Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 11-K
 
 
FOR ANNUAL REPORTS OF EMPLOYEE STOCK
PURCHASE, SAVINGS AND SIMILAR PLANS
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One):
ý
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-3157
 
 
INTERNATIONAL PAPER COMPANY
HOURLY SAVINGS PLAN
(Full title of the plan)
INTERNATIONAL PAPER COMPANY
6400 Poplar Avenue
Memphis, TN 38197
Telephone: (901) 419-9000
(Name of issuer of the securities held pursuant to the plan and
the address of its principal executive office)
INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN




TABLE OF CONTENTS
 
 
Page
 
 
 
 
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016:
 
 
 
 
 
 
 
 
 
 
 
 
NOTE:
All other schedules required by 29 CFR 2520.103-10 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 have been omitted because they are not applicable.
EXHIBIT 
23
  





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Plan Participants and Plan Administrator of
International Paper Company Hourly Savings Plan
Memphis, Tennessee

Opinion on the Financial Statements
We have audited the accompanying statements of net assets available for benefits of the International Paper Company Hourly Savings Plan (the “Plan”) as of December 31, 2017 and 2016, the related statements of changes in net assets available for benefits for the year ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2017 and 2016, and the changes in net assets available for benefits for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Plan in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Report on Supplemental Schedules
The supplemental schedule listed in the Table of Contents has been subjected to audit procedures performed in conjunction with the audit of the Plan's financial statements. The supplemental schedule is the responsibility of the Plan's management. Our audit procedures included determining whether the supplemental schedule reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedule. In forming our opinion on the supplemental schedule, we evaluated whether the supplemental schedule, including its form and content, is presented in compliance with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion, such schedule is fairly stated, in all material respects, in relation to the financial statements as a whole.

/s/ Deloitte & Touche LLP

Memphis, Tennessee
June 29, 2018

We have served as the Plan’s auditor since 2001.


1



INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31,
2017 AND 2016
(Amounts in thousands)
 
 
 
2017
 
2016
ASSETS:
 
 
 
 
Investments, at fair value (Note 4)
 
 
 
 
    Plan interest in Master Trust — Participant-directed investments
 
$
1,067,098

 
$
877,543

    Self-directed brokerage accounts— Participant-directed investments
 
18,533

 
16,570

Investments, at contract value (Note 5)
 
 
 
 
    Plan interest in Master Trust — Fully benefit-responsive investment contracts
 
431,944

 
462,829

Total investments
 
1,517,575

 
1,356,942

Receivables:
 
 
 
 
Notes receivable from participant loans
 
88,220

 
87,189

Participants’ contributions
 
1,283

 
1,169

Employer’s contributions
 
569

 
470

Total receivables
 
90,072

 
88,828

LIABILITIES:
 

 

Accrued expenses
 
217

 
236

Total liabilities
 
217

 
236

NET ASSETS AVAILABLE FOR BENEFITS
 
$
1,607,430

 
$
1,445,534

See notes to financial statements.


2



INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED DECEMBER 31,
2017 AND 2016
(Amounts in thousands)
 
 
 
2017
 
2016
ADDITIONS:
 
 
 
 
Contributions:
 
 
 
 
Participants’ contributions
 
$
95,585

 
$
92,065

Employer’s contributions
 
31,406

 
29,421

Total contributions
 
126,991

 
121,486

Investment (loss) income — Plan interest in Master Trust
 
 
 
 
Net appreciation (depreciation)
 
154,799

 
81,611

Interest
 
13,261

 
11,870

Dividends
 
6,771

 
6,705

Investment income (loss) — Plan interest in Master Trust
 
174,831

 
100,186

Investment income (loss) — Self-directed brokerage accounts
 
2,381

 
1,332

Total investment income (loss)
 
177,212

 
101,518

Interest income on notes receivable from participants
 
3,964

 
3,653

Total additions
 
308,167

 
226,657

DEDUCTIONS:
 
 
 
 
Benefits paid to participants
 
130,074

 
129,189

Net transfers to other plans (Note 8)
 
15,306

 
11,887

Administrative expenses
 
891

 
1,434

Total deductions
 
146,271

 
142,510

NET INCREASE (DECREASE)
 
161,896

 
84,147

NET ASSETS AVAILABLE FOR BENEFITS:
 
 
 
 
Beginning of year
 
1,445,534

 
1,361,387

End of year
 
$
1,607,430

 
$
1,445,534

See notes to financial statements.


3



INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,
2017 AND 2016
 
NOTE 1 - DESCRIPTION OF THE PLAN
The following description of the International Paper Company Hourly Savings Plan (the “Plan”) provides only general information about the provisions of the Plan. Participants should refer to the Plan document or the Plan’s summary plan description for a more complete description of the Plan’s provisions.
General—The Plan is a defined contribution plan providing retirement benefits to certain designated groups of hourly-paid employees of International Paper Company and its subsidiaries (the “Company”) who work in the United States, or who are United States citizens or residents working outside the United States. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
The assets of the Plan are held by State Street Bank and Trust Company (the “Trustee” or “State Street”) in the International Paper Company Defined Contribution Plans Master Trust (the “Master Trust”), a master trust established by the Company and administered by the Trustee. Self-directed brokerage accounts and participant loans are not assets of the Master Trust but are a part of the Net Assets Available for Benefits and are also held by State Street.
Empower Retirement (the “Recordkeeper”) is the recordkeeper for the Plan. Empower Retirement is a division of Great-West Life & Annuity Insurance Company ("Great-West").
Eligibility to Participate—An employee is generally eligible to participate in the Plan on the first of the month following the completion of one month of continuous service if the employee is an hourly employee at a designated location and is employed on a non-temporary basis. Participation in the Plan is voluntary. New employees are automatically enrolled in the Plan 45 days from the date they become eligible to participate, unless they otherwise decline participation.
Participant Contributions—Participant contributions may be made as before-tax, after-tax or Roth 401(k) contributions, or in any combination, and are subject to certain Internal Revenue Code (the “Code”) limitations. The maximum rate of participant contributions is 85% of annual compensation as defined by the Plan. Employees who are automatically enrolled contribute at the rate of 6% at paper mills and 4% of compensation for all others, unless they elect an alternate contribution percentage.
Company Matching Contributions—Generally the Company matches 50% of participants’ contributions up to either 4%, 5% or 6% of a participant’s annual compensation, subject to certain limitations. Company matching contributions are made in cash.
Retirement Savings Account— The Company makes a Retirement Savings Account (“RSA”) contribution based on compensation for employees at designated locations.
Rollover Contributions—The Plan is authorized to accept rollover contributions and direct trust-to-trust transfers of amounts which participants are entitled to receive from other qualified profit-sharing, stock bonus, and savings plans or traditional individual retirement accounts.
Investments—Participants direct the investment of all contributions into various investment options offered by the Plan. The Plan currently offers several diversified portfolios and pooled funds, a fixed income option referred to as the Stable Value Fund, an open brokerage window, and the Company’s common stock as investment options for participants. Company matching contributions are invested in accordance with the participant’s investment direction applicable to participant contributions. Contributions of participants who are automatically enrolled and the Company matching contributions are invested in the Tier 1 Smartmix Moderate Fund unless the participant makes alternate investment elections.
ESOP Portion of the Plan—The Company Stock Fund, excluding contributions made in the current Plan year, is designated as an employee stock ownership plan (“ESOP”). With respect to dividends paid on shares of Company stock held in the ESOP portion of the Plan, participants are permitted to elect to receive cash payouts of the dividends or to leave the dividends in the Plan to be reinvested in shares of Company stock. Each participant has the right to direct the manner in which whole shares of the Company stock held in the Company Stock Fund attributable to his account at valuation date will be voted at stockholders' meetings. Directions are given to the Trustee and are held in the strictest confidence and not divulged or released to any person, including officers or employees of the Company. An independent fiduciary appointed by the Company votes in person or by proxy any shares of Company stock for which voting instructions have not been received by the deadline set forth in the Company's written proxy mailed to participants.
Participant Accounts—Individual accounts are maintained for each Plan participant. Each participant’s account is credited with the participant’s contributions, the Company matching contributions, RSA contributions, and an allocation of Plan earnings, and is charged with benefit distributions, if applicable, and allocations of Plan losses and administrative expenses. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

4



Vesting—Participants are immediately vested in their participant contributions and rollover contributions, plus earnings thereon. Participants become 100% vested in Company matching contributions, RSA contributions, plus earnings thereon, after three years of service.
Participants also are fully vested in amounts contributed by the Company, plus earnings thereon, upon attainment of age 65, termination of employment due to death or disability, or termination of employment due to permanent closure or sale of an employee’s work facility. Forfeited balances of terminated participants are used to reduce future Company contributions.
Notes Receivable from Participants—Participants, including participants who are no longer employed by the Company, may borrow from their accounts an amount not to exceed (on a cumulative outstanding basis) the lesser of (1) 50% of the value of a participant’s contributions, rollover accounts, and the vested portion of a participant’s Company contributions account, less any restricted portions of such accounts, or (2) $50,000 reduced by the excess of the participant’s largest outstanding balance of all loans during the 12 months preceding the date the loan is to be made over the outstanding balance of loans on the date such loan is made.
Loans are repaid through payroll deduction, beginning as soon as administratively practicable after the effective date of the loan, with a minimum loan period of one year. Participants may make payments directly to the Plan if they are on leave of absence without pay. Participants may also pay remaining balances in lump sum directly to the Plan. The maximum repayment period is five years, unless for the purchase of a principal residence, in which case the maximum repayment period is 10 years. It is permissible to have two loans outstanding at any one time, but only one principal residence loan is allowed at a time. The interest rate is determined by the Plan administrator based on the prime interest rate as published in The Wall Street Journal plus 1%. Interest rates on loans outstanding ranged from 4.25% to 10.50% at December 31, 2017 and 2016. For participants who are no longer employed by the Company, loans are repaid by direct payments to the Plan.
A loan initiation fee of $50 is charged to the participant’s account for each new loan requested.
Withdrawals—A participant may make a general withdrawal in the following order: (1) the value of the after-tax contributions made before the preceding 24-month period and the unmatched after-tax contributions made within the preceding 24-month period with no suspension penalty or contribution suspension; (2) the value of the matched after-tax contributions made during the preceding 24 months with a 3-month suspension penalty period during which no Company matching contributions are made; (3) the value of any rollover account; and (4) the value of certain prior Company matching contributions as detailed in the appendix to the Plan document.
If the total amount available to a participant for a general withdrawal is insufficient to meet his financial needs, a participant who has not attained age 59-1/2 may apply for a hardship withdrawal of vested Company matching contributions and earnings thereon, before-tax contributions and pre-1989 earnings on before-tax contributions.
To demonstrate the necessity for a hardship withdrawal, a participant’s contributions to the Plan are suspended for six months. As an alternative method of demonstrating necessity, a participant may file a certification of financial hardship.
Participants who have attained age 59-1/2 may withdraw the value of before-tax contributions and the value of vested Company matching contributions, in addition to all amounts available under a general withdrawal.
Payment of Benefits—Distributions may be made when a participant retires, terminates employment, or dies. With the exception of the Company Stock Fund, distributions are in cash for the value of the participant’s account. Distributions from the Company Stock Fund are made in shares of Company common stock, in cash, or in a combination of shares and cash, as selected by the participant.
Upon termination of employment, a participant may elect a distribution in a lump-sum payment, partial lump-sum payment or through installments over 5 to 20 years. Beginning January 1, 2011, the maximum installment period for new elections is limited to the maximum life expectancy of the participant or the joint life expectancy of the participant and their beneficiary.
The Plan requires an automatic lump-sum distribution to a terminated participant whose account balance is $5,000 or less. An automatic lump-sum distribution in excess of $1,000 is automatically distributed to a rollover Individual Retirement Account (IRA) unless the participant timely elects another form of distribution.
Death benefits to a beneficiary are paid in either a lump-sum payment within five years of the participant’s death or in installment payments commencing within one year of the participant’s death, as elected by the beneficiary. If the beneficiary is the participant’s spouse, the beneficiary may elect to defer the distribution to the date the participant would have been age 70-1/2.
Some participants that have become participants in the Plan due to plan mergers have benefits differing from the general provisions of the Plan. The appendix to the Plan’s summary plan description explains these benefits in detail by location. These participants are often allowed to continue certain benefits offered in their previous plans. The contributions available for such withdrawals are only those contributions made under their previous plans and not the contributions or earnings thereon made under the Plan’s provisions.

5



Administrative Expenses—All administrative fees and expenses (except loan, self-directed brokerage account and Qualified Domestic Relations Order "QDRO" initiation fees which are charged to individual participant accounts) are charged to the Plan. The Recordkeeper nets the Master Trust administrative expenses of each plan with the investment income or loss of the Master Trust. Plan level expenses are included in administrative expenses in the accompanying statements of changes in net assets available for benefits.
Forfeited Accounts—When certain terminations of participation in the Plan occur, the non-vested portion of the participant's account as defined by the Plan, represents a forfeiture. The plan document permits the use of forfeitures to reduce future employer contributions for the plan year. However, if a participant is reemployed and fulfills certain requirements, as defined in the plan document, the account will be reinstated. On December 31, 2017 and 2016, forfeited non-vested accounts were valued at approximately $36,300 and $3,500, respectively. During the years ended December 31, 2017 and 2016, employer contributions were reduced by approximately $1,558,800 and $1,062,100, respectively, from forfeited non-vested accounts.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting—The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates—The preparation of financial statements in conformity with GAAP requires Plan management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Investment Valuation and Income Recognition—The Plan’s investments are stated at fair value, except for fully benefit-responsive contracts or synthetic guaranteed investment contracts, which are reported at contract value. Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Contract value is the amount Plan participants would receive if they were to initiate permitted transactions under the terms of the Plan (see Note 5). See Note 4 for discussion on fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan's gains and losses on investments bought and sold as well as held during the year.
Management fees and operating expenses charged to the Master Trust for investments in Master Trust investment accounts are deducted from income earned on a daily basis and are not separately reflected. Consequently, management fees and operating expenses are reflected as an adjustment to net appreciation (depreciation) in fair market value for such investments.
Risks and Uncertainties—The Plan utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements.
Notes Receivable from Participants—Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are recorded as distributions based on the terms of the Plan document.
Payment of Benefits—Benefit payments to participants are recorded upon distribution. There were no participants who elected a distribution from the Plan, but had not yet been paid at December 31, 2017.
Excess Contributions Payable—The Plan is required to return contributions to participants in the event certain nondiscrimination tests defined under the Code are not satisfied. For the years ended December 31, 2017 and 2016, the Plan passed the nondiscrimination tests, and no contributions were refundable.
Derivatives—Investments include various derivative instruments, such as swaps, options, forwards and futures, that are employed as asset class substitutes, or for bona fide hedging or other appropriate risk management purposes, to achieve investment objectives in an efficient and cost-effective manner as follows:
Market Exposure — To gain exposure to a particular market or alter asset class exposures (e.g., tactical asset allocation) quickly and at low cost.
To alter the risk/return characteristics of certain investments. For example, in fixed income accounts, derivatives may be used to alter the duration of the investment portfolio. Investment managers are also permitted to use derivatives to enhance returns by selecting instruments that will perform better than underlying securities under certain scenarios.
Foreign Currency Exposure Management — Investment managers may use derivatives, such as currency forwards, in order to manage foreign currency exposures.

6



The extent to which investment managers are permitted to use derivatives (and the manner in which they are used) is specified within investment manager investment guidelines. Derivative exposure is monitored regularly to ensure that derivatives are used in a prudent and risk-controlled fashion.
Derivative instruments and hedging activities were immaterial for the years ended December 31, 2017 and 2016.
Securities Lending—The Master Trust has, via a Securities Lending Authorization Agreement with State Street, authorized State Street to lend its securities to broker-dealers and banks pursuant to a form of loan agreement.
During 2017 and 2016, State Street lent, on behalf of the Company, certain securities held by State Street as custodian and received cash, securities issued or guaranteed by the United States government, and irrevocable letters of credit as collateral. State Street did not have the ability to pledge or sell collateral securities absent a borrower default. Borrowers were required to deliver collateral for each loan equal to (i) in the case of loaned securities denominated in United States dollars or sovereign debt issued by foreign governments, 103% of the market value of the loaned securities during 2017, and 102% in 2016; and (ii) in the case of loaned securities not denominated in United States dollars or whose primary trading market was not located in the United States, 105% of the market value of the loaned securities during 2017 and 2016.
State Street has indemnified the Plan by agreeing to purchase replacement securities, or return the cash collateral in the event a borrower failed to return a loaned security or pay distributions thereon. There were no losses during 2017 or 2016 resulting from a default of the borrowers.
The cash collateral received on loans is invested, together with the cash collateral of other qualified tax-exempt plan lenders in a collective investment pool called the Quality D Short-Term Investment Fund. As of December 31, 2017, the Quality D Short-Term Investment Fund had an average duration of 153 days and an average weighted final maturity of 28 days. As of December 31, 2016, such investment pool had an average duration of 91 days and an average weighted final maturity of 31 days.
Recent Accounting Pronouncements—None.

NOTE 3 - MASTER TRUST

The majority of the Plan’s investment assets are held in a trust account by the Trustee and consist of an undivided interest in an investment account of the Master Trust. Use of the Master Trust permits the commingling of trust assets with the assets of other plans sponsored by the Company for investment and administrative purposes. Although assets of the plans are commingled in the Master Trust, the Recordkeeper maintains supporting records for the purpose of allocating the net gain or loss of the investment account to the participating plans. The net investment income or loss of the investment assets and administrative expenses are allocated by the Recordkeeper to each participating plan based on the relationship of the interest of each plan to the total of the interests of the participating plans.

The Master Trust is subject to master netting agreements, or netting arrangements, with certain counterparties. These agreements govern the terms of certain transactions, and reduce the counterparty risk associated with relevant transactions by specifying offsetting mechanisms and collateral posting arrangements at pre-arranged exposure levels. Since different types of transactions have different mechanics and are sometimes traded out of different legal entities of a particular counterparty organization, each type of transaction may be covered by a different master netting arrangement possibly resulting in the need for multiple agreements with a single counterparty. Master netting agreements are specific to each different asset type; therefore, they allow the Master Trust to net its total exposure to a specified counterparty and settle it through a single payment, in a single currency in the event of a default with respect to any and all the transactions governed under a single agreement with the counterparty. The total and net assets of the Master Trust at December 31, 2017 and 2016, are summarized as follows (in thousands): 

7



 
Master Trust Balances
 
Plan's interest in Master Trust Balances
 
Master Trust Balances
 
Plan's interest in Master Trust Balances
 
 
 
 
 
 
 
 
 
2017
 
2016
Master Trust net assets:
 
 
 
 
 
 
 
     Common stock of International Paper
$
434,092

 
$
86,015

 
$
411,442

 
$
84,395

     Equities - domestic
767,287

 
161,404

 
704,239

 
145,943

     Equities - international
341,616

 
71,862

 
202,577

 
41,981

     Corporate bonds
155,302

 
32,669

 
136,970

 
28,365

     Government securities
167,188


35,869


139,275

 
29,609

     Mortgage backed securities
20,458


4,303


22,307

 
4,623

     Other fixed income
1,624


342


12,131

 
2,514

     Derivatives
(40
)
 
(8
)
 
(354
)
 
(100
)
     Cash and cash equivalents
82,156

 
22,396

 
62,735

 
17,450

Collateral held under securities lending
97,323

 
26,277

 
194,374

 
52,481

     Common collective trusts
2,321,972

 
653,449

 
1,866,587

 
526,663

          Total investments at fair value
4,388,978

 
1,094,578

 
3,752,283

 
933,924

     Stable Value fund at contract value
1,302,557

 
431,944

 
1,405,574

 
462,829

               Total investments
5,691,535

 
1,526,522

 
5,157,857

 
1,396,753

Receivable for securities sold
103,161

 
27,854

 
35,056

 
9,465

Other receivables
30,984

 
15,022

 
15,573

 
4,205

Total receivables
134,145

 
42,876

 
50,629

 
13,670

Total Master Trust assets
5,825,680


1,569,398


5,208,486

 
1,410,423

Liability to return collateral held under securities lending agreements
97,323


26,277


194,374

 
52,481

Payable for securities purchased
145,789

 
39,363

 
55,831

 
15,074

Other payables
33,824

 
4,716

 
13,642

 
2,496

               Total liabilities
276,936

 
70,356

 
263,847

 
70,051

Total Master Trust net assets
$
5,548,744

 
$
1,499,042

 
$
4,944,639

 
$
1,340,372

Plan interest in the Master Trust as a percentage of total
27.0
%
 
 
 
27.1
%
 
 

The net investment income (loss) of the Master Trust for the years ended December 31, 2017 and 2016, is summarized below (in thousands): 
 
 
2017
 
2016
Master Trust investment income (loss)
 
 
 
 
Net appreciation (depreciation) of investments
 
$
615,141

 
$
343,852

Interest
 
47,366

 
40,610

Dividends
 
32,789

 
32,009

Total Master Trust investment income (loss)
 
$
695,296

 
$
416,471

Investment income (loss) — Plan interest in Master Trust
 
$
174,831

 
$
100,186








8



The securities on loan under lending agreements from the Master Trust as of December 31, 2017 and 2016, are summarized below (in thousands): 
Securities on loan
 
2017
 
2016
     Equities - domestic
 
$
71,563

 
$
153,536

     Equities - international
 
6,821

 
8,247

     Corporate bonds
 
10,825

 
15,263

     Government securities
 
5,493

 
12,191

     Total Securities on loan
 
$
94,702

 
$
189,237


NOTE 4 - FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures, provides a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as follows: Level 1, which refers to securities valued using unadjusted quoted prices from active markets for identical assets; Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available; and Level 3, which refers to securities valued based on significant unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth by level within the fair value hierarchy a summary of the Plan’s investments measured at fair value on a recurring basis at December 31, 2017 and 2016. The Plan’s policy is to recognize significant transfers between levels at the beginning of the reporting period.
Fair Value Measurements as of December 31, 2017 (in thousands) 
 
 
Active Markets
for Identical
Assets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Common stock of International Paper
 
$
86,015

 
$

 
$

 
$
86,015

Equities - domestic
 
161,378

 
26

 

 
161,404

Equities - international
 
71,546

 
312

 
4

 
71,862

Corporate bonds
 

 
32,656

 
13

 
32,669

Government securities
 

 
35,869

 

 
35,869

Mortgage backed securities
 

 
4,303

 

 
4,303

Other fixed income
 

 
336

 
6

 
342

Derivatives
 

 

 
(8
)
 
(8
)
Cash and cash equivalents
 
22,396

 

 

 
22,396

Securities lending collateral
 
 
 
 
 
 
 
 
Cash
 
14,352

 

 

 
14,352

Non-cash
 

 
11,925

 

 
11,925

Self-directed brokerage accounts
 
17,145

 
1,388

 

 
18,533

       Total assets in fair value hierarchy
 
$
372,832

 
$
86,815

 
$
15

 
$
459,662

Investments measured at net asset value (a)
 

 

 

 
653,449

Total investments at fair value
 
$
372,832

 
$
86,815

 
$
15

 
$
1,113,111

(a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.


9



Fair Value Measurements as of December 31, 2016 (in thousands) 
 
 
Active Markets
for Identical
Assets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Common stock of International Paper
 
$
84,395

 
$

 
$

 
$
84,395

Equities - domestic
 
145,943

 

 

 
145,943

Equities - international
 
41,844

 
134

 
3

 
41,981

Corporate bonds
 

 
28,406

 
(41
)
 
28,365

Government securities
 

 
29,609

 

 
29,609

Mortgage backed securities
 

 
4,621

 
2

 
4,623

Other fixed income
 

 
2,514

 

 
2,514

Derivatives
 

 
(91
)
 
(9
)
 
(100
)
Cash and cash equivalents
 
17,450

 

 

 
17,450

Securities lending collateral
 
 
 
 
 
 
 
 
Cash
 
14,706

 

 

 
14,706

Non-cash
 

 
37,775

 

 
37,775

Self-directed brokerage accounts
 
16,512

 
58

 

 
16,570

       Total assets in fair value hierarchy
 
$
320,850

 
$
103,026

 
$
(45
)
 
$
423,831

Investments measured at net asset value (a)
 

 

 

 
526,663

Total investments at fair value
 
$
320,850

 
$
103,026

 
$
(45
)
 
$
950,494

(a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
Transfers Between Levels—The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
We evaluate the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total net assets available for benefits. For the years ended, December 31, 2017 and 2016, there were no significant transfers between levels.
Changes to Fair Value of Level 3 Assets and Related Gains and Losses - During each of the years ended December 31, 2017 and 2016, the transfers into and out of Level 3 assets, along with realized and unrealized gains and losses, purchases and sales, were not material.
Asset Valuation Techniques—Valuation technologies maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation methodologies used for assets measured at fair value.
Equity securities, including the common stock of International Paper, consist primarily of publicly traded U.S. companies and international companies. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded.
Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held are deemed to be actively traded.
Cash equivalents held are primarily short-term money market commingled funds that are valued at cost plus accrued interest which approximates fair value.
Fixed income investments consist of mortgage-backed securities, corporate bonds and government securities. Mortgage backed security holdings consist primarily of agency-rated holdings. The fair value estimates for mortgage securities are calculated by third-party pricing sources chosen by the custodian’s price matrix. Corporate bonds are valued using either the yields currently available on comparable securities of issuers with similar credit ratings or using a discounted cash flows approach that utilizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Government securities are valued by third-party pricing sources.
Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. The net asset value as provided by the trustee, is used as a practical expedient to estimate fair value. The net asset value is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported

10



net asset value. Participant transactions (purchased and sales) may occur daily. Were the Plan to initiate a full redemption of the collective trust, the investment advisor reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner.
Self-directed brokerage accounts primarily consist of common stock that is valued on the basis of readily determinable market prices.  These accounts have also been invested in actively traded mutual fund vehicles which are valued at the daily closing price as reported by the fund.  Investments within the self-directed brokerage accounts are up to the discretion of participants within the fund.
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements— There were no Plan Level 3 significant unobservable inputs used in 2017 or 2016.
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient as of December 31, 2017 and 2016, respectively (in thousands). There are no participant redemption restrictions for these investments; the redemption notice period is applicable only to the Plan.
 
 
2017 Fair value
 
Unfunded commitments
 
Redemption frequency
 
Redemption notice period
Common collective funds
 
$
624,676

 
N/A
 
Daily - Monthly
 
1- 5 days
Real estate
 
28,773

 
N/A
 
Quarterly
 
30 days
Total
 
$
653,449

 
 
 
 
 
 

 
 
2016 Fair value
 
Unfunded commitments
 
Redemption frequency
 
Redemption notice period
Common collective funds
 
$
494,210

 
N/A
 
Daily - Monthly
 
1- 5 days
Real estate
 
32,453

 
N/A
 
Quarterly
 
30 days
Total
 
$
526,663

 
 
 
 
 
 

NOTE 5 - INVESTMENT CONTRACTS
The Plan, via the Master Trust, has entered into various benefit-responsive investment contracts (Stable Value Contracts) which are intended to help the Stable Value Fund Master Trust Investment Account (Stable Value Fund) maintain stable principal valuation in most circumstances. Stable Value Contracts are negotiated over-the-counter contracts issued specifically to the Stable Value Fund by banks, insurance companies, and other financial institutions, and typically require the Stable Value Fund to pay periodic fees to the contract’s issuer.
The Stable Value Fund is managed by Goldman Sachs and invests in Stable Value Contracts to help offset price fluctuations. The terms of each Stable Value Contract obligate the contract’s issuer to keep a separate record for the contract’s value, which under most circumstances approximates the value of invested principal plus accrued interest, adjusted for deposits, withdrawals and fees. Participants may ordinarily direct the distribution or transfer of all or a portion of their investment at contract value as reported to the Plan by the issuers.
Stable Value Contracts are classified as either traditional guaranteed investment contracts (“TGIC”) or synthetic guaranteed investment contracts (“SGIC”). A SGIC differs from a TGIC in that the Plan owns the assets underlying the investment of a SGIC, and the bank, insurance company, or other financial institution issues a contract, referred to as a “wrapper,” that maintains the contract value of the underlying investment for the duration of the SGIC. The following represents the disaggregation of contract value between types of investment contracts held by the Plan at December 31, 2017 and 2016.
 
 
2017
 
2016
Synthetic investment contracts
 
$
417,308

 
$
428,085

Traditional investment contracts
 
6,150

 
12,022

Short-term investment fund
 
8,486

 
22,722

Total
 
$
431,944

 
$
462,829

The Stable Value Fund’s Net Asset Value (NAV) is normally expected to be calculated using the contract value of the Stable Value Contracts, regardless of the fluctuations in the market value of the underlying fixed income portfolios, which is intended to allow the fund to maintain a stable NAV. The terms of each Stable Value Contract provide for certain qualified withdrawals

11



allowed under the Plan, such as exchanges, withdrawals, distributions and benefits to be paid at contract value, although terms vary from contract to contract and certain withdrawals may not be permitted at contract value.
Investing in the Stable Value Fund involves certain risks, however the Stable Value Fund may be subject to additional risks other than those described below. The value of the Stable Value Fund’s investments may fluctuate, sometimes rapidly or unpredictably, due to a number of factors including changes in interest rates or inflation, adverse economic conditions, reduced market liquidity, poor manager performance, or other factors affecting the securities markets. The creditworthiness of the contract issuer or guarantor of fixed income securities or Stable Value Contracts, may deteriorate, or the issuer may default or become unable or unwilling to make timely principal payments, interest payments, or to otherwise honor its obligations, which may impact the Stable Value Fund’s performance or cause a reduction in the Stable Value Fund’s NAV.
There are certain risks associated with investing in Stable Value Contracts. Stable Value Contracts contain terms including events of default and termination provisions, which if triggered could obligate the Stable Value Fund’s managers to alter their investment strategy and wind down the contracts over a period of several years, or could potentially cause loss of coverage under the Stable Value Contract(s). Certain events or conditions, including but not limited to, changes to the Plan’s other investment funds, changes to the rules or administration of the Plan or Stable Value Fund, employer restructuring or layoffs, corporate mergers or divestitures, employer bankruptcy, partial or complete Plan termination, changes in law, accounting procedures or regulatory changes, may result in withdrawals from the Stable Value Contracts being made at market value instead of book value, which could result in a reduction of the Stable Value Fund’s NAV. The Trustee is responsible for determining the Stable Value Fund’s NAV and the amount of any participant’s redemption from the Stable Value Fund.

NOTE 6 - RELATED-PARTY TRANSACTIONS
Certain of the Master Trust’s investments are units of Master Trust Investment Accounts managed by the Trustee. State Street is the trustee, as defined by the Plan, and therefore, these transactions qualify as party-in-interest transactions. Fees paid by the Master Trust to the Trustee for trustee services were approximately $1.1 million for the years ended December 31, 2017 and 2016.
Also included in the Master Trust’s investments are shares of common stock of International Paper Company, the Plan’s sponsor, which qualify as party-in-interest transactions. At December 31, 2017 and 2016, the Plan held 6.5 million and 7.0 million units, respectively, of common stock of International Paper Company, the sponsoring employer, with a cost basis of $60.4 million and $62.3 million, respectively. The Plan recorded dividend income of $3.1 million and $3.7 million for the years ended December 31, 2017 and 2016, respectively.
Transactions with related parties were conducted on terms equivalent to those prevailing in an arm’s-length transaction.

NOTE 7 - INCOME TAX STATUS
The Internal Revenue Service (“IRS”) has determined and informed the Company, by a letter dated June 13, 2017, that the Plan and related trust were designed in accordance with the applicable requirements of the Code. The Company and the Plan administrator believe that the Plan, as amended from time to time subsequent to the receipt of the IRS determination letter, is currently designed and operated in compliance with the applicable requirements of the Code, and that the Plan and related trust continue to be tax-exempt. Therefore, no provision for income taxes has been included in the Plan’s financial statements.

GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2017, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or an asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to IRS examinations for years prior to 2013.

The DOL has advised the Company by letter dated March 13, 2018, that the Plan will be reviewed by the DOL to determine whether the Plan is conforming with the provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and any regulations or orders thereunder.
 
NOTE 8 - TRANSFERS (TO) FROM OTHER PLANS
The Company also sponsors the International Paper Company Salaried Savings Plan. If employees are transferred from hourly to salaried status or vice versa during the year, their account balances are transferred to the plan in which they are eligible to participate following transfer.

12



The following table summarizes the net transfers (to) from other plans during 2017 and 2016 (in thousands): 
 
 
2017
 
2016
International Paper Company Salaried Savings Plan—net transfers due to changes in employment status
 
$
(15,306
)
 
$
(11,887
)
Total net transfers (to) other plans
 
$
(15,306
)
 
$
(11,887
)
 
NOTE 9 - PLAN TERMINATION
Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event that the Plan is terminated, participants would become 100% vested in their accounts.

NOTE 10 - RECONCILIATION TO THE FORM 5500
For the years ended December 31, 2017 and 2016, the following is a reconciliation of participant-directed investments per the statements of net assets available for benefits to the Form 5500 (in thousands): 
 
 
2017
 
2016
Net assets available for benefits:
 
 
 
 
Total investments per the financial statements
 
$
1,517,575

 
$
1,356,942

Less self-directed brokerage accounts per the financial statements
 
(18,533
)
 
(16,570
)
Value of interest in Master Trust investment accounts per
Form 5500, Schedule H, Part I, Line 1c(11)
 
$
1,499,042

 
$
1,340,372




* * * * * *


13






SUPPLEMENTAL SCHEDULE



























14



INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN
EIN: 13-0872805; PLAN 118
FORM 5500, SCHEDULE H, PART IV, LINE 4i—SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2017
 
 
 
 
 
 
 
 
 
 
(a)
 
(b) Identity of Issue, Borrower,
Lessor or Similar Party
 
(c) Description of Investment, Including
Maturity Date, Rate of Interest,
Collateral, Par or Maturity Value
 
(d) Cost
 
(e) Current
Value
*
 
Various participants
 
Participant loans at interest rates of 4.25% to 10.50%, maturing through December 2027
 
**
 
$
88,219,829

*
 
Empower Retirement
 
Self-directed brokerage accounts - other assets
 
**
 
18,530,151

*
 
International Paper Company
 
Self-directed brokerage accounts - Common stock
 
**
 
2,897

 
*
Party-in-interest.
**
Cost information is not required for participant-directed investments and, therefore, is not included.


15



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the person who administers the Plan has duly caused this annual report to be signed by the undersigned thereunto duly authorized.
 
 
 
 
INTERNATIONAL PAPER COMPANY HOURLY SAVINGS PLAN
 
 
By:
 
/s/ Mark M. Azzarello
 
 
Mark M. Azzarello, Plan Administrator
 
Date:
June 29, 2018
Memphis, TN


16