STAMFORD, Conn., July 26 -- International Paper today reported second-quarter 2005 net earnings of $77 million ($0.16 per share), unchanged from $77 million ($0.16 per share) in the first quarter of 2005 and down from $193 million ($0.40 per share) in the 2004 second quarter, which included $131 million ($0.27 per share) of earnings from discontinued operations. Excluding these amounts, earnings from continuing operations totaled $62 million ($0.13 per share) in the second quarter 2004. Amounts included special items in all periods. Earnings from continuing operations and before special items in the second quarter of 2005 were $150 million ($0.31 per share), compared with $165 million ($0.34 per share) in the first-quarter of 2005 and $159 million ($0.33 per share) in the second quarter of 2004. Second-quarter 2005 net sales fell slightly to $6.5 billion versus $6.6 billion in the first quarter of 2005, due to lower volumes. Sales in the second quarter of 2004 were $6.2 billion. Operating profits of $501 million for the 2005 second quarter were lower compared with first-quarter 2005 operating profits of $551 million due to lower volumes in packaging and printing papers, higher input costs, and $31 million of organizational restructuring charges in the Printing Papers and Forest Products segments. "We anticipated some modest improvement in the second quarter following our strongest first quarter in years," said Chairman and Chief Executive Officer John Faraci. "However, while pricing was up slightly from the first quarter, sales volumes in our printing papers and industrial packaging businesses were lower than we expected. As a result, we took more lack-of- order downtime, including the indefinite shutdowns of uncoated printing papers machines in Jay, Maine, Pensacola, Fla., and Bastrop, La., bringing our total capacity closure through second quarter 2005 to 430,000 tons annually. These factors, combined with the higher input costs we've been experiencing for wood, chemicals and energy, impacted our margins." Commenting on the third quarter of 2005, Faraci said, "Demand looks mixed and overall pricing appears flat. Our raw material costs remain at high levels and continue to impact our profit margins. As we announced last week, we are implementing a transformation plan that will focus the company on two global platform businesses, uncoated papers and packaging. The plan includes debt repayment, returning value to shareowners and selective investments that will enable us to earn cost of capital and provide solid returns to shareowners even in today's markets. At the same time, we are even more focused on our ongoing efforts to improve productivity, reduce costs and serve our customers," Faraci said. SEGMENT INFORMATION Second-quarter 2005 segment operating profits and business trends compared with the first quarter of 2005 are as follows: Second-quarter operating profits for Printing Papers were $149 million compared with first-quarter operating profits of $183 million. The decline in earnings was largely caused by lower volumes in the printing papers business, including 135,000 tons lack-of-order downtime, and also reflected a $17 million special charge for severance and other charges relating to the indefinite shutdown of three U.S. paper machines. Industrial Packaging operating profits for the second quarter were $85 million compared with $105 million in first quarter, largely because of weak pricing, lower sales volumes and higher input costs. The business experienced 140,000 tons lack-of-order downtime in second-quarter 2005, versus 43,000 in first-quarter 2005, and none in second-quarter 2004. Consumer Packaging operating profits increased to $41 million in the second quarter, compared with $23 million in the previous quarter, as a result of better converting volume, higher average price realizations, better operating performance and benefits from cost reduction initiatives. The company's distribution business, xpedx, reported operating profits of $18 million for the second quarter, unchanged from the first quarter. Commercial print unit volume and pricing fell below expectations, but these impacts were generally offset by productivity gains and faster-than-expected growth in packaging and redistribution segments. Second-quarter Forest Products operating profits dropped slightly to $191 million from first-quarter earnings of $207 million. In Wood Products, the lumber segment experienced strong growth in both pricing and sales volumes, rebounding from a slow start early in the quarter. However, plywood pricing was flat and volumes dropped slightly from first quarter. In addition, Forest Products' results included a $14 million special charge related to the relocation of its headquarters from Savannah, Ga., to Memphis, Tenn. Operating profits at Carter Holt Harvey, International Paper's 50.5 percent owned subsidiary in New Zealand, were $10 million in the second quarter, compared with first-quarter operating profits of $5 million. Good pulp operations and increased land sales helped offset price reductions in pulp and wood products and continued low demand in the Australian housing market. In June, International Paper announced a decision to explore strategic options for its 50.5 percent share of the New Zealand-based company. Net corporate expenses of $133 million in the 2005 second quarter dropped from first quarter 2005's $155 million reflecting lower corporate overhead costs. EFFECTIVE TAX RATE The effective tax rate excluding special items for the second quarter of 2005 was 31 percent, compared with a tax rate of 24 percent in the 2005 first quarter, and 31 percent in the second quarter of 2004. The lower tax rate in the 2005 first quarter reflected the favorable resolution of a tax matter that reduced the tax provision by $19 million. EFFECTS OF SPECIAL ITEMS Special items in the second quarter included a pretax charge of $31 million ($19 million after taxes) for organizational restructuring charges, a pretax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, and a $19 million pretax credit ($12 million after taxes) for net adjustments of losses on businesses previously sold, including a $25 million credit from the collection of a note receivable from the 2001 sale of the Flexible Packaging business. In addition, Interest expense, net, included pretax interest income of $11 million ($7 million after taxes) collected on this note. The organizational restructuring charges included $17 million recorded in the Printing Papers business segment for severance and other charges associated with the indefinite shutdown of three U.S. paper machines, and $14 million recorded in the Forest Products business segment for costs associated with relocating its business headquarters to Memphis, Tenn., from Savannah, Ga. Additionally, a $94 million increase in the income tax provision was recorded principally for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of 2004. The net after-tax effect of all of these special items was an expense of $0.15 per share. Special items in the 2005 first quarter included a charge of $79 million ($52 million after taxes) for estimated losses on businesses held for sale, reflecting charges to reduce the net assets of the Industrial Papers and Fine Papers businesses to their estimated realizable value, and a charge of $66 million before taxes and minority interest ($36 million after taxes and minority interest). This $66 million charge includes a goodwill impairment write off in the United States of $42 million ($21 million after minority interest) associated with an acquisition by Carter Holt Harvey, and a $24 million charge ($15 million after taxes) for losses on early extinguishment of high-cost debt. The net after-tax effect of these special items was an expense of $0.18 per share. Special items in the 2004 second quarter included a charge of $107 million before taxes and minority interest ($63 million after taxes and minority interest) for restructuring and other costs, a charge of $36 million before taxes and minority interest ($32 million after taxes and minority interest) for estimated losses on sales and impairments of businesses held for sale and a $5 million credit ($3 million after taxes and minority interest) for the net reversal of restructuring and realignment reserves no longer required. In addition, a $5 million net increase in the tax provision, after minority interest, was recorded in the quarter reflecting a charge for an adjustment of deferred tax balances and a credit from the reduction of valuation reserves for capital loss carryovers. The net after-tax effect of all of these special items was an expense of $0.20 per share.