lower corporate and other items ($13 million), lower net interest expense ($22 million), and lower non-operating pension expense ($24 million). These benefits were offset by lower sales volumes ($31 million), higher operating costs ($52 million) including closure and transition costs associated with the Courtland mill closure, higher mill maintenance outage costs ($21 million), higher raw material and freight costs ($50 million), and higher tax expense ($42 million) reflecting a higher estimated tax rate. Equity earnings, net of taxes, relating to International Paper's investment in Ilim Holding S.A. were $20 million lower in the 2014 first quarter than in the 2013 first quarter. Net special items were a loss of $331 million in the 2014 first quarter, including $302 million associated with the Courtland mill shutdown, compared with a gain of $51 million in the 2013 first quarter. 26



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Compared with the fourth quarter of 2013, earnings benefited from higher average sales price realizations ($40 million) and lower non-operating pension expense ($20 million). These benefits were offset by lower sales volumes ($28 million), higher operating costs ($17 million) including closure and transition costs associated with the Courtland mill closure, higher mill maintenance outage costs ($22 million), higher raw material and freight costs ($27 million), higher corporate and other items ($22 million), higher net interest expense ($6 million) and a higher tax expense ($1 million). Equity earnings, net of taxes, for Ilim Holding, S.A. decreased by $19 million versus the 2013 fourth quarter. Net special items were a loss of $331 million in the 2014 first quarter, compared with a gain of $111 million in the 2013 fourth quarter. To measure the performance of the Company's business segments from period to period without variations caused by special or unusual items, International Paper's management focuses on industry segment operating profit. This is defined as earnings from continuing operations before taxes, equity earnings and noncontrolling interests, net of taxes, excluding interest expense, corporate charges and corporate special items which may include restructuring charges and (gains) losses on sales and impairments of businesses. The following table presents a reconciliation of net earnings attributable to International Paper Company to its operating profit:

Three Months Ended March 31 December 31, In millions 2014 2013 2013 Earnings (Loss) From Continuing Operations Attributable to International Paper Company $ (93 )$ 292$ 431 Add back (deduct): Income tax provision (benefit) (83 ) (69 ) (589 ) Equity (earnings) loss, net of taxes 33 10 9 Noncontrolling interests, net of taxes (4 ) (3 ) (6 ) Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings (147 ) 230 (155 ) Interest expense, net 142 164 133 Noncontrolling interests / equity earnings included in operations - - - Corporate items 9 22 (6 ) Special items 17 6 9 Non-operating pension expense 44 84 78 $ 65$ 506 $ 59 Industry Segment Operating Profit: Industrial Packaging $ 453$ 355$ 473 Printing Papers (410 ) 149 (47 ) Consumer Packaging 17 7 30 Distribution 5 (5 ) (397 )



Total Industry Segment Operating Profit $ 65$ 506 $ 59

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Industry Segment Operating Profit [[Image Removed]] Total industry segment operating profits of $65 million in the 2014 first quarter were lower than the $506 million in the 2013 first quarter, but slightly higher than the $59 million in the 2013 fourth quarter. The financial impact associated with the adverse weather that affected the U.S. during the first quarter of 2014 has been included within the respective columns in the above table and within the corresponding explanations that follow. Compared with the first quarter of 2013, operating profits in the current quarter benefited from higher average sales price realizations ($195 million) and lower other items ($6 million). These benefits were offset by lower sales volumes ($40 million), higher operating costs ($66 million) including closure and transition costs associated with the Courtland mill closure, higher mill maintenance outage costs ($26 million), and higher raw material and freight costs ($63 million). Special items were a loss of $512 million in the 2014 first quarter, including $495 million associated with the Courtland mill shutdown, compared with a loss of $65 million in the 2013 first quarter. Compared with the fourth quarter of 2013, operating profits benefited from higher average sales price realizations ($58 million). This benefit was offset by lower sales volumes ($41 million), higher operating costs ($23 million) including costs associated with the Courtland mill closure, higher mill maintenance outage costs ($32 million), higher raw material and freight costs ($39 million) and higher other items ($12 million). Special items were a loss of $512 million in the 2014 first quarter, compared with a loss of $607 million in the 2013 fourth quarter. During the 2014 first quarter, International Paper took approximately 233,000 tons of downtime of which approximately 60,000 tons were market-related compared with approximately 252,000 tons of downtime, which included about 53,000 tons that were market-related, in the 2013 first quarter. During the 2013 fourth quarter, International Paper took approximately 429,000 tons of downtime of which approximately 276,000 tons were market-related. Market-related downtime is taken to balance internal supply with our customer demand, while maintenance downtime is taken periodically during the year. 28



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Sales Volumes by Product (a) Sales volumes of major products for the three months ended March 31, 2014 and 2013 were as follows: Three Months Ended March 31, In thousands of short tons 2014 2013 Industrial Packaging North American Corrugated Packaging 2,516 2,549 North American Containerboard 746 858 North American Recycling 604 581 North American Saturated Kraft 47 40 North American Gypsum/Release Kraft 37 30 North American Bleached Kraft 7 31 EMEA Industrial Packaging 351 339 Asian Box 93 100 Brazilian Packaging (b) 79 41 Industrial Packaging 4,480 4,569 Printing Papers U.S. Uncoated Papers 499 630 European and Russian Uncoated Papers 375 329 Brazilian Uncoated Papers 271 264 Indian Uncoated Papers 58 60 Uncoated Papers 1,203 1,283 Market Pulp (c) 413 432 Consumer Packaging North American Consumer Packaging 351 369 European Coated Paperboard 84 91 Asian Coated Paperboard 350 360 Consumer Packaging 785 820 (a) Sales volumes include third party and inter-segment sales and exclude sales of equity investees. (b) Includes volumes for Brazil Packaging from date of acquisition in mid-January 2013. (c) Includes North American, European and Brazilian volumes and internal sales to mills. Discontinued Operations On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash. On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash. Income Taxes An income tax benefit of $83 million was recorded for the 2014 first quarter. Excluding a benefit of $198 million related to the tax effects of special items and a benefit of $17 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 31% for the quarter. An income tax benefit of $589 million was recorded for the 2013 fourth quarter. Excluding a tax benefit of $728 million related to the tax effects of special items and a benefit of $31 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 31% for the quarter. An income tax benefit of $69 million was recorded for the 2013 first quarter. Excluding a benefit of $116 million related to the tax effects of special items and a benefit of $33 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 21% for the quarter. The first quarter 2013 rate included a benefit of approximately $35 million related to the enactment into law of The American Taxpayer Relief Act of 2012 on January 2, 2013 (the Act). The Act retroactively restored several expired business tax provisions including the research and experimentation credit and the Subpart F controlled foreign corporation look-through exception. 29



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Interest Expense and Corporate Items Net interest expense for the 2014 first quarter was $142 million compared with $133 million in the 2013 fourth quarter and $164 million in the 2013 first quarter. Corporate items, net, were an expense of $9 million in the 2014 first quarter compared with net income of $6 million in the 2013 fourth quarter, and net expense of $22 million in the 2013 first quarter. Restructuring and Other Charges 2014: During the three months ended March 31, 2014, restructuring and other charges totaling $517 million before taxes ($315 million after taxes) were recorded. Details of these charges were as follows: Three Months Ended March 31, 2014 Before-Tax After-Tax In millions Charges Charges Courtland mill shutdown (a) 495 302 xpedx restructuring 2 - xpedx transaction costs 16 10 Other 4 3 Total $ 517$ 315 (a) During 2013, the Company deferred accelerating depreciation for certain assets as we evaluated 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 the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $430 million of accelerated depreciation related to these assets during the first quarter of 2014. The remaining net book value will be accelerated through depreciation expense during 2014. Other components of the first quarter of 2014 Courtland mill shutdown cost include site closure costs of $30 million, severance charges of $15 million and $20 million of other non-cash charges. Other On January 28, 2014, International Paper announced that its distribution solutions business, xpedx, will merge with Unisource Worldwide, Inc. 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. BUSINESS SEGMENT OPERATING RESULTS The following presents business segment discussions for the first quarter of 2014. Industrial Packaging 2014 2013



In millions 1st Quarter 1st Quarter 4th Quarter Sales

$ 3,693$ 3,560$ 3,715 Operating Profit 453 355 473



Industrial Packaging net sales for the first quarter of 2014 were 1% lower than in the fourth quarter of 2013 and 4% higher than in the first quarter of 2013. Operating profits in the first quarter of 2014 included charges of $12 million for integration costs associated with the Temple-Inland acquisition, and net charges of $2 million for other items. Operating profits in the fourth quarter of 2013 included charges of $12 million for integration costs associated with the Temple-Inland acquisition, and net charges of $1 million for other items. Operating profits in the first quarter of 2013 included charges of $12 million for integration costs associated with the Temple-Inland acquisition and net charges of $2 million for other items. Excluding these items, operating profits in the first quarter of 2014 were 4% lower than in the fourth quarter of 2013 and 27% higher than in the first quarter of 2013. North American Industrial Packaging net sales were $3.1 billion in the first quarter of 2014 compared with $3.1 billion in the fourth quarter of 2013 and $3.0 billion in the first quarter of 2013. Operating profits were $449 million ($460 million excluding Temple-Inland integration costs and a gain on the sale of a closed box plant facility) in the first quarter of 2014 compared with $472 million ($479 million excluding Temple-Inland integration costs and a gain on the sale of a closed box plant facility) in

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the fourth quarter of 2013 and $337 million ($350 million excluding Temple-Inland acquisition costs and mill divestiture costs) in the first quarter of 2013. Sales volumes in the first quarter of 2014 were lower than in the fourth quarter of 2013 despite having two more shipping days for boxes. Adverse weather conditions during the quarter negatively impacted shipments. Containerboard export sales volumes were higher, but domestic sales volumes were lower. Total maintenance and market-related downtime decreased about 144,000 tons. Maintenance downtime increased 72,000 tons to 118,000 tons in the first quarter of 2014 while market-related downtime decreased 216,000 tons to 60,000 tons in the first quarter of 2014. Average sales prices increased for boxes reflecting a more favorable product mix. Export containerboard sales prices were slightly lower. Input cost increases for energy and wood were only partially offset by lower costs for recycled fiber. Planned maintenance downtime costs were $36 million higher in the 2014 first quarter with outages at six mills compared with the 2013 fourth quarter which had outages at eight mills. Manufacturing operating costs were higher largely due to the extreme cold weather. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 decreased slightly. Total maintenance and market-related downtime was 19,000 tons lower in the first quarter of 2014 although market-related downtime was 30,000 tons higher. Average sales price realizations were significantly higher due to sales price increases for boxes and domestic containerboard that were implemented later in 2013. Input costs for wood and energy increased, partially offset by lower costs for starch. Planned maintenance downtime costs were about the same in both the first quarter of 2014 and first quarter of 2013. Entering the second quarter of 2014, sales volumes are expected to be seasonally higher for boxes with the same number of shipping days. Average sales prices are expected to be slightly lower reflecting a less favorable product mix. Input costs are expected to be lower for wood, energy and wax, but the benefit will be partially offset by higher costs for starch. Planned maintenance downtime costs should be $19 million higher. Operating profits will also benefit from the absence of the impact of the adverse weather that occurred in the first quarter. European Industrial Packaging net sales were $342 million in the first quarter of 2014 compared with $335 million in the fourth quarter of 2013 and $320 million in the first quarter of 2013. Operating profits were $9 million in the first quarter of 2014 compared with $8 million ($8 million excluding restructuring costs and acquisition costs) in the fourth quarter of 2013 and $17 million ($18 million excluding acquisition costs) in the first quarter of 2013. Sales volumes in the first quarter of 2014 were higher than in the fourth quarter of 2013 despite continued soft market demand. Average sales margins improved reflecting box sales price increases and the realization of previously announced decreases for input costs for kraft board. Other input costs were flat. Operating profits in the first quarter of 2014 include a settlement of $1 million related to the earthquakes in Northern Italy in May 2012 which affected our San Felice box plant compared with $5 million in the fourth quarter of 2013. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 increased reflecting recovering economic conditions and improved demand for industrial packaging. Average sales margins decreased significantly due to input costs for containerboard rising ahead of box sales price increases. Other input costs were lower, primarily for energy. Operating profits in the first quarter of 2013 included a $5 million insurance settlement related to the earthquakes in May 2012. Looking ahead to the second quarter of 2014, sales volumes are expected to be seasonally lower reflecting decreased demand in the fruit and vegetable packaging market. Average sales margins are expected to improve as costs for containerboard continue to decrease. Brazilian Industrial Packaging net sales were $85 million in the first quarter of 2014 compared with $95 million in the fourth quarter of 2013 and $45 million in the first quarter of 2013. Operating profits were a loss of $4 million ($2 million excluding acquisition costs) in the first quarter of 2014 compared with a loss of $3 million ($1 million excluding acquisition costs) in the fourth quarter of 2013 and a gain of $1 million in the first quarter of 2013. Compared with the fourth quarter of 2013, sales volumes were lower in the first quarter of 2014 due to seasonality and weaker activity at some of our major customers. Average sales price realizations were higher reflecting the partial realization of box and sheet price increases announced in the 2014 first quarter. Input costs increased for recycled fiber and energy. Operating profits in the second quarter of 2014 are expected to increase reflecting seasonally higher sales volumes and the full realization of the box sales price increase. Asian Industrial Packaging net sales for the packaging operations were $86 million in the first quarter of 2014 compared with $100 million in the fourth quarter of 2013 and $95 million in the first quarter of 2013. Operating profits for the packaging operations were a loss of $2 million (a loss of $1 million excluding restructuring costs) in the first quarter of 2014 compared with a loss of $4 million ($0 million excluding restructuring costs) in the fourth quarter of 2013 and a loss of $1 million in the first quarter of 2013. Net sales for the distribution operations were $96 million in the first quarter of 2014 compared with $70 million in the fourth quarter of 2013 and $75 million in the first quarter of 2013. Operating profits for the distribution operations were $1 million in the first quarter of 2014, $0 million in the fourth quarter of 2013 and $1 million in the first quarter of 2013. 31



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Compared with the fourth quarter of 2013, sales volumes for the packaging business were lower in the first quarter of 2014 reflecting softer than expected market demand. Average sales margins were squeezed due to price pressures. Operating profits in the second quarter of 2014 are expected to improve from the first quarter of 2014 reflecting higher sales volumes and the impact of cost savings initiatives. Printing Papers

2014 2013



In millions 1st Quarter 1st Quarter 4th Quarter Sales

$ 1,406$ 1,540$ 1,570 Operating Profit (410 ) 149 (47 ) Printing Papers net sales for the first quarter of 2014 were 10% lower than in the fourth quarter of 2013 and 9% lower than in the first quarter of 2013. Operating profits in the first quarter of 2014 included a $495 million charge for costs associated with the closure of our Courtland, Alabama mill while operating profits in the fourth quarter of 2013 included a $123 million charge associated with the impairment of goodwill and a trade name intangible asset at our India Papers business and a $67 million charge associated with the closure of our Courtland mill. Excluding these items, operating profits in the first quarter of 2014 were 41% lower than in the fourth quarter of 2013 and 43% lower than in the first quarter of 2013. North American Printing Papers net sales were $515 million in the first quarter of 2014 compared with $600 million in the fourth quarter of 2013 and $645 million in the first quarter of 2013. Operating profits were a loss of $484 million (a gain of $11 million excluding mill closure costs) in the first quarter of 2014 compared with a loss of $30 million (a gain of $37 million excluding mill closure costs) in the fourth quarter of 2013 and earnings of $63 million in the first quarter of 2013. Sales volumes in the first quarter of 2014 were lower compared with the fourth quarter of 2013 reflecting our selective exit from the market of certain lower-margin grades due to the Courtland mill closure, as well as softer domestic market demand. Average sales price realizations increased in the domestic market due to the full realization of a fourth-quarter 2013 price increase. Export average sales price realizations were also higher reflecting an increased proportion of sales to Latin America. Average sales margins were higher due to a more favorable product and geographic mix. Input costs increased, primarily for energy, partially offset by lower chemical costs. Planned maintenance downtime costs were $9 million higher with outages at the Georgetown, Riverdale and Eastover mills. Manufacturing operating costs were higher largely due to the impact of the extreme cold weather during the quarter. Operating profits were also negatively impacted by non-recurring costs associated with the shutdown of the Courtland mill. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 were lower due to weaker market demand for uncoated freesheet paper and the closure of the Courtland mill. Average sales price realizations increased in the domestic market reflecting price increases implemented during 2013. Input costs were higher for wood and energy. Planned maintenance downtime costs were $3 million higher than in the first quarter of 2013. Manufacturing operating costs in the first quarter of 2014 reflect the impact of the adverse weather during the quarter as well as non-recurring costs associated with the closure of the Courtland mill. Entering the second quarter of 2014, sales volumes are expected to be flat. Average sales price realizations are expected to improve with the full quarter impact of the realization of the fourth-quarter 2013 sales price increase for domestic uncoated freesheet paper. Input costs for energy and wood are expected to decrease. Planned maintenance downtime costs should be $7 million higher with outages scheduled at the Eastover, Riverdale and Ticonderoga mills. Costs associated with the Courtland mill closure should be lower than in the first quarter. In addition, the absence of the extreme weather conditions experienced during the first quarter will positively impact earnings. European Printing Papers net sales were $375 million in the first quarter of 2014 compared with $395 million in the fourth quarter of 2013 and $365 million in the first quarter of 2013. Operating profits were $38 million in the first quarter of 2014 compared with $36 million in the fourth quarter of 2013 and $54 million in the first quarter of 2013. Compared with the fourth quarter of 2013, sales volumes in the first quarter of 2014 for uncoated freesheet paper were seasonally lower in Russia, but were about flat in Europe. Average sales price realizations for uncoated freesheet paper decreased slightly in Europe, reflecting strong competitive pressures while average sales margins in Russia were negatively impacted by an increased proportion of export sales. Input costs in Russia were about flat with lower costs for wood and chemicals offset by higher energy and freight costs. In Europe input costs were higher, primarily for wood. Planned maintenance downtime costs were $14 million lower in the first quarter of 2014 which included a small outage at the Kwidzyn mill compared with an outage at the Saillat mill in the fourth quarter of 2013. Sales volumes in the first quarter of 2014 compared with the first quarter of 2013 were flat in Europe. In Russia, sales volumes for uncoated freesheet paper were higher primarily due to an increase in export shipments. Average sales price realizations for 32



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uncoated freesheet paper decreased due to weak economic conditions and average sales margins in Russia were lower due to an unfavorable geographic mix. Input costs for energy and wood in Russia and for wood in Europe were higher. Planned maintenance downtime costs were $1 million higher in the first quarter of 2014 compared with the first quarter of 2013. Manufacturing operating costs were flat. Looking forward to the second quarter of 2014, sales volumes are expected to be stable in both Europe and Russia. Average sales price realizations are expected to improve in Russia reflecting the impact of a local price increase for uncoated freesheet paper. Input costs are expected to be higher for wood. Planned maintenance downtime costs should be $23 million higher reflecting outages scheduled at the Kwidzyn and Svetogorsk mills. Brazilian Printing Papers net sales were $245 million in the first quarter of 2014 compared with $295 million in the fourth quarter of 2013 and $260 million in the first quarter of 2013. Operating profits were $45 million in the first quarter of 2014, $61 million in the fourth quarter of 2013 and $45 million in the first quarter of 2013. Sales volumes in the first quarter of 2014 were seasonally lower than in the fourth quarter of 2013 for uncoated freesheet paper in the Brazilian domestic and the Latin American export markets. Average sales price realizations increased in the Brazilian market reflecting the implementation of price increases in the cutsize and offset paper segments. Average sales price realizations were also higher in the Latin American and other export markets due to the partial realization of price increases announced during the quarter. Average sales margins were negatively impacted by the geographic mix. Higher input costs for wood were offset by lower pulp costs. Manufacturing operating costs were slightly lower. Planned maintenance downtime costs were $4 million lower in the first quarter of 2014 than in the fourth quarter of 2013 which included an outage at the Luiz Antonio mill. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 increased for uncoated freesheet paper in the Brazilian domestic market reflecting higher demand in anticipation of World Cup promotions. Shipments to export markets, however, were slightly lower. Average sales price realizations improved for domestic uncoated freesheet paper due to the price increases announced during the quarter. Input costs were higher for wood and energy. There were no planned maintenance outages in either period. Entering the second quarter of 2014, sales volumes are expected to increase reflecting seasonally stronger demand for uncoated freesheet paper in the Brazilian and Latin American markets. Average sales price realizations are expected to be higher due to the complete implementation of the first quarter price increases. Average sales margins should also benefit from an increased proportion of sales to the higher-margin domestic and Latin American markets. Planned maintenance downtime costs should be $1 million higher with an outage scheduled at the Tres Lagoas mill. Indian Printing Papers net sales were $45 million in the first quarter of 2014 compared with $50 million ($47 million excluding excise duties which were included in net sales in 2013) in the fourth quarter of 2013 and $50 million ($46 million excluding excise duties) in the first quarter of 2013. Operating profits were losses of $2 million in the first quarter of 2014, $126 million ($3 million excluding the impairment of goodwill and a trade name intangible asset) in the fourth quarter of 2013 and $4 million in the first quarter of 2013. Compared with the fourth quarter of 2013, operating results in the first quarter of 2014 reflect lower sales volumes, although sales to export markets increased significantly. Average sales price realizations increased due to the further realization of a price increase announced in the 2013 fourth quarter. Input costs increased, primarily for wood, while operating costs were lower. Compared with the first quarter of 2013, sales volumes are lower in the first quarter of 2014 due to weaker economic conditions. Average sales price realizations were significantly higher, reflecting price increases implemented in 2013. Input costs for wood were higher. Looking ahead to the second quarter of 2014, market demand is expected to remain soft, but sales volumes are expected to improve slightly. Average sales price realizations should be stable. Planned maintenance downtime costs should be slightly higher due to an outage planned at the Kadiam mill. Asian Printing Papers net sales were $19 million in the first quarter of 2014 compared with $20 million in the fourth quarter of 2013 and $25 million in the first quarter of 2013. Operating profits were about breakeven in both the first quarter of 2014 and the first quarter of 2013 and were $1 million in the fourth quarter of 2013. U.S. Market Pulp net sales were $207 million in the first quarter of 2014 compared with $210 million in the fourth quarter of 2013 and $195 million in the first quarter of 2013. Operating profits were a loss of $7 million in the first quarter of 2014 compared with a gain of $11 million in the fourth quarter of 2013 and a loss of $9 million in the first quarter of 2013. Sales volumes in the first quarter of 2014 compared with the fourth quarter of 2013 were slightly lower. Average sales price realizations for market pulp increased, but were relatively flat for fluff pulp. Poor weather conditions early in the quarter negatively impacted operating costs. Input costs were higher for energy and wood. Planned maintenance downtime costs in the first quarter of 2014 were $13 million higher than in the fourth quarter of 2013. 33



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Compared with the first quarter of 2013, sales volumes decreased in the first quarter of 2014 reflecting flat shipments of fluff pulp and lower market pulp shipments. Average sales margins increased due to higher sales price realizations and an improved product mix as the Franklin mill is at full fluff pulp production. Input costs were higher for wood, energy and chemicals. Planned maintenance downtime costs were $3 million higher. Operating costs were higher. Entering the second quarter of 2014, sales volumes are expected to be about flat. Average sales price realizations are expected to improve reflecting the partial realization of announced price increases for fluff pulp. Softwood pulp prices are expected to remain flat while hardwood pulp prices may decline due to increased competitive pressure. Input costs should be lower for wood and energy. Planned maintenance downtime costs should be $2 million higher with outages scheduled at the Riegelwood, Pensacola and Eastover mills. Consumer Packaging

2014 2013



In millions 1st Quarter 1st Quarter 4th Quarter Sales

$ 829 $ 830 $ 865 Operating Profit 17 7 30 Consumer Packaging net sales in the first quarter of 2014 were 4% lower than in the fourth quarter of 2013 and even with the first quarter of 2013. Operating profits included charges of $1 million in the first quarter of 2014 related to the closure of a sheet plant, charges of $2 million in the fourth quarter of 2013 related to the sale of the Shorewood business and charges of $44 million in the first quarter of 2013 related to a paper machine shutdown at our Augusta mill. Excluding these items, operating profits in the first quarter of 2014 were 44% lower than in the fourth quarter of 2013 and 65% lower than in the first quarter of 2013. North American Consumer Packaging net sales in the first quarter of 2014 were $464 million compared with $480 million in the fourth quarter of 2013 and $460 million in the first quarter of 2013. Operating profits were a loss of $7 million ($6 million excluding sheet plant closure costs) in the first quarter of 2014 compared with a gain of $2 million ($4 million excluding costs associated with the sale of the Shorewood business) in the fourth quarter of 2013 and a loss of $22 million (a gain of $22 million excluding paper machine shutdown costs) in the first quarter of 2013. Coated Paperboard sales volumes in the first quarter of 2014 were slightly lower than the fourth quarter of 2013. Average sales price realizations improved reflecting the partial realization of the sales price increases announced during the quarter. Operating costs were higher due to the extreme weather conditions during the quarter. Planned maintenance downtime costs were $8 million lower in the 2014 first quarter which included an outage at the Augusta mill compared with the fourth quarter of 2013 which included outages at the Texarkana and Augusta mills. Input costs for wood and energy were higher. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 decreased. However, in the first quarter of 2013, the business took 23,000 tons of market-related downtime prior to the permanent shutdown of a paper machine at the Augusta mill, compared with no market-related downtime in the first quarter of 2014. Average sales price realizations were higher due to the impact of price increases realized in 2013. Input costs were higher for wood and energy. Planned maintenance downtime costs were $20 million higher in the 2014 first quarter compared with the 2013 first quarter which included no outages. Operating costs were higher due to the poor weather conditions in 2014. Foodservice sales volumes in the first quarter of 2014 were seasonally lower than in the fourth quarter of 2013. Average sales margins reflected slightly higher average price realizations and a favorable customer mix, but were negatively impacted by higher input costs for resins. Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 increased. Average sales margins improved due to a favorable customer mix partially offset by higher input costs for resins. Looking forward to the second quarter of 2014, coated paperboard sales volumes are expected to be higher. Average sales margins are expected to increase due to further realization of price increases announced in the first quarter and a more favorable mix. Planned maintenance downtime costs should be about the same as in the first quarter of 2014 with outages scheduled at the Texarkana and Riegelwood mills. Input costs are expected to slightly improve for wood and energy from high levels. Operating profits will also benefit from the absence of the adverse weather conditions experienced in the first quarter. Foodservice sales volumes are expected to be seasonally higher while average sales margins are expected to be slightly lower reflecting a less favorable product mix. European Consumer Packaging net sales were $91 million in the first quarter of 2014 compared with $95 million in the fourth quarter of 2013 and $95 million in the first quarter of 2013. Operating profits in the first quarter of 2014 were $26 million compared with $25 million in the fourth quarter of 2013 and $32 million in the first quarter of 2013. Sales volumes in the first quarter of 2014 compared with the fourth quarter of 2013 were lower in Europe, but slightly higher in Russia. Average sales prices improved slightly in both Europe and Russia. Input costs and planned maintenance downtime costs 34



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were flat, while operating costs were higher. Compared with the first quarter of 2013, sales volumes decreased in Europe, but this was partially offset by higher sales volumes in Russia. Average sales margins improved in both Russia and Europe reflecting higher sales price realizations. There were no planned maintenance downtime costs in either period. Input costs increased for wood and energy. Operating costs in Europe were higher. Entering the second quarter of 2014, sales volumes are expected to increase, while average sales price realizations are expected to be about flat. Planned maintenance downtime costs are expected to be $8 million higher with outages scheduled at the Kwidzyn and Svetogorsk mills. Input costs are expected to be higher for wood. Asian Consumer Packaging net sales were $274 million in the first quarter of 2014, $290 million in the fourth quarter of 2013 and $275 million in the first quarter of 2013. Operating profits were a loss of $2 million in the first quarter of 2014 compared with a gain of $3 million in the fourth quarter of 2013 and a loss of $3 million in the first quarter of 2013. Compared with the fourth quarter of 2013, sales volumes were seasonally lower, and sales prices remain under pressure due to the over-supplied market conditions. Input costs for purchased fiber and energy were slightly higher, but operating costs were lower. Compared with the first quarter of 2013, sales volumes were flat, but average sales margins improved reflecting a more favorable product mix. Looking ahead to the second quarter of 2014, operating earnings are expected to increase slightly reflecting higher sales volumes and the benefits of cost savings initiatives, offset by higher pulp input costs and a scheduled shutdown for a paper machine rebuild. Distribution 2014 2013



In millions 1st Quarter 1st Quarter 4th Quarter Sales

$ 1,302$ 1,385$ 1,415 Operating Profit 5 (5 ) (397 ) Distribution net sales in the first quarter of 2014 were 8% lower than in the fourth quarter of 2013 and 6% lower than in the first quarter of 2013. Operating profits included net charges of $2 million, $2 million and $7 million in the first quarter of 2014, the fourth quarter of 2013 and the first quarter of 2013, respectively, for costs related to the reorganization of the Company's xpedx operations and a charge of $400 million in the fourth quarter of 2013 for the impairment of goodwill. Excluding these items, operating profits in the first quarter of 2014 were 40% higher than in the fourth quarter of 2013 and 250% higher than in the first quarter of 2013. Sales of papers and graphic arts products in the first quarter of 2014 totaled $735 million compared with $800 million in the fourth quarter of 2013 and $800 million in the first quarter of 2013. Trade margins as a percent of sales for printing papers were slightly up compared with the fourth quarter of 2013 and even with the first quarter of 2013. Packaging sales were $385 million in the first quarter of 2014, compared with $405 million in the fourth quarter of 2013 and $380 million in the first quarter of 2013. Trade margins as a percent of sales for packaging products were up from the fourth quarter of 2013, but down from the first quarter of 2013. Sales of facility solutions products totaled $180 million in the first quarter of 2014, compared with $210 million in the fourth quarter of 2013 and $205 million in the first quarter of 2013. Operating profits before reorganization costs in the first quarter of 2014 were $2 million higher than in the fourth quarter of 2013 due to higher margins. Operating profits before reorganization costs in the first quarter of 2014 were $5 million higher than in the first quarter of 2013 due to lower operating expenses. Entering the second quarter of 2014, earnings are expected to improve due to seasonal volume increases. Equity Earnings, Net of Taxes - Ilim Since October 2007, International Paper and Ilim Holding S.A. (Ilim) have operated a 50:50 joint venture in Russia. Ilim is a separate reportable industry segment. The Company recorded equity losses, net of taxes, of $31 million in the first quarter of 2014, $12 million in the fourth quarter of 2013 and $11 million in the first quarter of 2013. In the first quarter of 2014, the after-tax foreign exchange impact was a loss of $45 million on the remeasurement of U.S. dollar-denominated debt compared with a loss of $6 million in the fourth quarter of 2013. Compared with the fourth quarter of 2013, in the first quarter of 2014 sales volumes in the domestic market decreased for pulp and containerboard, partially offset by increased sales for paper. Shipments to China and other export markets increased for pulp, containerboard and paper reflecting the increased production resulting from the new pulp line at the Bratsk mill and the new coated and uncoated freesheet paper capacity at the Koryazhma mill. Average sales price realizations were higher due to a sales price increase for softwood pulp in China. Average sales price realizations decreased across all product lines sold to domestic markets. Input costs for wood were seasonally lower and costs for electricity and gas also decreased. 35



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Compared with the first quarter of 2013, sales volumes in the first quarter of 2014 reflected increased sales of softwood pulp to China, but lower sales of pulp to the domestic market and of hardwood pulp to China. Average sales price realizations were higher for softwood pulp and hardwood pulp for shipments to China and other export markets. In the domestic market, average sales price realizations were lower for pulp, containerboard and paper. Input costs for natural gas were higher, but were partially offset by lower electricity costs. A foreign exchange loss of $11 million on the remeasurement of U.S. dollar-denominated debt was recorded in the first quarter of 2013. Looking forward to the second quarter of 2014, sales volumes are expected to be slightly lower reflecting the impact on production capacity of the scheduled annual maintenance outages. Average sales price realizations are expected to be about flat on average versus the first quarter of 2014, but will trend downward during the second quarter as the announced price decreases for softwood and hardwood pulp in China are implemented. Input costs are expected to be seasonally higher for wood. Planned maintenance downtime costs should be higher than in the first quarter with outages scheduled at all three mills. LIQUIDITY AND CAPITAL RESOURCES Cash provided by continuing operations totaled $473 million for the first three months of 2014, compared with $516 million for the comparable 2013 three-month period. Earnings from operations adjusted for non-cash charges and the cash pension plan contributions were $699 million for the first three months of 2014 compared to $797 million for the first three months of 2013. Cash used for working capital components totaled $226 million for the first three months of 2014 compared to $281 million for the comparable 2013 three-month period. The Company generated free cash flow of approximately $254 million and $300 million in the first three months of 2014 and 2013, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by continuing 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, reduce debt, and fund other activities. The following is a reconciliation of free cash flow to cash provided by operations: Three Months Ended March 31, In millions 2014 2013



Cash provided by continuing operations $ 473$ 516 Adjustments: Cash invested in capital projects (277 ) (216 ) Cash contribution to pension plan

58 - Free Cash Flow $ 254$ 300



Investments in capital projects totaled $277 million in the first three months of 2014 compared to $216 million in the first three months of 2013. Full-year 2014 capital spending is currently expected to be approximately $1.4 billion, or about 95% of depreciation and amortization expense for our current businesses. Amounts related to early debt extinguishment during the three months ended March 31, 2014 and 2013 were as follows:

Three Months Ended March 31, In millions 2014 2013 Early debt reductions (a) $ 9$ 26 Pre-tax early debt extinguishment costs (b) - 6 (a) Reductions related to notes with interest rates ranging from 6.00% to 6.70% with original maturities from 2024 to 2027 for the three months ended March 31, 2014 and from 6.38% to 7.95% with original maturities from 2014 to 2018 for the three months ended March 31, 2013. (b) Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.



Financing activities for the first three months of 2014 included a $56 million net decrease in debt versus a $87 million net increase in debt during the comparable 2013 three-month period. During the first three months of 2014, International Paper acquired 8.2 million shares of treasury stock, including restricted stock tax withholding. International Paper also issued approximately 0.4 million shares of common stock and used 4.5 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $18 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $388 million, including $311 million related to shares repurchased under the Company's share repurchase program. In September 2013, the Company announced a share repurchase program to acquire up to $1.5 billion of the Company's common stock over the next two to three years in open market repurchase transactions. The Company had repurchased 16.8 million shares at an average price of $45.91, for a total of approximately $772 million, as of March 31, 2014. During the first three months of 2013, International Paper

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issued approximately $4.8 million shares of common stock and used approximately 0.5 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $191 million of cash. Also in the first three months of 2013, International Paper acquired 1.2 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $51 million. Cash dividend payments related to common stock totaled $153 million and $132 million for the first three months of 2014 and 2013, respectively. Dividends were $0.3500 per share and $0.3000 per share for the first three months in 2014 and 2013, respectively. At March 31, 2014, contractual obligations for future payments of debt maturities by calendar year were as follows: $528 million in 2014; $508 million in 2015; $488 million in 2016; $279 million in 2017; $1.9 billion in 2018; $912 million in 2019; and $4.8 billion thereafter. Maintaining an investment-grade credit rating is an important element of International Paper's financing strategy. At March 31, 2014, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody's, respectively. At March 31, 2014, International Paper's credit agreements totaled $2.0 billion, which management believes are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper's credit rating. The liquidity facilities include a $1.5 billion contractually committed bank credit agreement that expires in August 2016 and has a facility fee of 0.175% payable quarterly. The liquidity facilities also include up to $500 million of uncommitted commercial paper-based financings based on eligible receivable balances ($500 million available at March 31, 2014) under a receivables securitization program. On January 8, 2014, the Company amended the receivables securitization facility to extend the maturity date from January 2014 to December 2014. During the first quarter of 2013, International Paper borrowed $260 million under the receivable securitization facility at a rate of 0.95% payable monthly. During 2013, International Paper fully repaid the $260 million borrowed. Subsequent to March 31, 2014, International Paper borrowed $100 million under the receivable securitization facility with an interest rate of 0.90%. International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2014 with current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on 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. 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 noncontrolling 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 which was recognized in the second quarter of 2013. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified as expense in the first quarter of 2013 from accumulated other comprehensive income. The $17 million reclassification of the cumulative translation balance was offset by the initial estimate of a bargain purchase gain of $18 million which was also recorded in the 2013 first-quarter earnings. The Company announced on February 13, 2014 its intent to launch a voluntary tender offer for the remaining outstanding 12.6% public shares of Olmuksan. The formal application was filed with the Turkish Capital Markets Board on March 20, 2014 and approved on May 6, 2014. The tender offer will start within six business days from the date of approval and be open for 20 business days. 37



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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 majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013. The 25% owned by Jari is considered noncontrolling interest. International Paper follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. The Share Purchase Agreement related to the Orsa IP joint venture contained both a put and a call option that would allow Jari, at the third anniversary of the joint venture formation, to put its remaining shares to IP or allow IP, at the sixth anniversary of the joint venture formation, to call the remaining noncontrolling shares from Jari. Accordingly, the noncontrolling common stock held by Jari would be considered a redeemable noncontrolling interest and meet the requirements to be classified outside of permanent equity and is therefore classified as Redeemable noncontrolling interest in the accompanying consolidated balance sheets. The value of redeemable noncontrolling interest is reported at the greater of the redemption value or historical cost at the end of each reporting period. As of March 31, 2014 and December 31, 2013, the Company reported the redeemable noncontrolling interest at the redemption value of $168 million and $163 million, respectively. On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa IP from its venture partner, Jari, for approximately $135 million in cash. During the second quarter of 2014, the Company will reverse the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet with the net difference between this balance and the 25% purchase price being reflected as an increase to Paid-in capital. Additionally, as part of the agreement, Jari will assume the post-retirement medical liability associated with currently retired employees. Ilim Holding S.A. Shareholders' Agreement In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder's agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement was amended May 7, 2014. Pursuant to the amended agreement, beginning on January 1, 2017, either the Company or its partners may commence certain procedures specified under the deadlock provisions. If these or any other deadlock procedures are commenced, although it is not obligated to do so, the Company may in certain situations, choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant anti-trust authorities. Any such purchase by International Paper would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods. 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 accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions, postretirement benefits other than pensions, stock options and income taxes. The Company has included in its 2013 Form 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company's financial condition and results of operations and require management's judgments. The Company has not made any changes in these critical accounting policies during the first three months of 2014. Pension Accounting Net pension expense totaled approximately $90 million for International Paper's U.S. plans for the three months ended March 31, 2014, or about $50 million less than the pension expense for the first three months of 2013. The decrease in U.S. plan expense was principally due to an increase in the assumed discount rate to 4.60% in 2014 from 4.10% in 2013 and lower amortization of unrecognized actuarial losses. Net pension expense for non-U.S. plans was about $1 million for both the first three months of 2014 and 2013. 38



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After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the projected rate of future compensation increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on approximately 500 Aa-rated bonds appropriate to provide the projected benefit payments of the plan. A bond portfolio is selected and a single rate is determined that equates the market value of the bonds purchased to the discounted value of the plan's benefit payments. 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. At March 31, 2014, the market value of plan assets for International Paper's U.S. plans totaled approximately $10.8 billion, consisting of approximately 49% equity securities, 32% fixed income securities, and 19% real estate and other assets. Plan assets did not include 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 plans, tax deductibility, the cash flow generated by the Company, and other factors. The Company made a cash contribution of $58 million to the qualified pension plan in the first quarter of 2014 and an additional contribution of $205 million during April 2014. Additional required contributions of $180 million are expected to be made before year end. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $46 million in 2014. 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; and (ix) other factors you can find in our press releases and filings with the Securities and Exchange Commission, including the risk factors identified in Item 1A ("Risk Factors") of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. 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. 39



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