INTERNATIONAL PAPER CO /NEW/ (IP) FY 2021 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.”

The following generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of historical items in 2019, and year-to-year comparisons between 2020 and 2019, can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 19, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EXECUTIVE SUMMARY

Full-year 2021 net earnings attributable to shareholders were $1.8 billion ($4.47 per diluted share) compared with $482 million ($1.22 per diluted share) for full-year 2020.

During 2021, International Paper grew revenue and earnings while managing through significant operational and supply chain constraints. We serviced strong customer demand in a highly challenging operating environment due to continued uncertainties associated with COVID-19. For much of 2021, we operated with a sub-optimized system, which limited our ability to capture the full opportunity that comes with a strong demand backdrop. We made strong progress on price realization from prior increases to mitigate the impact of substantial cost pressure from inputs and distribution. We generated full-year cash from operations of $2.0 billion and free cash flow of $1.5 billion which included approximately $500 million of tax payments associated with various asset monetization transactions completed in 2021, as well as payment of deferred payroll taxes under

the 2020 CARES Act. In 2021, we further strengthened our balance sheet, reducing debt by $2.5 billion. Additionally, our U.S. qualified pension plan has a 105% funded status with a surplus of $600 million as of December 31, 2021. Lastly, we returned $1.6 billion to shareowners, including about $810 million in share repurchases.

In 2021, we announced the Company's Building a Better IP initiative to drive value creation by streamlining and simplifying the Company, increasing efficiency and reducing costs and accelerating profitable growth. To that end, in 2021 we further focused our portfolio around corrugated packaging with the spin-off of the Printing Papers business as a stand-alone public company, Sylvamo Corporation, and we initiated meaningful actions to materially lower our cost structure and accelerate profitable growth, with a commitment to deliver $350 to $430 million of incremental earnings in 2024.

Comparing our 2021 results to 2020, price and mix improved, with strong price realization across all of our business segments and channels. Mix was also favorable, driven by solid growth in higher-margin, U.S. packaging channels and lower containerboard exports. Volume was essentially flat versus the prior year as significant operational and supply chain constraints limited our ability to capture the full benefits of a solid demand backdrop. This was particularly the case in the fourth quarter 2021, as volume improved less than we anticipated, primarily due to significant Covid-19 omicron variant related labor and supply chain constraints late in the quarter, especially in our U.S. box system. Our North American Industrial Packaging business operated with depleted inventories throughout much of 2021, which increased costs across our system. Across the Company, supply chain operating costs increased significantly versus 2020, representing more than half of the increase in operations and costs in 2021. The second half of 2021 was especially challenging due to slow supply chain velocity and poor logistics reliability, putting additional cost pressure on our manufacturing systems. Maintenance outage costs increased as planned, following deferrals we chose to make in 2020. Input costs rose sharply across most categories, with costs increasing throughout 2021, resulting in significantly elevated input cost levels exiting 2021. Interest expense was substantially lower in 2021, benefiting from significant debt reduction in 2020 and 2021. Although corporate expenses were lower, there was some offset in the fourth quarter 2021 related to expected dis-synergies, following the spin-off of the Printing Papers business. Equity earnings improved on strong performance from our Ilim joint venture, partially offset by reduced earnings from Graphic Packaging following the final

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monetization of our investment in the first half of 2021.

Looking ahead to the first quarter 2022, as compared to the fourth quarter 2021, in our Industrial Packaging business, we expect to realize gains related to the August 2021 published price movement. Volume is expected to be lower in the first quarter 2022 on decreased seasonal demand and the impact of the Covid-19 omicron variant on labor availability and supply chains, although we do expect improvement as the first quarter progresses. Operations and costs are expected to decrease earnings, including additional costs related to the Prattville mill recovery and start-up costs, following the failure of the high-density storage tank in the fourth quarter 2021 Maintenance outage expense is expected to be significantly higher as the first quarter will be our highest outage quarter this year, representing about 40% of total planned outage costs in 2022. Input costs are expected to improve on lower recovered fiber and energy costs. In Global Cellulose fibers we expect our price and mix combined to be stable. We expect volume to decrease moderately due to on-going vessel delays. Operations and costs are expected to increase related to higher seasonal costs and the non-repeat of a favorable LIFO benefit in the fourth quarter 2021. Maintenance outage expense is expected to increase as the first quarter 2022 will also be Global Cellulose Fibers highest maintenance outage quarter in 2022. Input costs are expected to be slightly higher due mostly to higher energy costs. Lastly, equity earnings from the Ilim joint venture are expected to improve.

Looking to full-year 2022, year, we expect a solid demand environment for corrugated packaging and pulp, with demand growth normalizing as we recover from the near-term Covid-19 omicron constraints. We also expect to make good progress on our Building a Better IP initiatives, which will ramp up as the year progresses. We are well positioned to optimize our containerboard mill and corrugated box system following various disruptions in 2021, which will further improve our operating and distributions costs. With respect to our capital allocation, we are targeting capital expenditures of $1.1 billion. The planned increase is driven primarily by investments in our packaging business to build out capabilities and capacity in our box system to drive profitable growth. Additionally, we are committed to a competitive and sustainable dividend with a payout of 40 to 50% of free cash flow, which we will continue to review annually as earnings and cash flow grow. With regard to share repurchases, as of the end of 2021 we had $2.9 billion of available authorizations. We will continue to execute on these authorizations in a manner that balances the investment needs of the business and maximizes value for our shareowners.

On March 11, 2020 the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. During 2021, there continued to be a large number of COVID-19 cases and deaths in the United States and throughout the world, and restrictive measures, including masks and vaccine requirements were implemented or reinstituted by various governmental authorities and private businesses. Economic recovery in the United States and various other regions of the world has continued but may be threatened by the continued adverse effects of COVID-19 and other factors. Most of our manufacturing and converting facilities have remained open and operational during the pandemic and at the current time our manufacturing and converting facilities are generally operational. The health and safety of our employees and contractors is our most important responsibility as we manage through the COVID-19 pandemic. We have implemented work-systems across the Company to maintain the health and safety of our employees including social distancing, site cleaning, contract tracing and other measures as recommended by the CDC and WHO.

The pandemic has not had a material impact on demand for our products. However, all of our operations continue to experience higher supply chain costs and a constrained transportation environment due in part to the impacts of COVID-19. Moreover, due to the competitive labor market, we have experienced and may continue to experience, a shortage of labor for certain positions and increased labor costs.

There continue to be significant uncertainties associated with the COVID-19 pandemic, as detailed under RISKS RELATED TO THE COVID-19 PANDEMIC on page 8 to 19 of Item 1A. Risk Factors. The impacts of the pandemic had an adverse effect on our operations in 2021, and could have a material adverse effect on our financial condition, results of operations and cash flows if public health and/or global economic conditions deteriorate.

Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings (loss) attributable to International Paper (a GAAP measure) excluding discontinued operations, net special items and non-operating pension expense (income). Net earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most directly comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of discontinued operations, non-operating pension expense (income) and items considered by management to be unusual (net

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special items) from net earnings (loss) attributable to shareholders reported under GAAP. Adjusted Operating Earnings Per Share is calculated by dividing Adjusted Operating Earnings by diluted average shares of common stock outstanding. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present consolidated operating results from continuing operations. 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 Earnings (loss) attributable to common shareholders to Adjusted operating earnings (loss) attributable to common shareholders on a total and per share basis. Additional detail is provided later in this Form 10-K regarding the net special items referenced in the charts below:

Cash provided by operations, including discontinued operations, totaled $2.0 billion and $3.1 billion for 2021 and 2020, respectively. The Company generated free cash flow of approximately $1.5 billion in 2021 and $2.3 billion in 2020, respectively. Free Cash Flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management utilizes this measure in connection with managing our business and believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, service debt and make

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investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing underlying operational performance, we believe that free cash flow also enables investors to perform meaningful comparisons between past and present periods.

The following are reconciliations of free cash flow to cash provided by operations:

The non-GAAP financial measures presented in this Form 10-K as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company’s presentation of non-GAAP measures in this Form 10-K may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.

RESULTS OF OPERATIONS

Business Segment Operating Profits are used by International Paper’s management to measure the earnings performance of its businesses. Management uses this measure to focus on on-going operations and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. International Paper believes that using this information, along with net earnings, provides a more complete analysis of the results of operations by year. Business Segment Operating Profits are defined as earnings (loss) before income taxes and equity earnings, but including the impact of noncontrolling interests, and

excluding interest expense, net, corporate expenses, net, corporate net special items, business net special items and non-operating pension expense. Business Segment Operating Profits is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statement footnotes in accordance with ASC 280.

International Paper operates in two segments: Industrial Packaging and Global Cellulose Fibers. During 2021, as a result of the spin-off of our Printing Papers business along with certain mixed-use coated paperboard and pulp businesses and the associated reclassification of these businesses to Discontinued Operations, we no longer have a Printing Paper segment and the remaining sales and operating profits previously reported in the Printing Papers business have been reclassified for segment reporting for all periods presented.

The following table presents a comparison of net earnings (loss) from continuing operations attributable to International Paper Company to its total Business Segment Operating Profit:

Business Segment Operating Profit in 2021 was $96 million higher than in 2020 as the benefits from higher average sales price realizations and mix ($1.6 billion) and higher sales volumes ($8 million) were partially offset by higher operating costs ($350 million), higher input costs ($981 million) and higher maintenance outage costs ($177 million).

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The principal changes in operating profit by business segment were as follows:

•Industrial Packaging’s operating profit of $1.6 billion was $119 million lower than in 2020 as the benefits of higher average sales price, favorable mix and higher sales volumes were more than offset by higher operating costs, higher input costs and higher maintenance outage costs.

•Global Cellulose Fibers' operating loss improved $215 million to $3 million compared with 2020 as the benefits of higher average sales price, favorable mix and higher sales volumes were more than offset by higher operating costs, higher input costs and higher maintenance outage costs.

LIQUIDITY AND CAPITAL RESOURCES

Including discontinued operations, International Paper generated $2.0 billion of cash flow from operations for the year ended December 31, 2021, compared with $3.1 billion in 2020. Capital spending for 2021 totaled $549 million, or 45% of depreciation and amortization expense. Our liquidity position remains strong, supported by approximately $2.1 billion of credit facilities.

RESULTS OF OPERATIONS

While the operating results for International Paper’s various business segments are driven by a number of business-specific factors, changes in International Paper’s operating results are closely tied to changes in general economic conditions in North America, Europe, Latin America, North Africa and the Middle East.

Factors that impact the demand for our products include industrial non-durable goods production, consumer preferences, consumer spending and movements in currency exchange rates.

Product prices are affected by a variety of factors including general economic trends, inventory levels, currency exchange rate movements and worldwide capacity utilization. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood, recovered fiber and chemical costs; energy costs; freight costs; mill outage costs; salary and benefits costs, including pensions; and manufacturing conversion costs.

The following is a discussion of International Paper’s consolidated results of operations for the year ended December 31, 2021, and the major factors affecting these results compared to 2020.

For the year ended December 31, 2021, International Paper reported net sales of $19.4 billion, compared with $17.6 billion in 2020. International net sales (based on the location of the seller and including U.S. exports) totaled $5.2 billion or 27% of total sales in 2021. This compares with international net sales of $4.8 billion in 2020.

Full year 2021 net earnings attributable to International Paper Company totaled $1.8 billion ($4.47 per diluted share), compared with net earnings of $482 million ($1.22 per diluted share) in 2020. Amounts in all periods include the results of discontinued operations.

Earnings from continuing operations attributable to International Paper Company after taxes in 2021 and 2020 were as follows:

(a)Includes $284 million of net special items charges and $151 million of non-operating pension income.

(b)Includes $649 million of net special items charges and $31 million of non-operating pension income.

Compared with 2020, the benefits from higher average sales price and a favorable mix ($1.2 billion), higher sales volumes ($6 million), lower net interest expense ($82 million), and lower tax expense ($69 million) were partially offset by higher operating costs ($262 million), higher input costs ($734 million), higher maintenance outage costs ($133 million) and higher corporate and other costs ($51 million). In addition, 2021 results included higher equity earnings, net of taxes, relating to the Company’s investment in Ilim and other investments, partially offset by lower equity earnings relating to the Company's investment GPIP.

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See Business Segment Results on pages 29 through 31 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impact of these factors by segment.

DISCONTINUED OPERATIONS

On October 1, 2021, the Company completed the previously announced spin-off of its Printing Papers business along with certain mixed-use coated paperboard and pulp businesses in North America, France and Russia into a standalone, publicly-traded company, Sylvamo Corporation. On August 6, 2021, the Company completed the sale of its Kwidzyn, Poland mill which included the pulp and paper mill in Kwidzyn and supporting functions. As a result of the Sylvamo Corporation spin-off and sale of Kwidzyn, the Company no longer has a Printing Papers business segment, and all current and historical results have been adjusted to reflect the Kwidzyn and the Printing Papers business and other businesses conveyed to Sylvamo Corporation as discontinued operations. See Note 8 on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data for further discussion.

Discontinued operations include the operating earnings of the businesses noted above. Discontinued operations also includes an after-tax net special items gain of $330 million and charge of $7 million in 2021 and 2020, respectively.

Details of these charges (gains) were as follows:

INCOME TAXES

A net income tax provision from continuing operations of $188 million was recorded for 2021. Excluding a $87 million net tax benefit for other special items and a $49 million tax expense related to non-operating pension income, the operational tax provision was $226 million, or 19% of pre-tax earnings before equity earnings.

A net income tax provision from continuing operations of $176 million was recorded for 2020, including a tax benefit of $23 million related to the settlement of tax audits. Excluding this item, a $70 million net tax benefit for other special items and a $10 million tax expense related to non-operating pension income, the operational tax provision was $259 million, or 25% of pre-tax earnings before equity earnings.

EQUITY EARNINGS, NET OF TAXES

Equity earnings, net of taxes, consisted principally of the Company’s share of earnings from its 50% investment in Ilim of $311 million and $48 million in 2021 and 2020, respectively, and from its ownership interest in GPIP of $4 million in 2021 and its then 15.0% ownership interest at December 31, 2020 in GPIP of $40 million. The Company no longer had an ownership interest in GPIP at December 31, 2021 (see page 31).

INTEREST EXPENSE AND NONCONTROLLING INTEREST

Net corporate interest expense totaled $337 million in 2021 and $446 million in 2020. The decrease in 2021 compared with 2020 was due to lower average outstanding debt.

Net earnings attributable to noncontrolling interests were $2 million in 2021, compared with zero in 2020.

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SPECIAL ITEMS

Pre-tax special items included in continuing operations totaling $371 million and $742 million were recorded in 2021 and 2020, respectively. Details of these charges were as follows:

(a) Includes charges of $9 million recorded in the Industrial Packaging business segment and $5 million recorded in the Global Cellulose Fibers business segment.

(b) Recorded in the Industrial Packaging business segment.

(c) Allocation of income to noncontrolling interest associated with the sale of our EMEA Packaging business in Turkey.

Net losses on sales and impairments of businesses included in special items totaled a pre-tax gain of $7 million and loss of $465 million in 2021 and 2020, respectively. Details of these (gains) losses were as follows:

(a) Includes gains of $5 million recorded in the Industrial Packaging business segment and gains of $1 million recorded in Corporate.

See Note 8 Divestitures and Impairments on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data for further discussion.

International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) realign capacity to operate fewer facilities with the same revenue capability, (c) close high cost, unprofitable facilities, and (d) reduce costs. Additionally, the Company is committed to its capital allocation framework to maintain a strong balance sheet including reducing debt to maximize value creation and maintain our current investment grade credit rating.

During 2021 and 2020, pre-tax restructuring and other charges, net, totaling $509 million and $195 million were recorded. Details of these charges were as follows:

(a) Includes $11 million recorded in the Industrial Packaging business segment and $3 million recorded in the Global Cellulose Fibers business segment.

(b) Recorded in the Industrial Packaging business segment.

DESCRIPTION OF BUSINESS SEGMENTS

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

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INDUSTRIAL PACKAGING

International Paper is the largest manufacturer of containerboard in the United States. Our U.S. production capacity is over 13 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is converted into corrugated packaging and other packaging by our 175 North American corrugated packaging plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 16 recycling plants. Our corrugated packaging plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. In EMEA, our operations include a recycled fiber containerboard mill in Morocco and one in Spain and 24 corrugated packaging plants in France, Italy, Spain, Morocco and Portugal. On May 31, 2021, the Company completed the sale of its 90.38% ownership interest in Olmuksan International Paper, a corrugated packaging business in Turkey, to Mondi Group. As a result of the sale of our Kwidzyn, Poland mill on August 6, 2021 and the completion of the previously announced spin-off of Sylvamo Corporation on October 1, 2021 which included certain mixed-use coated paperboard businesses, the Coated Paperboard business is no longer reported as part of the Industrial Packaging business segment. See Note 8 Divestitures and Impairments of Businesses on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data.

GLOBAL CELLULOSE FIBERS

Our cellulose fibers product portfolio includes fluff, market and specialty pulps. International Paper is the largest producer of fluff pulp which is used to make absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products. Our market pulp is used for tissue and paper products. We continue to invest in exploring new innovative uses for our products, such as our specialty pulps, which are used for non-absorbent end uses including textiles, filtration, construction material, paints and coatings, reinforced plastics and more. Our products are made in the United States and Canada and are sold around the world. International Paper facilities have annual dried pulp capacity of about 3 million metric tons. As a result of the sale of our Kwidzyn, Poland mill on August 6, 2021 and the completion of the previously announced spin-off of Sylvamo Corporation on October 1, 2021 which included pulp businesses, EMEA Global Cellulose Fibers is no longer reported as part of the Global Cellulose Fibers business segment. See Note 8 Divestitures and Impairments of Businesses on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data.

ILIM

In October 2007, International Paper and Ilim completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills located in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 3.6 million metric tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 19.8 million acres (8.01 million hectares).

GPIP

On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which included its North American Coated Paperboard and Foodservice businesses, to Graphic Packaging International Partners, LLC ("GPIP"), a subsidiary of Graphic Packaging Holding Company, in exchange for a 20.5% ownership interest in GPIP. GPIP subsequently transferred the North American Consumer Packaging business to Graphic Packaging International, LLC ("GPI"), a wholly-owned subsidiary of GPIP that holds the assets of the combined business. The Company has since fully monetized its investment in GPIP with transactions beginning in the first quarter 2020 through the second quarter 2021 and no longer has an ownership interest in GPIP. See Note 11 Equity Method Investments on page 65 through 66 of Item 8. Financial Statements and Supplementary Data for further information.

BUSINESS SEGMENT RESULTS

The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability.

INDUSTRIAL PACKAGING

Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production, as well as with demand for e-commerce, processed foods, poultry, meat and agricultural products. In addition to prices and volumes, major factors affecting the profitability of Industrial Packaging are raw material and energy costs, freight costs, mill outage costs, manufacturing efficiency and product mix.

Industrial Packaging net sales for 2021 increased 10% to $16.3 billion compared with $14.9 billion in 2020. Operating profits in 2021 were 7% lower than in 2020. Comparing 2021 with 2020, benefits from

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higher average sales price and a favorable mix ($1.2 billion) and stable sales volumes were offset by higher operating costs ($237 million), higher input costs ($890 million) and higher maintenance outage costs ($142 million) .

(a) Includes intra-segment sales of $126 million for 2021 and $117 million for 2020.

North American Industrial Packaging's sales volumes increased in 2021 compared with 2020 for corrugated boxes driven by strong demand across our customer segments. Domestic containerboard sales volumes also increased. Export containerboard sales volumes were lower. Total maintenance and economic downtime was about 25,000 tons higher in 2021 compared with 2020, primarily due to maintenance downtime. Average sales margins were higher reflecting higher prices for both containerboard and boxes and a favorable geographic mix. Operating and distribution costs increased, primarily due to inflation and supply chain and labor constraints related to the Omicron COVID-19 variant. 2021 earnings were impacted by the winter storms in the first quarter and the incident at the Prattville mill in the fourth quarter. 2020 earnings include costs related to the Riverdale conversion. Planned maintenance downtime costs were $143 million higher in 2021 than in 2020. Input costs were significantly higher, driven by higher wood, recovered fiber and energy costs.

Looking ahead to the first quarter of 2022, compared with the fourth quarter of 2021, sales volumes for boxes are expected to be lower, driven by seasonality and continued supply chain and labor constraints associated with the Omicron variant. Average sales margins are expected to be higher. Operating costs are expected to increase and include additional costs related to the Prattville mill. Planned maintenance downtime costs are expected to be $119 million higher. The first quarter of 2022 is expected to be the highest maintenance quarter of the year. Input costs are expected to be lower primarily for recovered fiber and energy.

EMEA Industrial Packaging's sales volumes in 2021 were lower than in 2020 driven by the sale of our EMEA Packaging business in Turkey in May 2021. Sales volumes improved in the Eurozone and

Morocco reflecting demand recovery from the COVID-19 pandemic. Average sales margins were lower in all regions driven by higher containerboard costs partially offset by corrugated packaging sales price recovery. Operating costs were lower, driven by improvements at the Madrid, Spain mill. Planned maintenance outage costs were $1 million lower in 2021 compared with 2020. Input costs were significantly higher, primarily driven by energy and fiber costs.

Entering the first quarter of 2022, compared with the fourth quarter of 2021, sales volumes are expected to be stable. Average sales margins are expected to be higher, reflecting lower input costs. Operating costs are expected to be higher. Planned maintenance outage costs are expected to be $1 million lower due to no planned outages in the first quarter. Input costs are expected to be higher, primarily for energy.

On October 14, 2020, the Company closed the previously announced sale of its Brazilian Packaging business. See Note 8 Divestitures and Impairments on pages 61 through 63 of Item 8. Financial Statements and Supplementary Data for further discussion.

GLOBAL CELLULOSE FIBERS

Demand for Cellulose Fibers products is closely correlated with changes in demand for absorbent hygiene products, primarily driven by the demographics and income growth in various geographic regions. It is further affected by changes in currency rates that can benefit or hurt producers in different geographic regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs, mill outage costs, and freight costs.

Global Cellulose Fibers net sales for 2021 increased 14% to $2.7 billion, compared with $2.4 billion in 2020. Operating profits in 2021 improved significantly compared to 2020. Comparing 2021 with 2020, benefits from higher average sales price, favorable mix and sales volumes ($454 million) were partially offset by higher operating costs ($113 million), higher input costs ($91 million) and higher maintenance outage costs ($35 million).

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Sales volumes in 2021 compared with 2020 were lower reflecting the extremely challenging supply chain environment. Total maintenance and economic downtime was about 11,000 tons lower in 2021 compared with 2020, primarily due to economic downtime. Average sales margins were higher, reflecting higher average fluff and market pulp prices. Operating costs increased, driven by inflation and supply chain related mill slowbacks and downtime. Distribution costs were significantly higher driven by global supply chain disruptions causing port congestion and container shortages. Planned maintenance outage costs were $35 million higher in 2021. Input costs were significantly higher, driven by wood, energy and chemicals.

Entering the first quarter of 2022, compared with the fourth quarter of 2021, sales volumes are expected to be flat as solid demand is offset by continuing supply chain constraints. Average sales margins are expected to be stable. Operating costs are expected to be seasonally higher. Distribution costs are also expected to increase from supply chain constraints. Planned maintenance outage costs are expected to be $4 million higher than in the fourth quarter of 2021. Input costs are expected to be seasonally higher, primarily for chemicals and energy.

EQUITY EARNINGS, NET OF TAXES - ILIM

International Paper accounts for its investment in Ilim, a separate reportable industry segment, using the equity method of accounting.

The Company recorded equity earnings, net of taxes, related to Ilim of $311 million in 2021, compared with earnings of $48 million in 2020. Foreign exchange gains (losses) included in equity earnings in 2021 were not material and JSC Ilim Group had no U.S. dollar-denominated debt outstanding as of December 31, 2021. Operating results recorded in 2020 included an after-tax non-cash foreign exchange loss of $50 million, primarily on the remeasurement of Ilim's U.S. dollar denominated net debt.

Driven by logistics issues and congestion at the Chinese border, sales volumes for the joint venture decreased by 3% in 2021, primarily for softwood pulp and hardwood pulp shipments to China, partially offset by higher shipments of softwood pulp and hardwood pulp to Russia and higher shipments of containerboard to China and other export markets. Average sales margins were significantly higher for sales of softwood pulp, hardwood pulp and containerboard reflecting higher average sales prices. Input costs were higher, primarily for wood, fuel and chemicals. Distribution costs were negatively impacted by transportation tariffs and inflation. Maintenance and repair expenses were higher. Due to escalating regulations, an environmental reserve

was recorded in 2021 for the Siberian mill sites. The Company received cash dividends from the joint venture of $154 million in 2021 and $141 million in 2020.

Entering the first quarter of 2022, sales volumes are expected to be higher than in the fourth quarter of 2021, as distribution constraints at the Chinese border are anticipated to be resolved. Based on results to date in the current quarter, average sales margins are expected to decrease for softwood pulp and hardwood pulp shipped to China. Average sales margins are expected to increase for shipments of containerboard to China. Input costs for wood are projected to be higher due to seasonality. Distribution costs will increase.

EQUITY EARNINGS - GPIP

International Paper recorded equity earnings of $4 million in 2021 and $40 million in 2020 on its ownership position in GPIP. The Company received cash dividends from the investment of $5 million in 2021 and $20 million in 2020. The Company no longer has an ownership interest in GPIP - see Description of Business Segments on pages 28 and 29 for further detail regarding our ownership interest.

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 operating cash costs, such as raw material, energy, mill outage and distribution, do have an effect on operating cash generation, we believe that our focus on commercial and operational excellence, as well as our ability to tightly manage costs and working capital has improved our cash flow generation over an operating cycle.

Use of cash during 2021 was primarily focused on working capital requirements, capital spending, debt reduction and returning cash to shareholders through dividends and share repurchases under the Company's share repurchase program.

CASH PROVIDED BY OPERATING ACTIVITIES

Cash provided by operations, including discontinued operations, totaled $2.0 billion in 2021, compared with $3.1 billion for 2020. Cash used by working capital components (accounts receivable, contract assets and inventory less accounts payable and accrued liabilities, interest payable and other) totaled $426 million in 2021, compared with cash provided by working capital components of $324 million in 2020.

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Cash dividends received from equity investments were $159 million in 2021, compared with $162 million in 2020.

INVESTMENT ACTIVITIES

Including discontinued operations, investment activities in 2021 increased from 2020, as 2021 included proceeds from the sale of the Kwidzyn, Poland mill and the sale of our ownership interest in Olmuksan International Paper for $827 million, net of cash divested, proceeds from the monetization of our investment in Graphic Packaging International Partners, LLC (GPIP) for $908 million (see Note 11 Equity Method Investments on pages 65 and 66 of Item 8. Financial Statements and Supplementary Data) and proceeds of $4.85 billion from the settlement of the 2015 Financing Entities Timber Notes (see Note 15 Variable Interest Entities on pages 74 and 75 of Item 8. Financial Statements and Supplementary Data). Capital spending was $549 million in 2021, or 45% of depreciation and amortization, compared with $751 million in 2020, or 58% of depreciation and amortization. Capital spending as a percentage of depreciation and amortization was 31% for Global Cellulose Fibers and 46% for Industrial Packaging in 2021.

The following table shows capital spending by business segment for the years ended December 31, 2021 and 2020, excluding amounts related to discontinued operations of $69 million in 2021 and $88 million in 2020.

Capital spending in 2022 is expected to be approximately $1.1 billion, or 96% of depreciation and amortization.

Acquisitions

See Note 7 Acquisitions on page 61 of Item 8. Financial Statements and Supplementary Data for a discussion of the Company's acquisitions.

FINANCING ACTIVITIES

Including discontinued operations, financing activities during 2021 included debt issuance of $1.5 billion and reductions of $2.5 billion for a net decrease of $1.0 billion. Financing activities during 2020 included debt issuances of $583 million and reductions of $2.3 billion for a net decrease of $1.7 billion.

Amounts related to early debt extinguishment during the years ended December 31, 2021 and 2020 were as follows:

(a)Reductions related to notes with interest rates ranging from 3.00% to 7.50% with original maturities from 2021 to 2048 for the years ended December 31, 2021 and 2020.

(b)Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.

The Company's early debt reductions in 2021 included debt tenders of $500 million with interest rates ranging from 4.80% to 5.15% and maturity dates ranging from 2035 to 2046, $200 million with an interest rate of 3.55% due in 2029, and $558 million with interest rates ranging from 4.35% to 4.40% and maturity dates ranging from 2047 to 2048. In addition to these debt tenders, the Company had make whole calls of $517 million related to debt with an interest rate 3.80% due in 2026 and $268 million related to debt with an interest rate of 3.00% due in 2027. Finally, the Company had $429 million in open market repurchases related to debt with interest rates ranging from 3.00% to 5.38% and maturity dates ranging from 2027 to 2048. In addition to the early debt reductions, the Company had debt reductions of $37 million in 2021 related primarily to capital leases, debt maturities, and international debt.

The Company had debt issuances in 2021 of $1.5 billion related primarily to Sylvamo debt issuances. In the fourth quarter of 2021, Sylvamo made a $1.4 billion net cash distribution to the Company as part of the spin-off.

Other financing activities during 2021 included the net issuance of approximately 1.9 million shares of treasury stock. Repurchases of common stock and payments of restricted stock withholding taxes totaled $838.6 million, including $810.9 million related to shares repurchased under the Company's share repurchase program. The Company has repurchased 85.1 million shares at an average price of $47.93, for a total of approximately $4.1 billion, since the repurchase program began in September 2013 through December 31, 2021. The Company paid cash dividends totaling $780 million during 2021.

Other financing activities during 2020 included the net issuance of approximately one million shares of treasury stock. Repurchases of common stock and payments of restricted stock withholding taxes totaled $42 million, including $14 million related to shares repurchased under the Company's share repurchase

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program. The Company paid cash dividends totaling $806 million during 2020.

Interest Rate Swaps

Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk, International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt. During 2020, International Paper terminated its interest rate swaps with a notional amount of $700 million and maturities ranging from 2024 to 2026 with an approximate fair value of $85 million. Subsequent to the termination of the interest rate swaps, the fair value basis adjustment is amortized to earnings as interest income over the same period as a debt premium on the previously hedged debt. The Company had no outstanding interest rate swaps for the years ended December 31, 2021 and 2020 (see Note 17 Derivatives and Hedging Activities on pages 76 through 79 of Item 8. Financial Statements and Supplementary Data).

Variable Interest Entities

Information concerning variable interest entities is set forth in Note 15 Variable Interest Entities on pages 74 through 75 of Item 8. Financial Statements and Supplementary Data. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. These installment notes were used by variable interest entities as collateral for borrowings from third-party lenders. These variable interest entities were restructured in 2015 when the installment notes and third-party loans were extended. The restructured variable interest entities held installment notes of $4.8 billion and third-party loans of $4.2 billion which both matured in August 2021. We settled the third-party loans at their maturity with the proceeds from the installment notes. This resulted in cash proceeds of approximately $630 million representing our equity in the variable interest entities. Maturity of the installment notes and termination of the monetization structure also resulted in a $72 million tax liability that was paid in the fourth quarter of 2021. As of December 31, 2021, the Company's remaining deferred tax liability associated with the 2015 Financing Entities was $813 million. The nature and timing of the income tax due related to these transactions is currently under review by the Internal Revenue Service.

LIQUIDITY AND CAPITAL RESOURCES OUTLOOK FOR 2022

We expect another year of solid cash generation in 2022. Furthermore, we intend to continue to make choices for the use of cash that are consistent with our capital allocation framework to drive long-term

value creation. These include maintaining a strong balance sheet and investment grade credit rating, returning meaningful cash to shareholders through dividends and share repurchases and making organic investments to maintain our world-class system and strengthen our packaging business.

Our share repurchase program most recently approved by our Board of Directors on October 12, 2021, which does not have an expiration date, has approximately $2.9 billion aggregate amount of shares of common stock remaining authorized for purchase as of December 31, 2021. We may continue to repurchase shares under such authorization in open market transactions (including block trades), privately negotiated transactions or otherwise, subject to prevailing market conditions, our liquidity requirements, restrictions in our debt documents, applicable securities laws requirements and other factors. In addition, we pay regular quarterly cash dividends and expect to continue to pay regular quarterly cash dividends in the foreseeable future. Each quarterly dividend is subject to review and approval by our Board of Directors, and is subject to restrictions in our debt documents.

Capital Expenditures and Long-Term Debt

Capital spending for 2022 is planned at approximately $1.1 billion, or about 96% of depreciation and amortization.

At December 31, 2021, International Paper’s credit agreements totaled $2.1 billion, which is comprised of the $1.5 billion contractually committed bank credit agreement and up to $550 million under the receivables securitization program. Management believes these credit agreements 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. At December 31, 2021, the Company had no borrowings outstanding under the $1.5 billion credit agreement or the $550 million receivables securitization program. The Company’s credit agreements are not subject to any restrictive covenants other than the financial covenants as disclosed on pages 75 and 76 in Note 16 - Debt and Lines of Credit of Item 8. Financial Statements and Supplementary Data, and the borrowings under the receivables securitization program being limited by eligible receivables. The Company was in compliance with all its debt covenants at December 31, 2021 and was well below the thresholds stipulated under the covenants as defined in the credit agreements. Further the financial covenants do not restrict any borrowings under the credit agreements.

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International Paper also has a commercial paper program with a borrowing capacity up to $1.0 billion supported by its $1.5 billion credit agreement. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed or floating rate notes. The Company had no borrowings outstanding as of December 31, 2021 under this program.

International Paper expects to be able to meet projected capital expenditures, service existing debt, meet working capital and dividend requirements and make common stock and/or debt repurchases for the next 12 months and for the foreseeable future thereafter 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 maintain appropriate levels of liquidity to meet our needs while managing balance sheet debt and interest expense, and we have repurchased, and may continue to repurchase, our common stock (under our existing share repurchase program) and debt (including in open market purchases) to the extent consistent with this capital structure planning. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. During 2020, management took various actions to further strengthen the Company’s liquidity position in response to the COVID-19 pandemic. This included the Company deferring the payment of our payroll taxes as allowed under CARES Act. The CARES Act allows for the deferral of the payment of the employer portion of Social Security taxes accrued between March 27, 2020 and December 31, 2020. Under the CARES Act 50% of the deferred payroll taxes was paid in 2021 and the remainder will be paid by December 31, 2022. We believe that our credit agreements and commercial paper program provide us with sufficient liquidity to operate in the current environment; however, an extended period of economic disruption could impact our access to additional sources of liquidity.

Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2021, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively.

Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2021, were as follows:

(a)Includes financing lease obligations.

(b)Includes $798 million relating to fiber supply agreements entered into at the time of the 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. Also includes $979 million relating to fiber supply agreements assumed in conjunction with the 2016 acquisition of Weyerhaeuser's pulp business.

(c)Not included in the above table due to the uncertainty of the amount and timing of the payment are unrecognized tax benefits of approximately $160 million. Also not included in the above table is $106 million of Deemed Repatriation Transition Tax associated with the 2017 Tax Cuts and Jobs Act which will be settled from 2022 - 2026.

We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2021, to be permanently reinvested and, accordingly, no U.S. income taxes have been provided thereon (see Note 13 Income Taxes on pages 68 through 70 of Item 8. Financial Statements and Supplementary Data). We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Pension Obligations and Funding

At December 31, 2021, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $242 million lower than the fair value of plan assets, excluding non-U.S. plans. Approximately $595 million 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 not to make any voluntary contributions in 2019, 2020 or 2021. At this time, we

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do not expect to have any required contributions to our plans in 2022, 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 SHAREHOLDERS' AGREEMENT

In October 2007, in connection with the formation of the Ilim joint venture, International Paper entered into a shareholders' agreement with an initial 15-year term expiring in October 2022 that automatically renews for successive five-year terms, unless terminated by either party. The shareholders' agreement also 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. If these or any other deadlock procedures under the shareholders' agreement are commenced, although it is not obligated to do so, the Company may in certain situations choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant antitrust authorities. Based on the provisions of the agreement, the Company estimates that the current purchase price for its partners' 50% interests would be approximately $2.3 billion, excluding the impact of Ilim debt at December 31, 2021, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company's option. The purchase by the Company of its partners’ 50% interest in Ilim would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods.

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 subjective judgments about matters that are inherently uncertain.

Accounting policies whose application has had or is reasonably likely to have a material impact on the reported results of operations and financial position of International Paper, and that can require a significant level of estimation or uncertainty by management that affect their application, include the accounting for contingencies, impairment or disposal of long-lived

assets and goodwill, pensions and income taxes. The Company has discussed the selection of critical accounting policies and the effect of significant estimates with the Audit and Finance Committee of the Company’s Board of Directors and with its independent registered public accounting firm.

While we have taken into account certain impacts arising from COVID-19 in connection with the accounting estimates reflected in this Annual Report on Form 10-K, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be affected.

CONTINGENT LIABILITIES

Accruals for contingent liabilities, including personal injury, product liability, environmental, asbestos and other legal 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 litigation and settlement experience and recommendations of legal counsel and, if applicable, other experts. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. Liabilities for asbestos-related matters require reviews of recent and historical claims data. The Company utilizes its in-house legal and environmental experts to develop estimates of its legal, environmental and asbestos obligations, supplemented as needed by third-party specialists to analyze its most complex contingent liabilities.

We calculate our workers' compensation reserves based on estimated actuarially calculated development factors. The workers' compensation reserves are reviewed at least quarterly to determine the adequacy of the accruals and related financial statement disclosure. While we believe that our assumptions are appropriate, the ultimate settlement of workers' compensation reserves may differ significantly from amounts we have accrued in our consolidated financial statements.

Brazil Goodwill Tax Matter: The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by Sylvamo do Brasil Ltda., a wholly-owned subsidiary of the Company until the October 1, 2021 spin-off of the Printing Papers business. The Company received assessments for the tax years

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2007-2015 totaling approximately $106 million in tax, and $351 million in interest, penalties, and fees as of December 31, 2021 (adjusted for variation in currency exchange rates). After a previous favorable ruling challenging the basis for these assessments, we received other subsequent unfavorable decisions from the Brazilian Administrative Council of Tax Appeals. The Company has appealed and intends to further appeal these and any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. The Company believes that it has appropriately evaluated the transaction underlying these assessments, and has concluded based on Brazilian tax law, that its tax position would be sustained.

The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015. This assessment pertains to a business that was conveyed to Sylvamo Corporation as of October 1, 2021, as part of our spin-off transaction. Pursuant to the terms of the tax matters agreement entered into between the Company and Sylvamo Corporation, the Company will pay 60% and Sylvamo will pay 40%, on up to $300 million of any tax assessment related to the matter, and the Company will pay all amounts of the assessment over $300 million. The Brazilian government may enact a tax amnesty program that would allow Sylvamo do Brasil Ltda. to resolve this dispute for less than the assessed amount. In addition, all decisions concerning the conduct of the litigation related to this matter, including strategy, settlement, pursuit and abandonment, continue to be made by the Company. Sylvamo Corporation thus has no control over any decision related to this ongoing litigation. As of October 1, 2021, in connection with the recording of the distribution of assets and liabilities resulting from the spin-off transaction, the Company has established a liability representing the initial fair value of the contingent liability under the tax matter agreement. The contingent liability was determined in accordance with ASC 460 "Guarantees" based on the probability weighting of various possible outcomes. The initial fair value estimate and recorded liability as of December 31, 2021 is $48 million. This liability will not be adjusted in subsequent periods unless facts and circumstances change such that an amount greater than the initial recognized liability becomes probable and estimable.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through undiscounted cash flows from

future operations or disposals. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, evaluation for possible impairment of goodwill is required annually. The amount and timing of any impairment charges based on these assessments may require the estimation of future cash flows or the fair 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, various other projected operating economic factors and other intended uses of the assets. As these key factors change in future periods, the Company will update its impairment analysis to reflect its latest estimates and projections.

ASU 2011-08, "Intangibles - Goodwill and Other," allows entities testing goodwill for impairment the option of performing a qualitative assessment before performing the quantitative goodwill impairment test. If a qualitative assessment is performed, an entity is not required to perform the quantitative goodwill impairment test unless the entity determines that, based on that qualitative assessment, it is more likely than not that its fair value is less than its carrying value.

The Company performed its annual testing of its reporting units for possible goodwill impairments by applying the qualitative assessment to its North America Industrial Packaging reporting unit and the quantitative goodwill impairment test to its EMEA Industrial Packaging reporting unit as of October 1, 2021.

For the current year evaluation, the Company assessed various assumptions, events and circumstances that would have affected the estimated fair value of the North America Industrial Packaging reporting unit under the qualitative assessment and the results of the qualitative assessments indicated that it was not more likely than not that the fair value of the reporting unit was less than its carrying value.

The Company also performed the quantitative goodwill impairment test which included comparing the carrying amount of the EMEA Industrial Packaging reporting unit to its estimated fair value. The Company performed the quantitative goodwill impairment test for EMEA Industrial Packaging due to the changes in the reporting unit's asset base as a result of acquisitions and divestitures since the previous quantitative goodwill impairment test. The Company calculated the estimated fair value of the reporting unit using a weighted approach based on

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discounted future cash flows, market multiples and transaction multiples. The determination of fair value using the discounted cash flow approach requires management to make significant estimates and assumptions related to forecasts of future revenues, operating profit margins, and discount rates. The determination of fair value using market multiples and transaction multiples requires management to make significant assumptions related to revenue multiples and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiples. The results of our annual impairment test indicated that the carrying amount did not exceed the estimated fair value of the EMEA Industrial Packaging reporting unit.

In addition, the Company considered whether there were any events or circumstances outside of the annual evaluation that would reduce the fair value of its reporting units below their carrying amounts and necessitate a goodwill impairment evaluation. In consideration of all relevant factors, there were no indicators that would require goodwill impairment subsequent to October 1, 2021.

PENSION BENEFIT OBLIGATIONS

The charges recorded for pension benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases and mortality rates.

The calculations of pension obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets and the discount rate used to calculate plan liabilities.

In advance of the spin-off of the Printing Papers segment into a standalone, publicly traded company, Sylvamo, a legally separate Sylvamo Pension Plan was established to transfer both pension liabilities and qualified pension assets for the approximately 900 active qualified pension participants who transitioned to Sylvamo. Effective September 1, 2021, the Retirement Plan of International Paper and the Sylvamo Pension Plan were legally separated and remeasured as of that date.

Benefit obligations and fair values of plan assets as of December 31, 2021, for International Paper’s pension plan were as follows:

The table below shows the discount rate used by International Paper to calculate U.S. pension obligations for the years shown:

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

The weighted average expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year ended December 31, 2021 was 6.40%.

Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2022 pension expense by approximately $27 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $19 million.

Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were:

The 2012, 2013 and 2014 returns above represent weighted averages of International Paper and Temple-Inland asset returns. International Paper and Temple-Inland assets were combined in October 2014. The annualized time-weighted rate of return

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earned on U.S. pension plan assets was 14.0% and 11.3% for the past five and ten years, respectively.

ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains and losses in subsequent years.

Net periodic pension plan expenses, calculated for all of International Paper’s plans, were as follows:

The decrease in 2021 pension expense primarily reflects a higher asset returns, lower interest cost due to a lower discount rate and lower actuarial loss due to a higher amortization period slightly offset by higher service cost.

Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as of December 31, 2021, projected future net periodic pension plan expense (income) would be as follows:

The Company estimates that it will record net pension income of approximately $114 million for its U.S. defined benefit plans in 2022, compared to income of $112 million in 2021.

The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2021 totaled approximately $12.1 billion, consisting of

approximately 18% equity securities, 68% debt securities, 8% real estate funds and 6% other assets. The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make voluntary contributions in the future. There were no required contributions to the U.S. qualified plan in 2021. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $21 million for the year ended December 31, 2021.

INCOME TAXES

International Paper records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering technical merits of the position based on specific tax regulations and facts of each matter. Changes to recorded liabilities are only made when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or recent court cases that are relevant to the matter.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit 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.

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LEGAL PROCEEDINGS

Information concerning the Company’s environmental and legal proceedings is set forth in Note 14 Commitments and Contingent Liabilities on pages 70 through 74 of Item  8. Financial Statements and Supplementary Data.

RECENT ACCOUNTING DEVELOPMENTS

See Note 2 Recent Accounting Developments on page 56 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.

EFFECT OF INFLATION

While inflationary increases in certain input costs, such as energy, wood fiber and chemical costs, have an impact on the Company’s operating results, changes in general inflation have had minimal impact on our operating results in 2019 and 2020. The effects of inflation in the current year have been more significant than prior years as the pandemic has had an impact on economic conditions, including labor market conditions, economic activity, consumer behavior, supply shortages and disruptions and inflationary pressures. Sales prices and volumes are primarily influenced by economic supply and demand factors in specific markets and by exchange rate fluctuations but are also currently being impacted by the current inflationary environment.

FOREIGN CURRENCY EFFECTS

International Paper has operations in a number of countries. Its operations in those countries also export to, and compete with, imports from other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars and the remeasurement impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of imports into, and exports out of, the United States (and the impact on local currency pricing of products that are traded internationally). In general, a weaker U.S. dollar and stronger local currency is beneficial to International Paper. The currency that has the most impact is the Euro.

MARKET RISK

We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate

purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper’s debt obligations is included in Note 16 Debt and Lines of Credit on pages 75 and 76 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 17 Derivatives and Hedging Activities on pages 76 through 79 of Item 8. Financial Statements and Supplementary Data.

The fair value of our debt and financial instruments varies due to changes in market interest and foreign currency rates and commodity prices since the inception of the related instruments. We assess this market risk utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices.

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment-grade securities of financial institutions and money market mutual funds with a minimum rating of AAA and limit exposure to any one issuer or fund. Our investments in marketable securities at December 31, 2021 and 2020 are stated at cost, which approximates market due to their short-term nature. Our interest rate risk exposure related to these investments was not material.

We issue fixed and floating rate debt in a proportion that management deems appropriate based on current and projected market conditions. Derivative instruments, such as, interest rate swaps, may be used to execute this strategy. At December 31, 2021 and 2020, the fair value of the net liability of financial instruments with exposure to interest rate risk was approximately $6.7 billion and $9.3 billion, respectively. The potential increase in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $304 million and $443 million at December 31, 2021 and 2020, respectively.

COMMODITY PRICE RISK

The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap or forward purchase contracts may be used to manage risks associated with market fluctuations in energy prices. At December 31, 2021 and 2020, the net fair value of these contracts was

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immaterial and the potential loss in fair value from a 10% adverse change in quoted commodity prices for these contracts was also immaterial.

FOREIGN CURRENCY RISK

International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis by entering into cross-currency interest rate swaps, or foreign exchange

contracts. At December 31, 2021 and 2020, the net fair value of financial instruments with exposure to foreign currency risk was immaterial. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates was also immaterial.