INTERNATIONAL PAPER CO /NEW/ (IP) FY 2022 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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of historical items in 2020, and

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year-to-year comparisons between 2021 and 2020, can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 18, 2022, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EXECUTIVE SUMMARY

Full-year 2022 net earnings attributable to shareholders were $1.5 billion ($4.10 per diluted share) compared with $1.8 billion ($4.47 per diluted share) for full-year 2021.

During 2022, International Paper grew revenue and earnings, driven by solid commercial and operational performance, while facing significant inflation and lower demand. Our businesses generated improved earnings as profit improvement initiatives and price realization offset significant inflationary cost headwinds. We continued to make solid progress in our Building a Better IP initiatives, delivering $250 million of earnings benefits through initiatives focused on lowering our cost structure and accelerating profitable growth. As a result, we exceeded our full-year target and have strong momentum going forward. We made strategic investments, primarily in our Industrial Packaging business, in support of profitable growth and will continue to make such investments to grow earnings and cash generation by building additional capabilities and capacity in our U.S. box system. We made significant progress toward achieving value-creating returns in our Global Cellulose Fibers business by delivering $100 million of earnings growth in 2022. The business expects to continue the earnings improvement in 2023. We generated full-year cash from operations of $2.2 billion and free cash flow of $1.2 billion. Our continued solid cash generation enabled us to return $1.93 billion to shareholders, including $1.26 billion in share repurchases and $673 million in dividend payments. Finally, we reached agreement to sell our 50% interest in Ilim SA to our joint venture partners for $484 million. Additionally, our partners have expressed interest in purchasing our shares in JSC Ilim Group for $24 million. Upon sale of our interests in the Ilim joint venture, which are subject to regulatory approval, we will no longer have investments in Russia.

Comparing our 2022 results to 2021, price and mix improved significantly for both the North American Industrial Packaging and Global Cellulose Fibers businesses, with strong price realization across all of our channels, along with the benefits of commercial initiatives. Volume was lower in our North American Industrial Packaging business following stronger packaging demand in 2021 as consumers had pulled forward purchases of goods during the pandemic. In

2022, demand was also negatively impacted as consumers shifted priorities toward both non-discretionary goods as well as services while dealing with inflation. Operating costs were negatively impacted by lower volumes in our North American Industrial Packaging business. High inflation on materials and services also negatively impacted operating costs in our North American Industrial Packaging and Global Cellulose Fibers businesses. Rising supply chain costs negatively impacted both businesses during 2022. Higher operating costs were partially offset by improved mill performance and reliability. Maintenance outage expense increased, as planned, impacted by high inflation on equipment, parts and contracted services. Input costs rose sharply across nearly all categories, with higher energy and fuel costs being the leading drivers. Corporate expenses were favorable driven by overhead streamlining initiatives.

Looking ahead to the first quarter 2023, as compared to the fourth quarter 2022, in our Industrial Packaging business, we expect price and mix to be lower based on prior price index movements and lower average export prices. Volume is expected to be higher in the first quarter 2023 due to four more shipping days in North America, partially offset by normal seasonal declines in North America. Operations and costs are expected to decrease earnings due to the non-repeat of favorable one-time items in the fourth quarter 2022, seasonally higher energy consumption and additional inflation on materials and services. 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 2023. Input costs are expected to improve on lower average costs for energy, fuel and fiber. In our Global Cellulose Fibers business, we expect price and mix to improve. We expect volume to decrease due to seasonally lower demand and customer inventory destocking in response to increased supply chain velocity. Operations and costs are expected to increase on the non-repeat of a favorable one-time items in the fourth quarter 2022. Operations and costs will also be impacted by higher unabsorbed fixed costs due to lower volumes, seasonally higher energy consumption and additional inflation on materials and services. Maintenance outage expense is expected to increase as the first quarter 2023 will also be Global Cellulose Fibers highest maintenance outage quarter in 2023. Input costs are expected to decrease driven by lower energy and fiber.

Looking to full-year 2023, we believe we have significant opportunities to reduce high marginal costs across our system and capture further benefits from our Building a Better IP initiatives. The Building a Better IP initiatives are focused on continuing to

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invest in projects to drive structural cost reduction through efficiency improvements and accelerating profitable growth. We expect continued momentum from these initiatives as we move into 2023 including meaningful earnings growth in our Global Cellulose Fibers business as a result of our commercial strategy execution. We expect cash from operations ranging from $1.9 billion to $2.3 billion with free cash flow of $0.9 billion to $1.1 billion. Included in both ranges is approximately $190 million for the tax settlement payment related to our timber monetization transaction. With respect to our capital allocation framework, we are targeting capital expenditures of $1.0 billion to $1.2 billion with increased investments in our US box system to build additional capabilities and support profitable growth with our customers. As previously mentioned, we returned approximately $1.9 billion of cash to shareowners in 2022. In October 2022, our board of directors authorized an additional $1.5 billion of share repurchases with a total current authorization of approximately $3.2 billion. Going forward, we are committed to returning cash through maintaining our dividend and through opportunistic share repurchases.

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 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:

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Cash provided by operations, including discontinued operations, totaled $2.2 billion and $2.0 billion for 2022 and 2021, respectively. The Company generated free cash flow of approximately $1.2 billion in 2022 and $1.5 billion in 2021. 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 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.

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Business Segment Operating Profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of less than wholly owned subsidiaries, 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. The Company recently announced an agreement to sell 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. 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 2022 was $213 million higher than in 2021 as the benefits from higher average sales price realizations net of an unfavorable mix ($2.2 billion) were partially offset by lower sales volumes ($160 million), higher operating costs ($657 million), higher input costs ($1.1 billion) and higher maintenance outage costs ($70 million).

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

•Industrial Packaging’s operating profit of $1.7 billion was $104 million higher than in 2021 as the benefits of higher average sales price net of an unfavorable mix were partially offset by lower sales volumes, higher operating costs, higher input costs and higher maintenance outage costs.

•Global Cellulose Fibers' operating profit (loss) improved $109 million to $106 million profit compared with 2021 as the benefits of higher average sales price, favorable mix and sales volumes were partially offset by higher operating costs, higher input costs and higher maintenance outage costs.

LIQUIDITY AND CAPITAL RESOURCES

Including discontinued operations, International Paper generated $2.2 billion of cash flow from operations for the year ended December 31, 2022, compared with $2.0 billion in 2021. Capital spending for 2022 totaled $931 million, or 90% of depreciation and amortization expense. Our liquidity position remains strong, supported by approximately $2.0 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

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December 31, 2022, and the major factors affecting these results compared to 2021.

For the year ended December 31, 2022, International Paper reported net sales of $21.2 billion, compared with $19.4 billion in 2021. International net sales (based on the location of the seller and including U.S. exports) totaled $5.9 billion or 28% of total sales in 2022. This compares with international net sales of $5.2 billion in 2021.

Full year 2022 net earnings attributable to International Paper Company totaled $1.5 billion ($4.10 per diluted share), compared with net earnings of $1.8 billion ($4.47 per diluted share) in 2021. Amounts in 2022 and 2021 include the results of discontinued operations.

Earnings from continuing operations attributable to International Paper Company after taxes in 2022 and 2021 were as follows:

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

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

Compared with 2021, the benefits from higher average sales price net of an unfavorable mix ($1.7 billion), lower corporate and other costs ($82 million) and lower net interest expense ($57 million) were partially offset by lower sales volumes ($129 million), higher operating costs ($530 million), higher input costs ($853 million), higher maintenance outage costs ($57 million) and higher tax expense ($79 million). In addition, 2022 results included lower equity earnings, net of taxes. Our Building a Better IP initiatives delivered $250 million of earnings in 2022 primarily though our lean effectiveness initiative which streamlined our corporate and staff functions and our strategy acceleration initiative to deliver profitable growth through commercial and investment excellence.

See Business Segment Results on pages 32 and 33 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

The Company recently announced it has reached an agreement to sell its equity investment in Ilim and has also received an indication of interest to purchase its

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equity investment in Ilim Group. All current and historical results of the Ilim investment are presented as Discontinued Operations, net of taxes in the consolidated statement of operations. This transaction is discussed further in Note 11 - Equity Method Investments on pages 66 through 68 of Item 8. Financial Statements and Supplementary Data for further discussion.

On October 1, 2021, the Company completed the 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 had a Printing Papers business segment and historical results reflect the Kwidzyn and the Printing Papers business and other businesses conveyed to Sylvamo Corporation as discontinued operations. See Note 8 - Divestitures on pages 62 through 64 of Item 8. Financial Statements and Supplementary Data for further discussion.

Discontinued operations include the equity and operating earnings of the businesses noted above. Discontinued operations also includes an after-tax net special items loss of $533 million in 2022 and gain of $330 million in 2021.

Details of these (gains) and losses were as follows:

INCOME TAXES

A net income tax benefit from continuing operations of $236 million was recorded for 2022, including 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 Corporation 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 a $48 million tax expense related to non-operating pension income, the operational tax provision (non-GAAP) was $378 million, or 24% of pre-tax earnings before equity earnings.

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 (non-GAAP) was $226 million, or 19% of pre-tax earnings before equity earnings.

The operational tax provision and rate are non-GAAP measures and are calculated by adjusting the income tax provision from continuing operations and rate to exclude net special items and non-operating pension expense (income). Management adjusts the income tax provision and rate to account for non-recurring, non-operational items as we believe it provides a more meaningful comparison of the income tax rate between past and present periods.

INTEREST EXPENSE, EQUITY EARNINGS, NET OF TAXES AND NONCONTROLLING INTEREST

Net corporate interest expense totaled $325 million in 2022 and $337 million in 2021. Net interest expense in 2022 includes $58 million of interest expense related to the timber monetization restructuring tax matter. The decrease in 2022 compared with 2021 was due to lower average outstanding debt.

Equity earnings, net of taxes were a loss of $6 million and income of $2 million in 2022 and 2021, respectively.

Net earnings attributable to noncontrolling interests were $2 million in 2021. There were no net earnings attributable to noncontrolling interests in 2022.

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SPECIAL ITEMS

Pre-tax special items (excluding interest expense) included in continuing operations totaling $175 million and $371 million were recorded in 2022 and 2021, respectively. Details of these charges were as follows:

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

Net (gains) losses on sales and impairments of businesses included in special items totaled a pre-tax loss of $76 million and gain of $7 million in 2022 and 2021, respectively. Details of these (gains) losses were as follows:

See Note 8 Divestitures on pages 62 through 64 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 2022 and 2021, pre-tax restructuring and other charges, net, totaling $89 million and $509 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.

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 176 North American corrugated packaging plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 16 U.S. 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.

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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.

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 2022 increased 7% to $17.5 billion compared with $16.3 billion in 2021. Operating profits in 2022 were 6% higher than in 2021. Comparing 2022 with 2021, benefits from higher average sales price net of an unfavorable mix ($1.6 billion) were offset by lower sales volumes ($168 million), higher operating costs ($400 million), higher input costs ($882 million) and higher maintenance outage costs ($59 million).

(a) Includes intra-segment sales of $132 million for 2022 and $126 million for 2021.

North American Industrial Packaging's average sales margins were higher reflecting higher prices for both containerboard and corrugated boxes. Sales volumes decreased in 2022 compared with 2021 for corrugated boxes across our segments driven by the macroeconomic environment reflecting lower consumer spending on goods and retailer inventory destocking. Containerboard sales volumes also decreased. Total maintenance and economic downtime was about 956,000 short tons higher in 2022 compared with 2021, primarily due to economic downtime. Operating and distribution costs increased, primarily due to inflation on materials and services and supply chain and labor constraints. Planned maintenance downtime costs were $58 million higher in 2022 than in 2021. Input costs were significantly higher, driven by higher energy, wood and chemical costs.

Looking ahead to the first quarter of 2023, compared with the fourth quarter of 2022, sales volumes for corrugated boxes and containerboard are expected to increase reflecting four additional shipping days partially offset by the normal season decline. Average sales margins are expected to be lower. Operating costs are expected to increase. Planned maintenance downtime costs are expected to be $95 million higher. Input costs are expected to be lower primarily for recovered fiber and energy.

EMEA Industrial Packaging's average sales margins were higher in the Eurozone driven by higher average sales price. Average sales margins in Morocco were lower reflecting the impact of an unfavorable product mix. Sales volumes in 2022 were lower than in 2021 driven by the sale of our EMEA Packaging business in Turkey in May 2021. Operating costs were higher driven by inflation on materials and services. Planned maintenance outage costs were higher in 2022 compared with 2021. Input costs were significantly higher, driven by unprecedented energy costs.

Entering the first quarter of 2023, compared with the fourth quarter of 2022, sales volumes are expected to be higher driven by seasonality in Morocco. Average sales margins are expected to be higher, reflecting lower containerboard costs. Operating costs are expected to be higher. Planned maintenance outage costs are expected to be $4 million lower due to no planned outages in the first quarter. Other input costs are expected to be stable.

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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 2022 increased 18% to $3.2 billion, compared with $2.7 billion in 2021. Operating profits in 2022 improved significantly compared to 2021. Comparing 2022 with 2021, benefits from higher average sales price, a favorable mix and sales volumes ($552 million) were partially offset by higher operating costs ($257 million), higher input costs ($175 million) and higher maintenance outage costs ($11 million).

Sales volumes in 2022 compared with 2021 were lower reflecting the challenging supply chain environment. Total maintenance and economic downtime was about 13,000 short tons higher in 2022 compared with 2021, primarily due to economic downtime. Average sales margins were higher, reflecting higher average fluff and market pulp prices. Operating costs increased, driven by inflation on materials and services and supply chain related mill slowbacks and downtime. Distribution costs were significantly higher driven by continuing global supply chain disruptions. Planned maintenance outage costs were $11 million higher in 2022. Input costs were significantly higher, driven by chemicals, wood and energy.

Entering the first quarter of 2023, compared with the fourth quarter of 2022, sales volumes are expected to be lower reflecting seasonally lower demand and customer inventory destocking in response to increased supply chain velocity. Average sales margins are expected to improve. Operating costs are expected to be higher. Planned maintenance outage costs are expected to be $13 million higher than in the fourth quarter of 2022. Input costs are expected to be lower, primarily for energy.

EQUITY EARNINGS, NET OF TAXES - ILIM

On January 24, 2023, the Company announced it had reached an agreement to sell its equity investment in Ilim and also received from the same purchasers an

indication of interest to purchase its equity investment in Ilim Group. This transaction is discussed further in Note 11 - Equity Method Investments on pages 66 through 68 of Item 8. Financial Statements and Supplementary Data.

All current and historical results of the Ilim investment are presented as Discontinued Operations, net of taxes in the consolidated statement of operations. The Company recorded equity earnings, net of taxes, related to Ilim of $296 million in 2022, compared with earnings of $311 million in 2021.

Higher sales volumes and better sales margins in 2022 were more than offset by higher input costs, shipping costs and repair expenses. Sales volumes for the joint venture increased by 5% in 2022, primarily for softwood pulp and containerboard shipments to China, partially offset by lower shipments of softwood pulp and containerboard to other export markets. Average sales margins were significantly higher for sales of softwood pulp and hardwood pulp reflecting higher average sales prices in all markets. Average sales margins for shipments of containerboard declined reflecting lower average sales prices in all markets. Input costs were higher, primarily for wood, fuel and chemicals. Distribution costs were negatively impacted by higher transportation tariffs and other inflationary pressures. Maintenance and repair expenses were higher due in part to repairs to recovery boiler No. 2 at the Ust-Ilimsk mill in the fourth quarter of 2022. The Company received cash dividends from the joint venture of $204 million in 2022 and $154 million in 2021.

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 2022 was primarily focused on working capital requirements, capital spending and returning cash to shareholders through dividends and share repurchases under the Company's share repurchase program.

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CASH PROVIDED BY OPERATING ACTIVITIES

Cash provided by operations, including discontinued operations, totaled $2.2 billion in 2022, compared with $2.0 billion for 2021. Cash used by working capital components (accounts receivable, contract assets and inventory less accounts payable and accrued liabilities, interest payable and other) totaled $145 million in 2022, compared with cash used by working capital components of $426 million in 2021. Cash dividends received from equity investments were $204 million in 2022, compared with $159 million in 2021.

INVESTMENT ACTIVITIES

Including discontinued operations, investment activities in 2022 decreased from 2021, 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 and proceeds of $4.85 billion from the settlement of the 2015 Financing Entities Timber Notes (see Note 15 Variable Interest Entities on pages 75 and 76 of Item 8. Financial Statements and Supplementary Data). Capital spending was $931 million in 2022, or 90% of depreciation and amortization, compared with $549 million in 2021, or 45% of depreciation and amortization. Capital spending as a percentage of depreciation and amortization was 56% for Global Cellulose Fibers and 97% for Industrial Packaging in 2022.

The following table shows capital spending by business segment for the years ended December 31, 2022 and 2021, excluding amounts related to discontinued operations of $69 million in 2021:

Capital spending in 2023 is expected to be approximately $1.0 billion to $1.2 billion, or 91% to 109% of depreciation and amortization.

Acquisitions

See Note 7 Acquisitions on page 62 of Item 8. Financial Statements and Supplementary Data for a discussion of the Company's acquisitions.

FINANCING ACTIVITIES

Financing activities during 2022 included debt issuances of $1.0 billion and reductions of $1.0 billion. Including discontinued operations, financing activities during 2021 included debt issuances of $1.5 billion and reductions of $2.5 billion for a net decrease of $1.0 billion.

Amounts related to early debt extinguishment during the years ended December 31, 2022 and 2021 were as follows:

(a)Reductions related to notes with interest rates ranging from 3.00% to 8.70% with original maturities from 2023 to 2048 for the years ended December 31, 2022 and 2021.

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

The Company's early debt reductions in 2022 included debt tenders of $498 million with interest rates ranging from 6.40% to 8.70% and maturity dates ranging from 2023 to 2039. In addition, during 2022, the Company had $5 million in open market repurchases related to debt with interest rates ranging from 4.35% to 4.40% and maturity dates ranging from 2047 to 2048. In addition to the early debt reductions, the Company had debt reductions of $514 million in 2022 related primarily to capital leases, debt maturities, and international debt.

In January 2023, the Company entered into a variable term loan agreement providing for a $600 million term loan which was fully drawn on the date of such loan agreement and matures in 2028. The $600 million debt was issued following the repayment of $410 million of commercial paper earlier in 2023 and will also be used to repay debt maturing later in 2023 and general corporate purposes.

Other financing activities during 2022 included the net issuance of approximately 1.6 million shares of treasury stock. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.3 billion, including $1.3 billion related to shares repurchased under the Company's share repurchase program. The Company has repurchased 114.4 million shares at an average price of $46.66, for a total of approximately $5.3 billion, since the repurchase program began in September 2013 through December 31, 2022. The Company paid cash dividends totaling $673 million during 2022.

Other financing activities during 2021 included the net issuance of approximately 1.9 million shares of

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treasury stock. Repurchases of common stock and payments of restricted stock withholding taxes totaled $838 million, including $810.9 million related to shares repurchased under the Company's share repurchase program. The Company paid cash dividends totaling $780 million during 2021.

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, 2022 and 2021 (see Note 17 Derivatives and Hedging Activities on pages 78 through 81 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 75 and 76 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. On September 2, 2022, the Company and the Internal Revenue Service agreed to settle the previously disclosed timber monetization restructuring tax matter. Under this agreement, the Company will fully resolve the matter and pay $252 million in U.S. federal income taxes. As a result, interest will also be charged upon closing of the audit. The amount of interest expense recognized through December 31, 2022 is $58 million. As of December 31, 2022, $89 million in U.S.

federal income taxes and $28 million in interest expense have been paid as a result of the settlement agreement. The remaining $163 million U.S. federal income tax liability and $30 million accrued interest liability are recorded as current liabilities in the balance sheet. The reversal of the Company’s remaining deferred tax liability associated with the 2015 Financing Entities of $604 million was recognized as a one-time tax benefit in the third quarter of 2022.

LIQUIDITY AND CAPITAL RESOURCES OUTLOOK FOR 2023

We expect another year of solid cash generation in 2023. 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 businesses.

On October 11, 2022, our Board of Directors approved an additional $1.5 billion under our share repurchase program. This program does not have an expiration date and has approximately $3.2 billion aggregate amount of shares of common stock remaining authorized for purchase as of December 31, 2022. 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, 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.

Capital Expenditures and Long-Term Debt

Capital spending for 2023 is planned at approximately $1.0 billion to $1.2 billion, or about 91% to 109% of depreciation and amortization.

At December 31, 2022, International Paper’s credit agreements totaled $2.0 billion, which is comprised of the $1.5 billion contractually committed bank credit agreement and up to $500 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,

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2022, the Company had no borrowings outstanding under the $1.5 billion credit agreement or the $500 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 76 through 78 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, 2022 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.

Under the terms of the Company's commercial paper 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. As of December 31, 2022, the Company had $410 million outstanding under the program with remaining capacity of $590 million. As of December 31, 2022, the remaining credit agreement capacity was $1.1 billion.

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 through open market purchases, privately negotiated transactions or otherwise) 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 was paid in 2022. We believe that our credit agreements and commercial paper program provide us with sufficient liquidity to operate in the current negative macroeconomic 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, 2022, 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, 2022, were as follows:

(a)Includes financing lease obligations.

(b)Includes $4.0 billion relating to fiber supply agreements.

(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 $169 million. Also not included in the above table is $95 million of Deemed Repatriation Transition Tax associated with the 2017 Tax Cuts and Jobs Act which will be settled from 2023 - 2026. Additionally, the deferred tax liability of $485 million related to the Temple-Inland timber monetization is not included in the table above. It will be settled with the maturity of the notes in 2027.

We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2022, to be permanently reinvested and, accordingly, no U.S. income taxes have been provided thereon (see Note 13 Income Taxes on pages 69 through 71 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, 2022, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $29 million lower than the fair value of plan assets, excluding non-U.S. plans. Approximately $297 million of this amount relates to plans that are subject to minimum funding requirements. Under current IRS funding rules, the calculation of minimum

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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 2020, 2021 or 2022. At this time, we do not expect to have any required contributions to our plans in 2023, 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.

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.

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. The Company estimated the probable liability associated with these environmental matters to be approximately $243 million ($251 million undiscounted) in the aggregate as of December 31, 2022 and $182 million ($191 million undiscounted) in the aggregate as of December 31, 2021. Liabilities for asbestos-related matters require reviews of recent and historical claims data. The Company's total recorded liability with respect to pending and future asbestos-related claims was $105 million and $103 million, net of estimated insurance recoveries, as of December 31, 2022 and 2021, respectively. The Company utilizes its in-house legal counsel 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. The Company's total recorded workers' compensation reserve was $136 million and $159 million as of December 31, 2022 and 2021, respectively. 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.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable. A recoverability test is performed by comparing the undiscounted cash flows to carrying value of the assets. If the carrying amount is less than the undiscounted cash flows, the fair value of the assets is compared to the carrying value to determine if they are impaired. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value.

We perform an annual goodwill impairment as of October 1. Additionally, interim assessments of possible impairments of goodwill are also made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value.

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The amount and timing of goodwill and long-lived asset impairment charges based on these assessments requires 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.

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, 2022.

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. Our most recent quantitative goodwill impairment test for our NA IPG reporting unit was performed as part of our 2020 annual goodwill impairment test. That quantitative goodwill impairment test indicated that the fair value of the NA IPG reporting unit exceeded the carrying amount by approximately 100%.

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 estimated fair value of the reporting unit was calculated using a weighted approach based on 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 quantitative goodwill impairment test indicated that the carrying amount exceeded the estimated fair value of the EMEA Industrial Packaging reporting unit and it was determined that all of the goodwill in the reporting unit, totaling $76 million, was impaired. The decline in the fair value of EMEA Industrial Packaging and resulting impairment charge was due to the impacts of certain macroeconomic conditions, including the impacts from inflation and the geopolitical environment to the reporting unit.

Due to the macroeconomic factors noted above, we also performed the long-lived asset impairment test for asset groups that represent the EMEA Industrial Packaging reporting unit prior to the goodwill impairment test and the respective assets groups were determined not to be impaired.

OTHER-THAN-TEMPORARY IMPAIRMENT

The Company evaluates our investment in the Ilim joint venture for other-than-temporary impairment (OTTI) when circumstances indicate the investment may be impaired. When a decline in fair value is deemed to be an OTTI, an impairment is recognized to the extent that the fair value is less than the carrying value of the investment. We consider various factors in determining whether a loss in value of an investment is other than temporary including: the length of time and the extent to which the fair value has been below cost, the financial condition of Ilim joint venture, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value is other than temporary, expectations about operations, as well as industry, financial, regulatory and market factors. During the fourth quarter of 2022, the Company received a binding third-party offer to purchase our interest in the Ilim joint venture which was then submitted to our joint venture partners under the preemption provisions of the Ilim shareholders' agreement. The third-party offer resulted in an implied fair value that was less than our investment carrying value. This decrease in fair value below carrying value was not considered to be a temporary decline in value. As such, the Company recorded a $533 million impairment in the fourth quarter of 2022 based on the agreed selling price for our 50% interest. The impairment charge included recognition of $375 million of foreign currency cumulative translation adjustment loss. The timing by which the sale of our investment will be completed is dependent on obtaining required regulatory approvals. In the meantime, we could recognize additional OTTI charges as the carrying value of our investment

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fluctuates relative to the approximate $500 million implied fair value, through additional equity earnings and foreign currency translation.

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.

Benefit obligations and fair values of plan assets as of December 31, 2022, 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, 2022 was 6.00%.

Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2023 pension expense by approximately $20 million, while a (decrease)

increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $15 million.

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

The 2013 and 2014 returns above represent weighted averages of International Paper and Temple-Inland asset returns. International Paper and Temple-Inland assets were combined in October 2014. The annualized time-weighted rate of return earned on U.S. pension plan assets was 4.7% and 7.1% 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 increase in 2022 pension income primarily reflects lower service cost, lower actuarial loss, and lower asset returns, slightly offset by higher interest 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, 2022, projected future net periodic pension plan expense (income) would be as follows:

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The Company estimates that it will record net pension expense of approximately $102 million for its U.S. defined benefit plans in 2023, compared to income of $116 million in 2022.

The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2022 totaled approximately $8.8 billion, consisting of approximately 16% equity securities, 67% debt securities, 9% real estate funds and 8% 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 2022. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $29 million for the year ended December 31, 2022.

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. Accrued interest related to these uncertain tax positions is recorded in our consolidated statement of operations in Interest expense, net.

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 assessing the need for and magnitude of appropriate valuation allowances against deferred tax

assets. This assessment is completed by tax jurisdiction and relies on both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. The Company's valuation allowance was $677 million and $708 million at December 31, 2022 and 2021, respectively.

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.

LEGAL PROCEEDINGS

Information concerning the Company’s environmental and other legal proceedings is set forth in Note 14 Commitments and Contingent Liabilities on pages 71 through 75 of Item  8. Financial Statements and Supplementary Data. The Company is not subject to any administrative or judicial proceeding arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that is likely to result in monetary sanctions of $1 million or more.

RECENT ACCOUNTING DEVELOPMENTS

See Note 2 Recent Accounting Developments on page 57 of Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.

EFFECT OF INFLATION

Inflationary increases in certain input costs, such as energy, wood, recycled fiber, freight and chemical costs, had an adverse impact on the Company’s operating results in 2021 and 2022, but had a minimal impact in 2020. We expect that inflationary pressures will continue to adversely impact our operating results

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in 2023. The effects of inflation have been more significant in recent years due to general inflationary conditions, including labor market conditions, economic activity, consumer behavior, supply shortages and disruptions. 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 76 through 78 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 78 through 81 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, 2022 and 2021 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, 2022 and 2021, the fair value of the net liability of financial instruments with exposure to interest rate risk was approximately $4.3 billion and $6.7 billion, respectively. The potential increase in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $328 million and $304 million at December 31, 2022 and 2021, 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, 2022 and 2021, the net fair value of these contracts was $20 million asset and $10 million asset. The potential loss in fair value from a 10% adverse change in quoted commodity prices for these contracts would have been approximately $3 million and $2 million at December 31, 2022 and 2021, respectively.

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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, 2022 and 2021, 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.