INTERNATIONAL PAPER CO NEW

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, 2023, and the major factors affecting these results compared to 2022.

For the year ended December 31, 2023, International Paper reported net sales of $18.9 billion, compared with $21.2 billion in 2022. International net sales (based on the location of the seller and including U.S. exports) totaled $5.3 billion or 28% of total sales in 2023. This compares with international net sales of $5.9 billion in 2022.

Full year 2023 net earnings attributable to International Paper Company totaled $288 million ($0.82 per diluted share), compared with net earnings of $1.5 billion ($4.10 per diluted share) in 2022. Amounts in 2023 and 2022 include the results of discontinued operations.

Earnings from continuing operations attributable to International Paper Company after taxes in 2023 and 2022 were as follows:

(a)Includes $412 million of net special items charges and $41 million of non-operating pension expense.

(b)Includes $429 million of net special items income and $144 million of non-operating pension income.

Compared with 2022, the benefits from lower input costs ($743 million), lower maintenance outage costs ($6 million), lower corporate and other costs ($3 million), lower net interest expense ($25 million) and lower tax expense ($8 million) were more than offset by lower average sales price and an unfavorable mix ($329 million), lower sales volumes ($172 million) and higher operating costs ($700 million). In addition, excluding special items, 2023 results included higher equity earnings, net of taxes. Our Building a Better IP initiatives delivered $260 million of earnings in 2023 primarily though our strategy acceleration initiative to deliver profitable growth through commercial and investment excellence.

See Business Segment Results on pages 36 and 37 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 September 18, 2023, the Company completed the sale of its Ilim equity investment and, as a result, all current and historical results of the Ilim investment are presented as Discontinued Operations, net of taxes and our equity investment is no longer a separate reportable industry segment. This transaction is discussed further in Note 11 - Equity Method Investments on pages 69 and 70 of Item 8. Financial Statements and Supplementary Data for further discussion.

Discontinued operations include the equity earnings of the prior Ilim joint venture. Discontinued operations also includes after-tax losses of $126 million and $533 million in 2023 and 2022, respectively for impairment and transaction costs related to our former equity method investment in the Ilim joint venture.

A net income tax provision from continuing operations of $59 million was recorded for 2023 and the reported effective income tax rate was 15%. This includes a tax benefit of $23 million related to the settlement of tax audits and tax expense of $4 million related to internal legal entity restructuring. Excluding these items, a $141 million net tax benefit for other special items and a $13 million tax benefit related to non-operating pension expense, the operational tax provision (non-GAAP) for 2023 was $232 million, or 23% of pre-tax earnings before equity earnings.

A net income tax benefit from continuing operations of $236 million was recorded for 2022 and the reported effective income tax rate was (16%). This includes a tax benefit of $604 million related to the settlement of the timber monetization restructuring tax matter, a tax benefit of $66 million related to the tax-free exchange of our shares of Sylvamo and tax expense of $45 million related to a foreign deferred tax valuation allowance. Excluding these items, a $37 million net tax benefit for other special items and $48 million tax expense related to non-operating pension income, the operational tax provision (non-GAAP) for 2022 was $378 million, or 24% of pre-tax earnings before equity earnings.

The operational tax provision and operational effective tax rate are non-GAAP financial measures and are calculated by adjusting the income tax provision from continuing operations and rate to exclude the tax effect of net special items and non-operating pension expense (income). Management believes that this presentation provides useful information to investors by providing a meaningful comparison of the income tax rate between past and present periods.

The following is a reconciliation of the net income tax provision (benefit) to the operational tax provision and rate:

INTEREST EXPENSE AND EQUITY EARNINGS, NET OF TAXES

Net corporate interest expense totaled $231 million in 2023 and $325 million in 2022. Net interest expense includes $3 million and $58 million of interest expense related to the timber monetization restructuring tax matter in 2023 and 2022, respectively. Net interest expense in 2023 also includes $6 million of interest income associated with the settlement of tax audits. The decrease in net interest expense in 2023 compared with 2022 was due to higher interest income.

Equity earnings, net of taxes were a loss of $21 million and a loss of $6 million in 2023 and 2022, respectively. Equity earnings in 2023 includes an $18 million other-than-temporary impairment of an equity method investment.

SPECIAL ITEMS

Pre-tax special items (excluding interest expense and equity earnings) included in continuing operations totaling $557 million and $175 million were recorded in 2023 and 2022, respectively. Details of these charges were as follows:

(a) Recorded in the Industrial Packaging business segment.

(b) Recorded in the Global Cellulose Fibers business segment.

(c) Recorded in the Industrial Packaging business segment for the impairment of goodwill in our EMEA Packaging business.

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 2023 and 2022, pre-tax restructuring and other charges, net, totaling $99 million and $89 million, respectively, were recorded. Details of these charges were as follows:

(a) Recorded in the Industrial Packaging business segment.

(b) Recorded in the Global Cellulose Fibers segment.

(c) Includes $8 million income recorded in the Industrial Packaging business segment and $3 million income recorded in the Global Cellulose Fibers business segment.