STAMFORD, Conn., Oct. 25 -- International Paper today reported third-quarter 2005 net earnings of $1.04 billion ($2.07 per share), compared with $77 million ($0.16 per share) in the second quarter of 2005 and a net loss of $470 million ($0.91 per share) in the 2004 third quarter. Third quarter 2005 earnings included $278 million from discontinued operations ($0.55 per share) relating to the sale of the company's interest in Carter Holt Harvey Ltd. and $603 million ($1.19 per share) principally from a U.S. federal income tax audit agreement reached with the U.S. Internal Revenue Service. The 2004 third quarter results included a discontinued operations charge of $684 million ($1.34 per share) primarily from the sale of Weldwood of Canada Ltd. Amounts for all quarters also included certain other special items. Earnings from continuing operations and before special items in the third quarter of 2005 were $162 million ($0.33 per share), compared with $143 million ($0.29 per share) in the second quarter of 2005 and $200 million ($0.40 per share) in the third quarter of 2004. Third-quarter 2005 net sales were $6.0 billion, compared with $5.9 billion in the second quarter of 2005 and $6.0 billion in the third quarter of 2004. The company experienced seasonal sales increases in most businesses, with the exception of a slight decline in the industrial packaging business. Operating profits of $489 million for the 2005 third quarter were slightly lower compared with second-quarter 2005 operating profits of $491 million, due principally to lower price realizations and higher energy costs. However, higher earnings from land and real estate sales and continued strong productivity improvements helped offset some of these negative impacts. "Our mills ran well and continued the aggressive improvement we've been seeing all year, which helped offset some of the impact of pricing pressure and energy costs," said Chairman and Chief Executive Officer John Faraci. "This improvement at the mill level, combined with the execution of our transformation plan, is positioning International Paper for much stronger results once input costs abate." Commenting on the fourth quarter of 2005, Faraci said, "We estimate fourth-quarter earnings from continuing operations and before special items to be lower than third quarter predominantly because of skyrocketing raw material costs, particularly energy, and higher transportation costs." SEGMENT INFORMATION Third-quarter 2005 segment operating profits and business trends compared with the second quarter of 2005 are as follows: Third-quarter operating profits for Printing Papers were $132 million compared with second-quarter operating profits of $149 million. The decline in earnings was largely caused by a decline in uncoated freesheet price realizations, as well as higher input costs. Increases in coated paper pricing and seasonally stronger volumes, as well as solid performance by Brazilian operations helped offset some of the negative impacts. The results also include $9 million in special charges for environmental reserves and severance and other charges relating to the previously announced indefinite shutdown of three U.S. paper machines. In the second quarter 2005, the business took $17 million in special charges related to the three machine shutdowns. Industrial Packaging operating profits for the third quarter were $33 million compared with $85 million in second quarter, largely because of lower pricing for linerboard and boxes together with higher input costs. Consumer Packaging operating profits were down slightly at $37 million, compared with $41 million in the previous quarter, largely because of higher input costs. The company's distribution business reported operating profits of $23 million for the third quarter, up from $18 million in the previous quarter, on the strength of stronger sales. High energy prices are impacting transportation costs. Third-quarter Forest Products operating profits rose to $272 million from second-quarter earnings of $191 million. Forest Resources saw strong earnings mainly due to a $58 million increase in timberland sales from second quarter and a $26 million increase in "higher and better use" land sales. In Wood Products, prices have come down from second-quarter highs, but both pricing and volume for lumber and plywood were strong through the end of the quarter. Hurricane-related downtime had a minor impact on the quarter. Net corporate expenses of $142 million in the 2005 third quarter were up slightly from second quarter's $133 million. DISCONTINUED OPERATIONS During the 2005 third quarter, the company completed the sale of its majority share of Carter Holt Harvey Ltd. to Rank Group Investments Ltd. Cash proceeds totaled US $1.14 billion. The pre-tax and after-tax gains on the sale were approximately $29 million and $361 million, respectively. All prior period financial information has been restated to reflect Carter Holt Harvey Ltd. as a discontinued operation. EFFECTIVE TAX RATE The effective tax rate excluding special items for the third quarter of 2005 was 23 percent, compared with a tax rate of 35 percent in the 2005 second quarter. The lower tax rate in the 2005 third quarter reflected the reduction of the projected 2005 full-year tax rate to 27 percent. EFFECTS OF SPECIAL ITEMS Special items in the third quarter included a pretax charge of $70 million ($48 million after taxes) for organizational restructuring charges and losses on debt extinguishment, a pretax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a $5 million pretax charge ($3 million after taxes) for adjustments of losses on businesses previously sold, and a $3 million pretax credit ($2 million after taxes) for the net adjustment of previously provided reserves. In addition, a $517 million income tax benefit was recorded, principally as a result of an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audit. Net interest expense also includes a $43 million pretax credit ($26 million after taxes) relating to this agreement. The net after-tax effect of all of these special items was a credit of $1.19 per share. 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, net interest expense included pretax interest income of $11 million ($7 million after taxes) collected on this note. 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 2004 third quarter included a charge of $26 million before taxes ($16 million after taxes) for restructuring and other costs, a pre-tax credit of $103 million ($64 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a charge of $38 million for estimated losses on sales and impairments of businesses held for sale and a $6 million credit ($4 million after taxes) for the net reversal of restructuring and realignment reserves no longer required. The net after- tax effect of all of these special items was a credit of $0.03 per share.