Allegheny Technologies Incorporated (ATI) uses innovative technologies to produce a wide range of specialty materials for global markets. Our specialty materials are produced in a variety of alloys and forms, and are selected for use in environments that demand materials having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. Major end markets of our products include aerospace, construction and mining, chemical processing, oil and gas, automotive, electrical energy, food processing equipment and appliances, machine and cutting tools, transportation, medical, and defense industries. Unless the context requires otherwise, "ATI," "we," "our," "us" and similar terms refer to Allegheny Technologies Incorporated and its subsidiaries.

Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements. Actual results or performance could differ materially from those encompassed within such forward looking statements as a result of various factors, including those described below.

OVERVIEW

2004 was a year of transition and transformation for ATI. After incurring losses over the previous three years and the first quarter of 2004, we generated profits for each of the last three quarters of 2004, and a profit for the full 2004 year of $19.8 million, or $0.22 per share. Sales increased 41% to $2.73 billion for 2004 as higher base-selling prices, the effect of raw material surcharges, and higher shipments for most of our major products resulted from improved business conditions in most of the major markets we serve.

Demand for our stainless steel flat-rolled products increased for 2004 due to the improvement in the U.S. industrial economy, especially in most capital goods markets. This improvement in demand and higher base-prices for most of the products of our Flat-Rolled Products segment, along with our acquisition of certain manufacturing assets of J&L Specialty Steel LLC ("J&L") in mid-2004, and the benefits of cost reductions, offset the negative effects of rapidly rising raw material costs on our last-in, first-out ("LIFO") inventory accounting methodology and higher energy costs, resulting in an operating profit for this segment of $61.5 million for 2004 compared to an operating loss of $14.1 million in 2003. Sales for our High Performance Metals segment improved 24% primarily due to improving demand from the aerospace and medical markets for our nickel-based alloys and superalloys and titanium alloys, and continued strong demand for our exotic materials, especially from the government and chemical processing markets. Operating profit for the High Performance Metals segment improved 224% to $84.8 million, due primarily to the improved pricing and increased shipments resulting from the increase in demand and the benefits from our cost reduction efforts, partially offset by the impact on our LIFO inventory accounting methodology from rising raw material costs. Results for our Engineered Products segment also improved, as sales increased 17% and operating profit increased 168% to $20.8 million due to improved demand from the oil and gas, construction and transportation markets, plus the benefits from our cost reduction actions.

While segment profitability improved significantly in 2004, operating results were negatively impacted by higher raw material costs which resulted in LIFO inventory valuation reserve charges of $112.2 million, and higher energy costs of $6.2 million, which partially offset the benefits of $142 million in cost reductions and $14.6 million of lower retirement benefit expense.

Retirement benefit expenses decreased in 2004 to $119.8 million primarily as a result of higher than expected returns on pension assets during 2003, and actions taken in the second quarter 2004 to control retiree medical costs, partially offset by the use of a lower discount rate assumption for determining benefit plan liabilities.

During 2004, our goals were to return our stainless steel business to profitability, and to continue to focus on enhancing our leading market positions, reducing costs, and improving our balance sheet. We were successful in each of these areas. Our accomplishments during 2004 from these important efforts included:

o In June 2004, we acquired substantially all of the stainless steel manufacturing assets of J&L Specialty Steel LLC for $67 million, which represented the cost of this business' net working capital, including the assumption of certain current liabilities, and which is subject to final adjustment. The acquisition was completed for a $7.5 million cash payment at closing with the balance financed by the seller. These facilities were successfully integrated into our Allegheny Ludlum operations in the second half of 2004. In connection with the acquisition, a new progressive labor agreement was negotiated with United Steelworkers of America ("USWA"), which represents employees at our Allegheny Ludlum operations and at the acquired operations. The new progressive labor agreement significantly improves the productivity and cost structure of our flat-rolled products business.

o We completed two major strategic capital investments, both of which began in 2002. The second of two new electric arc furnaces for our flat-rolled products melt shop located in Brackenridge, PA began operation in September 2004 with the first furnace having begun operation in November 2003. The second project was a major upgrade and expansion of our High Performance Metals long products rolling mill facility located in Richburg, SC, which began production in mid-2004. We believe these projects provide state-of-the-art operating capabilities, increased efficiencies, lower operating costs, and expanded capacity.

o We realized continued success in implementing the ATI Business System, which is driving lean manufacturing throughout our operations. In addition to the gross cost reductions discussed above and the improved safety performance discussed below, another result of our ATI Business System efforts was a significant improvement in managed working capital. We define managed working capital as accounts receivable and gross inventories less accounts payable. At December 31, 2004, managed working capital was 29.5% of annualized sales compared to 30.7% and 32.4% of annualized sales at 2003 and 2002 year-ends, respectively.

o We continued to realize significant improvement in safety. As a result of our continuing focus on and commitment to safety, in 2004, our OSHA Total Recordable Incident Rate improved by 33% and our Lost Time Case Rate improved by 36%, both compared to 2002.

o We have strengthened our balance sheet. In addition to returning ATI to profitability in 2004, in July 2004 we completed the sale of 13.8 million shares of our common stock in a public offering and received $229.7 million in net proceeds. We intend to use a portion of the net proceeds from this offering to enhance our abilities to make growth-oriented investments, including capital investments and acquisitions that we believe will offer attractive returns. We also intend to use a portion of the net proceeds to strengthen our balance sheet by reducing our outstanding liabilities, which may include making voluntary contributions to our U.S. defined benefit trust or the repayment or repurchase of our long-term debt securities. In September 2004, we executed a portion of our strategy by making a voluntary contribution of $50 million to our U.S. defined benefit pension plan.

o We reduced our other postretirement benefit liability by approximately $331 million, or 36%, as a result efforts to control costs by capping ATI's share of retiree medical costs and by capping and eventually eliminating these benefits for certain non-collectively bargained employees.

As a result of these accomplishments, we believe that ATI should benefit from improving business conditions in 2005. As we begin the year, most of our end markets remain strong and we expect 2005 to be a year of revenue growth and accelerating profitability. Sales are expected to grow in 2005, compared to 2004, due to the full year impact of significantly improved prices and higher volumes, especially in our Flat-Rolled Products and High Performance Metals segments. We remain encouraged by the aerospace market build forecasts in terms of both the number and size of aircraft, as well as increased high performance metal content. We expect a full year of benefits in 2005 from the strategic assets added in 2004, principally the stainless steel melt shop and finishing operations in Midland, PA and Louisville, OH acquired in June 2004, the upgraded Brackenridge, PA stainless steel melt shop completed in September 2004, and the expanded high performance metals long-products rolling mill in Richburg, SC, which began production in mid-2004. For 2005, capital expenditures are expected to be between $85 and $100 million. We are committed to improving operating performance through the ATI Business System. We have established a 2005 cost reduction goal of approximately $100 million, before the effects of inflation. We also expect to continue to benefit from synergies and cost reductions from the J&L asset acquisition and the new labor agreement in our flat-rolled products business. Finally, retirement benefit expense is projected to be approximately $33 million lower in 2005 than in 2004, primarily as a result of actions taken in 2004 to control retiree medical costs.

ACQUISITION OF J&L SPECIALTY STEEL LLC ASSETS

On June 1, 2004, we completed the acquisition of substantially all of the assets of J&L Specialty Steel LLC, a producer of flat-rolled stainless steel products with operations in Midland, Pennsylvania and Louisville, Ohio, for $67.0 million in total consideration, including the assumption of certain current liabilities. The purchase price included $7.5 million cash paid at closing, the issuance to the seller of a non-interest bearing $7.5 million promissory note payable on June 1, 2005, and the issuance to the seller of a promissory note in the principal amount of $52.0 million, which is subject to final adjustment, and secured by the property, plant and equipment acquired, payable in installments in 2007 through 2011, which bears interest at a London Inter-bank Offered Rate plus a 1% margin, with a maximum interest rate of 6%.

In connection with the J&L asset acquisition, we reached a new labor agreement with the USWA, which represents employees at Allegheny Ludlum and at the former J&L facilities. The new agreement provides for a workforce restructuring through which we expect to achieve significant productivity improvements. Through a reduction in the number of job classifications and the implementation of flexible work rules, employees are being given broader responsibilities and the opportunity to become more involved in the business. The number of production and maintenance employees at the pre-acquisition Allegheny Ludlum facilities is being reduced by 650 employees, or approximately 25%, through an early retirement program over two and a half years pursuant to which the employees are being offered transition incentives. Approximately 40% of these retirements occurred in second half of 2004, with over 70% of these retirements to be effective by the end of 2005, and 100% of these retirements to be effective by June 2006.

With the addition of the J&L assets, we estimate that our Allegheny Ludlum operations will be capable of annual shipments in excess of 700,000 tons of flat-rolled specialty metals with approximately 2,650 production and maintenance employees. By comparison, Allegheny Ludlum shipped 478,000 tons of these metals in 2003 with over 3,000 production and maintenance employees.

The acquisition of the J&L assets and the negotiation of the new progressive labor agreement with the USWA are expected to improve the performance of our Allegheny Ludlum business. We expect the new labor agreement, combined with the integration of the former J&L operations, to generate annual cost structure improvements relative to the combined performance of the former J&L and pre-acquisition Allegheny Ludlum operations of approximately $200 million when workforce restructuring and synergies are fully implemented in the second half of 2006. We anticipate these cost structure improvements to come from reduced labor costs, operating synergies, improved product mix, and reduced fixed costs. In the aggregate, we expect these initiatives to result in a competitive cost structure for our flat-rolled stainless steel business. During the second half of 2004, the former J&L operations were successfully integrated into Allegheny Ludlum with the improvement in cost structure realized to date reflected in our operating results. Going forward the cost savings associated with the former J&L operations that have yet to be realized, such as further reductions in labor costs associated with the contractual reduction in the size of the workforce and additional operating and procurement synergies, will be included as part of our continuing overall cost reduction programs.

 
RESULTS OF OPERATIONS

Sales were $2.73 billion in 2004, $1.94 billion in 2003 and $1.91 billion in 2002. International sales represented approximately 20% of 2004 total sales and 23% of total sales for each of 2003 and 2002.

Operating profit was $167.1 million in 2004, $19.9 million in 2003, and $27.3 million in 2002. Our measure of operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, curtailment gain, management transition and restructuring costs, other costs net of gains on asset sales, and retirement benefit expense. We believe operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.

Income before tax was $19.8 million in 2004 compared to loss before tax of $280.2 million and $103.8 million for 2003 and 2002, respectively. Income before income tax for 2004 included a curtailment gain, net of restructuring charges, of $40.4 million. Loss before tax included restructuring charges and litigation expense of $84.9 million in 2003, and restructuring charges of $42.8 million in 2002. A severe decline in the equity markets in 2000 through 2002 and lower discount rate assumptions for determining benefit plan liabilities resulted in retirement benefit expenses of $119.8 million in 2004, $134.4 million in 2003 and $21.8 million for 2002.

Net income was $19.8 million for 2004 compared to losses, before the cumulative effect of change in accounting principle, of $313.3 million and $65.8 million for 2003 and 2002, respectively. Results for 2004 do not include an income tax provision or benefit for current or deferred taxes primarily as a result of the continuing uncertainty regarding full utilization of our net deferred tax assets and available operating loss carryforwards. Net income for 2004 included a curtailment gain, net of restructuring costs of $40.4 million, related to the elimination of retiree medical benefits for certain non-collectively bargained employees beginning in 2010, and costs associated with the acquisition of the J&L assets and the new labor agreement. The net loss for 2003 included a $138.5 million charge for a valuation allowance on the majority of our net deferred tax assets, pretax restructuring charges of $62.4 million relating to asset impairments in the Flat-Rolled Products segment and workforce reductions across all operating segments and the corporate office, and $22.5 million for litigation expense. As a result of recording the deferred tax valuation allowance, results for 2003 include an income tax provision of $33.1 million, whereas 2002 pretax losses were reduced by income tax benefits of $38.0 million. Results for 2002 included charges of $42.8 million related to the indefinite idling of our Massillon, OH stainless steel plate facility in the Flat-Rolled Products segment, and workforce reductions.

We operate in three business segments: Flat-Rolled Products, High Performance Metals and Engineered Products. These segments represented the following percentages of our total revenues for the years indicated:

                                        2004          2003          2002
                                      --------      --------      --------
Flat-Rolled Products                        60%           54%           55%
High Performance Metals                     29%           33%           33%
Engineered Products                         11%           13%           12%

Information with respect to our business segments is presented below and in Note 10 of the Notes to Consolidated Financial Statements.

 
FLAT-ROLLED PRODUCTS

(In millions)                                             2004          % Change         2003           % Change           2002
                                                       ----------      ----------     ----------       ----------       ----------
Sales to external customers                            $  1,643.9              58%    $  1,043.5                0%      $  1,040.3
Operating income (loss)                                      61.5             n/m          (14.1)             (64)%           (8.6)
Operating income (loss) as a percentage of sales              3.7%                          (1.4%)                            (0.8%)
International sales as a percentage of sales                 12.9%                          13.5%                             11.8%
                                                       ----------      ----------     ----------       ----------       ----------

n/m: Not meaningful

Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, strip, engineered strip, and Precision Rolled Strip(R) products, as well as silicon electrical steel sheet, and tool steels. The major end markets for our flat-rolled products are construction and mining, automotive, electrical energy, food processing equipment and appliances, machine and cutting tools, chemical processing, oil and gas, electronics, communication equipment and computers. The operations in this segment are Allegheny Ludlum, our 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL), and our 50% interest in the industrial titanium joint venture known as Uniti LLC. The remaining 40% interest in STAL is owned by the Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People's Republic of China. The financial results of STAL are consolidated into the segment's operating results with the 40% interest of our minority partner recognized in the statement of operations as other income or expense. The remaining 50% interest in Uniti LLC is held by VSMPO-AVISMA, a Russian producer of titanium, aluminum, and specialty steel products. We account for the results of the Uniti joint venture using the equity method since we do not have a controlling interest. On June 1, 2004, we acquired substantially all of the assets of J&L Specialty Steel LLC, including facilities located in Midland, PA and Louisville, OH. Operating results include the acquired J&L operations from the date of acquisition. However since the acquisition was accounted for as a purchase, 2004 results did not include any operating profit on sales of the approximately $56 million of the J&L inventory on hand at the acquisition date.

2004 COMPARED TO 2003

Sales for the Flat-Rolled Products segment for 2004 were $1,643.9 million, or 58% higher than 2003, which was due primarily to improved demand, higher base-selling prices, higher raw material surcharges, and higher shipments resulting from the Midland, PA and Louisville, OH facilities acquired in June 2004. Comparative information on the segment's products for the years ended December 31, 2004 and 2003 was:

For the Years Ended December 31,                    2004           2003         % Change
--------------------------------                 ----------     ----------     ----------
Volume (finished tons):
         Total Flat-Rolled Products                 587,753        478,353             23%
         Commodity                                  422,944        342,689             23%
         High value                                 164,809        135,664             21%

Average Prices (per finished ton):
         Total Flat-Rolled Products              $    2,793     $    2,179             28%
         Commodity                                    2,195          1,582             39%
         High value                                   4,328          3,687             17%

Finished tons shipped in 2004 increased by 23% to 587,753 tons compared to shipments of 478,353 tons for 2003. The average transaction prices to customers, which includes the effect of higher raw material surcharges and higher base-selling prices, increased by 28% to $2,793 per ton in 2004. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) increased 23% and average transaction prices for these products increased 39%. The increase in shipments was primarily attributable to improving demand from the residential construction and remodeling markets, and capital goods markets such as chemical processing, oil and gas, and power generation markets, and the benefit of additional capacity resulting from the Midland, PA and Louisville, OH facilities acquired in June 2004. Demand remained good from the automotive and appliance markets. The increase in average transaction prices was primarily due to higher base-selling prices and higher raw material surcharges. The majority of our stainless steel products are sold at prices that include surcharges for raw materials such as iron, nickel, chromium, and molybdenum, including purchased scrap, which are required to manufacture our products.

Linegraph depicting
Nickel prices                      97     98     99     00     01     02     03     04
Nickel Prices
($/lb)                            2.70   1.76   3.67   3.32   2.69   3.26   6.43    6.25

Linegraph depicting
Chromium Prices                    97     98     99     00     01     02     03     04
Chromium Prices
($/lb)                            0.49   0.40   0.39   0.41   0.29   0.35   0.54    0.69

Linegraph depicting
Molybdenum Oxide Prices            97     98     99     00     01     02     03     04
Molybdenum Oxide Prices
($/lb)                            3.69   2.57   2.56   2.23   2.36   3.26   7.26   31.24

Linegraph depicting
Iron Scrap Prices                  97     98     99     00     01     02     03     04
Iron Scrap Prices
($/lb)                             144     83    129     85     74    105    173     233

The cost of these raw materials increased significantly in 2004, which resulted in substantially higher raw material surcharges. In addition, a raw material surcharge for iron scrap was instituted in the first half of 2004 as a result of the cost of iron scrap increasing approximately 70% in 2004 compared to average cost for 2003. The average base-selling price in December 2004 for Type 304 commodity stainless steel cold-rolled sheet increased approximately 28% compared to the same period 2003. In 2004, consumption in the U.S. of stainless steel strip, sheet and plate products increased approximately 15%, compared to 2003 consumption, according to the Specialty Steel Institute of North America (SSINA). Our high-value product shipments in the segment (including strip, Precision Rolled Strip, super stainless steel, nickel alloy and titanium products) increased 21%, and average transaction prices for high-value products increased 17%. Certain of these high-value products are used in the consumer durables and capital goods markets, both of which benefited from an improving U.S. economy in the markets we serve, which positively affected shipments and base-selling prices. In addition, shipments of Precision Rolled Strip products increased in Europe and Asia due primarily to strong demand from the automotive and electronics markets, partially aided by the weaker U.S. currency.

                                     99         00         01         02         03         04
                                   ------     ------     ------     ------     ------     ------
Apparent Domestic
Consumption - Stainless
Steel Sheet and Strip
(Millions of tons)                   1.90       1.90       1.55       1.60       1.57       1.80

(Source: SSINA)

As a result of the improving business conditions, operating income increased to $61.5 million for 2004 compared to an operating loss of $14.1 million in the 2003 period. The benefits of increased shipment volumes, higher base-selling prices, and cost reduction initiatives were partially offset by higher raw material and energy costs. During 2004 the average cost of our raw materials in our Flat-Rolled products segment increased approximately 50%. For 2004, we incurred approximately $94 million of expense for these cost increases, including LIFO inventory charges of $86.5 million and cost increases of $7.5 million for certain raw materials which were not subject to surcharges for the full year. In addition, natural gas and electricity costs for 2004 were approximately $5 million higher than 2003.

We continued to aggressively reduce costs and streamline our operations. In 2004, we achieved gross cost reductions, before the effects of inflation, of $80 million in our Flat-Rolled Products segment. Major areas of cost reductions, before the effects of inflation, included $26 million from operating efficiencies, $28 million from procurement, $24 million from lower compensation and fringe benefit expenses, and $2 million from other fixed cost savings. During the second half of 2004, we began reducing our hourly workforce at our Allegheny Ludlum plants by 650 employees, which represented approximately 25% of the pre-J&L acquisition hourly workforce, in accordance with the new labor agreement with the USWA. This agreement resulted in a pension termination benefits charge of $25.3 million in the second quarter 2004. Under this agreement, 267 hourly employees retired in 2004 with 383 employees contractually scheduled to retire in 2005 through the first half of 2006. The pension termination benefits charge is presented in restructuring costs on the statement of operations and is not included in the results for the segment.

We continued to invest to enhance our flat-rolled specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to upgrade the Brackenridge, PA melt shop, which commenced in 2002 and cost approximately $40 million, was successfully completed. The first of the two new electric arc furnaces began operation in November 2003 and the second furnace began operation in September 2004. Cost savings from this capital investment are estimated to be over $20 million annually.

2003 COMPARED TO 2002

Sales for the Flat-Rolled Products segment for 2003 were $1,043.5 million, essentially the same as 2002, which was due primarily to the effect of higher raw material surcharges offsetting lower volumes and reduced base-selling prices. Weak demand and base pricing for products of the Flat-Rolled Products segment, especially commodity stainless steel, which persisted for most of 2003, plus the negative effects of rapidly rising raw material costs and higher energy costs resulted in an operating loss of $14.1 million for 2003 compared to an operating loss of $8.6 million in 2002.

Finished tons shipped in 2003 declined by 2% to 478,353 tons compared to shipments of 487,335 tons for 2002. The average transaction prices to customers increased by 2% to $2,179 per ton in 2003 due primarily to higher raw materials surcharges, which offset a 4% decline in average base-selling prices, which exclude the effect of surcharges. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 2% while average prices for these products increased 3%. The decline in shipments was primarily attributable to continued depressed demand for commodity stainless steel sheet and plate due to the continued weakness in the U.S. industrial economy, especially in the non-residential construction and most capital goods markets. The increase in average transaction prices was primarily due to higher raw material surcharges, principally for nickel and nickel-bearing scrap. Commodity stainless steel base-selling prices, which exclude surcharges, declined 4% in 2003 compared to 2002. During the same period, consumption in the U.S. of stainless steel strip, sheet and plate products was flat according to the Specialty Steel Institute of North America (SSINA). High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, nickel alloy and titanium products) decreased 1%, while average transaction prices for high-value products were flat. Increased shipments of Precision Rolled Strip(R) products in Europe and Asia were partially offset by the overall decline in shipments of other high-value products. Certain of these high-value products are used in the consumer durables and capital goods markets, both of which continued to be impacted by the weak U.S. economy in the markets we serve, which negatively affected shipments.

Operating results for 2003 were adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. For example, the cost of nickel, a major raw material in the production of many stainless steel alloys, increased 97% in 2003 from an average cost of $3.26 per pound for the month of December 2002 to an average cost of $6.43 per pound for December 2003, as priced on the London Metals Exchange. While we were able to offset a significant portion of the increase through raw material surcharges in the pricing of our products, these higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology. For 2003, we incurred approximately $36 million of expense for these cost increases, including LIFO inventory charges of $27 million and cost increases of $9 million for certain raw materials which were not subject to our surcharges. In addition, natural gas and electricity costs for 2003 were approximately $12 million higher than 2002.

 
HIGH PERFORMANCE METALS

(In millions)                                            2004        % Change        2003        % Change         2002
-----------------------                                --------      --------      --------      --------       --------
Sales to external customers                            $  794.1            24%     $  641.7             2%      $  630.0
Operating profit                                           84.8           224%         26.2           (16%)         31.2
Operating profit as a percentage of sales                  10.7%                        4.1%                         5.0%
International sales as a percentage of sales               32.5%                       34.8%                        39.3%

Our High Performance Metals segment produces, converts and distributes a wide range of high performance alloys, including nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, exotic alloys such as zirconium, hafnium, niobium, nickel-titanium, tantalum, and their related alloys, and other specialty materials, primarily in long product forms such as ingot, billet, bar, rod, wire, and seamless tube. The operations in this segment are Allvac, Allvac Ltd (U.K.) and Wah Chang.

These products are designed for the high performance requirements of such major markets as aerospace jet engines and airframes, chemical processing, oil and gas, medical, energy generation, defense, transportation, nuclear power, marine, and high-energy physics markets.

2004 COMPARED TO 2003

Sales for the High Performance Metals segment increased 24% to $794.1 million in 2004 primarily due to improved demand from commercial aerospace, biomedical, defense, chemical processing, and oil and gas markets. Our exotic alloys business continued to benefit from sustained demand from government and medical markets, and from corrosion markets particularly in Asia. Operating profit for the High Performance Metals segment improved significantly to $84.8 million as a result of increased shipments for most of our products, higher selling prices, and the benefits of cost reductions. Comparative information on the segment's products for the years ended December 31, 2004 and 2003 was:

For the Years Ended December 31,                               2004           2003         % Change
--------------------------------                            ----------     ----------     ----------
Volume (000's lbs.):
     Nickel-based and specialty steel alloys                    34,353         35,168             (2%)
     Titanium mill products                                     22,012         18,436             19%
     Exotic alloys                                               4,318          4,245              2%

Average Prices (per lb.):
     Nickel-based and specialty steel alloys                $     8.60        $  6.57             31%
     Titanium mill products                                      12.34          11.50              7%
     Exotic alloys                                               40.95          37.64              9%

Shipments of nickel-based and specialty steel alloys decreased 2% due primarily to product mix, while average prices increased 31%. Titanium mill products shipments increased 19% and average prices increased 7%. Shipments for exotic alloys increased 2% and average prices increased 9%. Backlog of confirmed orders for the segment increased 41% to approximately $380 million at December 31, 2004, compared to approximately $270 million at December 31, 2003.

Operating profit for 2004 and 2003 was adversely affected by higher raw material costs, which increased significantly in the past two years. These higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in $16.2 million of expense for 2004, compared to $11.7 million of LIFO expense in 2003.

We continued to aggressively reduce costs in 2004. Gross cost reductions for 2004, before the effects of inflation, totaled approximately $48 million. Major areas of cost reductions, before the effects of inflation, included $21 million from operating efficiencies, $13 million from procurement, and $14 million from salaried and hourly labor cost savings.

We continued to invest to enhance our specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to enhance the capabilities of our long products rolling mill facility located in Richburg, SC, which cost approximately $48 million, began construction in 2002 and commenced production in the second quarter of 2004. The project includes mutual conversion agreements with Outokumpu Oyj's U.S. subsidiary, Outokumpu Stainless, giving us access to process our products at Outokumpu Stainless' facility and Outokumpu Stainless access to process their stainless steel long products at our Richburg facility.

2003 COMPARED TO 2002

Sales for the High Performance Metals segment increased 2% to $641.7 million in 2003 primarily due to strong demand for our exotic materials, especially for the government and chemical processing markets, which offset continued weakness in the commercial aerospace and land-based turbine power generation markets. However, operating profit for the High Performance Metals segment declined 16% to $26.2 million because of lower demand and prices for nickel-based alloys and superalloys, specialty steel alloys and titanium-based alloys, which represent approximately 70% of the segment's sales. In addition, rising raw material costs offset cost reduction efforts.

Shipments of nickel-based and specialty steel alloys decreased 2%, while average prices increased 3% due primarily to product mix. Titanium mill products shipments decreased 3% and average prices decreased 3%. Shipments for exotic alloys increased 14% and average prices increased 4%. Backlog of confirmed orders for the segment was approximately $270 million at December 31, 2003, compared to approximately $300 million at December 31, 2002.

Operating profit for 2003 was adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. These higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in $11.7 million of expense for 2003, compared to $7.4 million of LIFO income in 2002. Operating profit in 2002 was adversely impacted by the effects of a seven-month labor strike settled in March 2002 at our Wah Chang operation, which produces our exotic alloys.

Gross cost reductions, before the effects of inflation, for 2003 totaled approximately $45 million. Major areas of cost reductions, before the effects of inflation, included $23 million from operating efficiencies, $13 million from procurement, and $9 million from hourly and salary labor cost savings. During 2003, we implemented further workforce reductions, which affected approximately 200 employees, or 19% of the salaried workforce. In connection with these reductions, which were substantially completed by the end of the year, we recorded charges of $3 million for the related severance costs. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment.

 
ENGINEERED PRODUCTS

(In millions)                                      2004        % Change        2003        % Change        2002
--------------------------------------------     --------      --------      --------      --------      --------
Sales to external customers                      $  295.0            17%     $  252.2             6%     $  237.5
Operating profit                                     20.8           168%          7.8            66%          4.7
Operating profit as a percentage of sales             7.1%                        3.1%                        2.0%
International sales as a percentage of sales         28.9%                       31.0%                       29.5%

Our Engineered Products segment includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The segment also produces carbon alloy steel impression die forgings, and large grey and ductile iron castings, and provides precision metals processing services. The operations in this segment are Metalworking Products, Portland Forge, Casting Service and Rome Metals.

The major markets served by our products of the Engineered Products Segment include a wide variety of industrial markets including automotive, chemical processing, oil and gas, machine and cutting tools, construction and mining, aerospace, transportation, and wind power generation.

2004 COMPARED TO 2003

Sales for the Engineered Products segment in 2004 increased 17%, to $295.0 million and operating profit increased 168%, to $20.8 million compared to 2003. Demand for our tungsten products was strong from general manufacturing, and the oil and gas and medical markets. Demand improved for forgings from the Class 8 truck, and construction and mining markets. Demand for castings was strong from the transportation and wind energy markets. The improvement in segment operating profit was primarily due to higher sales volumes, improved pricing, and the impact of cost reductions, which totaled $9 million in 2004. The improvement in profitability was partially offset by higher raw material costs, which resulted in a LIFO inventory valuation reserve charge of $9.5 million in 2004, compared to a charge of $1.9 million in 2003.

Sales for the Engineered Products segment increased 6%, to $252.2 million in 2003, compared to 2002, and operating profit increased 66%, to $7.8 million. Demand for our tungsten products from the oil and gas, medical and automotive markets improved during 2003. Demand also improved for forgings and castings. Segment operating profit improved primarily due to higher sales and the impact of cost reductions, which totaled $9 million in 2003.

In the second half of 2003, we announced an additional restructuring of the European operations of Metalworking Products. Restructuring charges of approximately $3 million associated with this consolidation are presented as restructuring costs on the 2003 statement of operations and are not included in segment results.

CORPORATE EXPENSES

Corporate expenses were $34.9 million in 2004 compared to $20.5 million in 2003, and $20.6 million in 2002. Cost controls and reductions in the number of corporate employees that were implemented over this period were offset in 2004 by increased compensation expense and the costs of complying with Sarbanes-Oxley regulations. A significant portion of the increase in compensation expense is non-cash and is associated with our long-term, performance based stock compensation plans. Achievement under these plans is marked-to-market for stock price changes, which resulted in substantially higher expense in 2004 due to the significant increase in our stock price during the year, and our stock performance relative to a group of our industry peers.

INTEREST EXPENSE, NET

Interest expense, net of interest income, was $35.5 million for 2004 compared to $27.7 million for 2003 and $34.3 million for 2002. The effect of "receive fixed, pay floating" interest rate swap contracts of $150 million, related to our $300 million, 8.375% 10-year Notes issued in December 2001, decreased interest expense by $4.4 million in 2004, $6.7 million in 2003 and $4.9 million in 2002, compared to the fixed interest expense of the Notes. These swap agreements were terminated in the third quarter 2004. Interest expense in 2004 and 2003 was reduced by $0.9 million and $2.1 million, respectively, related to interest capitalization on capital projects.

Interest expense is presented net of interest income of $2.9 million for 2004, $6.2 million for 2003 and $3.0 million for 2002. The increase in interest income for 2003 primarily relates to interest on settlements of prior years' tax liabilities.

CURTAILMENT GAIN AND RESTRUCTURING COSTS

We recorded a curtailment gain, net of restructuring costs, of $40.4 million in 2004 and restructuring costs of $62.4 million, and $42.8 million in 2003 and 2002, respectively.

In 2004, the curtailment gain, net of restructuring costs, of $40.4 million, includes the $71.5 million curtailment and settlement gain and the $25.3 million pension termination benefit charge discussed in Retirement Benefit Expense, below, and $5.8 million of restructuring charges. The restructuring charges related to the new labor agreement at our Allegheny Ludlum operations, and the J&L asset acquisition, and included labor agreement costs of $4.6 million, severance costs of $0.7 million related to approximately 30 salaried employees, and $0.5 million for asset impairment charges for redundant equipment following the J&L asset acquisition.

In 2003, we recorded restructuring charges of $62.4 million, including $47.5 million for impairment of long-lived assets in the Flat-Rolled Products segment, $11.1 million for workforce reductions across all business segments and the corporate office, and $3.8 million for facility closure charges including present-valued lease termination costs, net of forecasted sublease rental income, at the corporate office. In the 2003 fourth quarter, based on existing and projected operating levels at our remaining operations in Houston, PA, and at our Washington Flat Roll coil facility located in Washington, PA, we determined that the net book values of these facilities were in excess of their estimated fair market values based on expected future cash flows. Charges for the Houston facility and the Washington Flat Roll coil facility were recorded to write down the net book values of these facilities to their estimated fair market values. These asset impairment charges did not impact current operations at these facilities. The workforce reductions affected approximately 375 employees across all segments and the corporate office. Approximately $5 million of the severance charges was paid from the Company's pension plan, and at December 31, 2004, approximately $5 million of the workforce reduction and facility closure charges are future cash costs that will be paid over the next nine years. Cash to meet these obligations is expected to be generated from one or more of the following sources: internally generated funds from operations, current cash on hand, or borrowings under existing credit lines.

In 2002, we recorded total charges of $42.8 million related to the indefinite idling of our Massillon, OH stainless steel plate facility due to continuing poor demand for wide continuous mill plate products, and further workforce reductions across all of our operations. The Massillon, OH stainless steel plate facility was indefinitely idled in the 2002 fourth quarter, and resulted in a pretax non-cash asset impairment charge of $34.4 million, representing the excess of the book value of the facility over its estimated fair market value. In addition, during the second half of 2002, and in light of the continued weak demand in the markets we serve, we announced workforce reductions of approximately 665 employees. These workforce reductions were substantially complete by the end of the first half of 2003, and resulted in a pretax, primarily cash, severance charge of $8.4 million, net of a retirement benefits curtailment gain. These expenses were presented as restructuring costs on the statement of operations and were not included in segment results. Of the $42.8 million restructuring charge recorded in 2002, $8.4 million resulted in expenditures of cash.

OTHER EXPENSES, NET OF GAINS ON ASSET SALES

Other expenses, net of gains on asset sales, includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate, non-strategic investments and other assets, operating results from equity-method investees, minority interest and other non-operating income or expense. These items are presented primarily in selling and administrative expenses, and in other income (expense) in the statement of operations and resulted in other income of $2.5 million in 2004, and net charges of $47.7 million and $11.6 million in 2003 and 2002, respectively.

In 2003, charges for closed companies related to legal, environmental, insurance and other matters were approximately $30 million higher than in 2002. These charges include $22.5 million related to litigation with the San Diego Unified Port District, as more fully described in Note 14, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements, and which is included in selling and administrative expenses in the consolidated statement of operations; and changes in our estimates of our liability for environmental closure costs and for liabilities under retrospectively-rated insurance programs. In 2002, we recognized a pretax charge of $6.5 million for our approximate 30% share of the net losses in New Piper Aircraft ("New Piper"), and for the write-off of the carrying value of this investment.

RETIREMENT BENEFIT EXPENSE

Retirement benefit expenses, which primarily include pension and postretirement medical benefits, declined $14.6 million in 2004 primarily as a result of higher than expected returns on pension assets during 2003, and actions taken in the second quarter 2004 to control retiree medical costs, partially offset by the use of a lower discount rate assumption for determining benefit plan liabilities. Retirement benefit expense had increased significantly over the previous three years principally due to lower pension investments as a result of severe declines in the equity markets in 2000 through 2002, and higher benefit liabilities from long-term labor contracts negotiated in 2001. Retirement benefit expense, excluding the effect of curtailment gains and termination benefit charges, was $119.8 million for 2004, $134.4 million for 2003 and $21.8 million for 2002. Retirement benefit expenses have adversely affected both cost of sales and selling and administrative expenses. Retirement benefit expense included in cost of sales and selling and administrative expenses for the years ended 2004, 2003 and 2002 was as follows:

(In millions)                             2004          2003          2002
-----------------------------------     --------      --------      --------
Cost of sales                           $  (88.4)     $  (94.6)     $   (9.9)
Selling and administrative expenses        (31.4)        (39.8)        (11.9)
                                        ----------    ----------    ----------
Total retirement benefit expense        $ (119.8)     $ (134.4)     $  (21.8)
                                        ==========    ==========    ==========

The 2004 retirement benefit expense discussed above does not include the effects of the $71.5 million curtailment and settlement gain related to the elimination of retiree medical benefits for certain non-collectively bargained employees beginning in 2010, nor does this expense include the $25.3 million charge related to the Transition Assistance Program ("TAP") incentives associated with the new labor agreement at Allegheny Ludlum, which will be paid from our U.S. defined benefit pension plan. Additionally, the retirement benefit expense recognized through December 31, 2004 includes approximately $2 million of the expected $46 million favorable impact on our postretirement medical expense from the enactment of the Federal Medicare prescription drug benefit program in December 2003. The reduction in postretirement expense from this program will be recognized over a number of years.

Retirement benefit expenses for 2005 are expected to be approximately $87 million, with effects on cost of sales and selling and administrative expenses similar to the percentages in 2004. The pension expense component is expected to decline to approximately $63 million pretax for 2005 from $74 million for 2004 as actual returns on pension assets in 2004 were higher than expected, partially offset by a lower assumed discount rate to value pension benefit liabilities. The postretirement medical expense component is expected to decline to approximately $24 million for 2005 from $46 million for 2004 primarily as a result of actions taken in the 2004 second quarter to control certain retiree medical costs partially offset by a lower assumed discount rate to value benefit liabilities.

Results of operations for 2004 do not include an income tax provision or benefit for current or deferred taxes primarily as a result of the continuing uncertainty regarding full utilization of our net deferred tax asset and available operating loss carryforwards. In the 2003 fourth quarter we recorded a $138.5 million valuation allowance for the majority of our net deferred tax asset, based upon the results of our quarterly evaluation concerning the estimated probability that the net deferred tax asset would be realizable in light of our recent history of annual reported losses. This charge did not affect cash and does not affect our ability to utilize any of our deferred tax assets on future tax returns. Our income tax provision (benefit) for 2003 and 2002 was $33.1 million and $(38.0) million, respectively. In 2004, 2003 and 2002, we received $7.2 million, $65.6 million and $45.6 million, respectively, in income tax refunds related to carrying back the previous year's taxable loss to earlier years in which we had paid taxes. Under current tax laws we are substantially unable to carryback any current year or future tax losses to prior periods to obtain cash refunds of taxes paid during those periods. Current year federal tax losses, if any, can be carried forward for up to 20 years and applied against taxes owed in those future years. As of December 31, 2004, we had a U.S. Federal income tax net operating loss carryforward of approximately $140 million, which equates to a U.S. Federal tax benefit of approximately $50 million. This carryforward is available to offset any taxable income in 2005, or in future periods through 2024.

Deferred taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. At December 31, 2004, we had a net deferred tax asset of $53.0 million, net of a valuation allowance of $188.9 million. A significant portion of our deferred tax assets, prior to the valuation allowance, relates to postretirement employee benefit obligations, which have been recorded in the accompanying financial statements but which are not recognized for income tax reporting purposes until the benefits are paid. These benefit payments are expected to occur over an extended period of years. No valuation allowance was required on $53.0 million of net deferred tax assets based upon our ability to utilize these assets within the carryback, carryforward period, including consideration of tax planning strategies that we would undertake to prevent an operating loss or tax credit carryforward from expiring unutilized. We intend to maintain a valuation allowance on the net deferred tax asset until a realization event occurs to support the reversal of all or a portion of the reserve. As a result, future tax provisions or benefits are expected to be recognized only when taxable income exceeds net operating loss carryforwards resulting in cash tax payments, or when tax losses are recoverable as cash refunds.

FINANCIAL CONDITION AND LIQUIDITY

We believe that internally generated funds, current cash on hand and available borrowings under existing secured credit lines will be adequate to meet foreseeable liquidity needs. We did not borrow funds under our domestic secured credit facility during 2004 or 2003. However, a portion of this secured credit facility is utilized to support letters of credit.

Our ability to access the credit markets in the future to obtain additional financing, if needed, may be influenced by our credit rating. As of December 31, 2004, Standard & Poor's Ratings Services corporate credit rating for our Company was BB- with a stable outlook and our senior unsecured debt was rated B+. As of December 31, 2004, Moody's Investor Service's senior implied rating for our Company was B1 with a stable outlook, and senior unsecured rating was B3. Changes in our credit rating do not impact our access to, or cost of, our existing credit facilities.

We have no off-balance sheet financing relationships with variable interest or structured finance entities.

COMMON STOCK OFFERING

On July 28, 2004, we completed the sale of 13.8 million shares of our common stock in a public offering, including 1.8 million shares to cover overallotments, and received $229.7 million in net proceeds. The 13.8 million shares were reissued from treasury stock. We intend to use a portion of the net proceeds from the offering to enhance our abilities to make growth-oriented investments, including capital investments and acquisitions that we believe will offer attractive returns. We also intend to use a portion of the net proceeds to strengthen our balance sheet by reducing our outstanding liabilities, which may include making voluntary contributions to our U.S. defined benefit trust or the repayment or repurchase of our long-term debt securities. We may also use a portion of the net proceeds for other general corporate purposes. In September 2004, we executed a portion of our strategy by making a voluntary contribution of $50 million to our U.S. defined benefit plan to improve the funded position of our U.S. defined benefit pension plan. Based on current actuarial studies, we do not expect to be required to make cash contributions to this defined benefit pension plan during the next several years. However, we may elect, depending upon the investment performance of the pension plan assets and other factors, to make additional voluntary cash contributions to this pension plan in the future.

                                 00       01       02       03       04
                                 --       --       --       --       --
Managed Working Capital
($ millions)                     853      719      564      576      853
Managed Working Capital
as % of Sales                   36.8%    36.8%    32.4%    30.7%    29.5%

CASH FLOW AND WORKING CAPITAL

In 2004, cash generated by operations of $74.1 million, proceeds from sale of common stock of $229.7 million, proceeds from asset sales of $6.6 million, and proceeds from exercises of stock options of $7.6 million, were used to invest $49.9 million in capital equipment, approximately half of which was for two major capital projects (in the Flat-Rolled Products and High Performance Metals segments), fund a $50 million voluntary contribution to our U.S. pension plan, pay $7.5 million of the purchase price for the J&L assets, repay debt of $15.9 million, pay dividends of $21.2 million, and increase cash balances by $171.2 million, to $250.8 million at December 31, 2004. In 2003, cash generated from operations of $82.0 million, proceeds from asset sales of $9.8 million and proceeds from financing activities of $27.7 million, were used to invest $74.4 in capital equipment, primarily for two major projects (in the Flat-Rolled Products and High Performance Metals segments), pay dividends of $19.4 million, and increase cash balances by $20.2 million, to $79.6 million at December 31, 2003.

The impact of improved operating results in 2004 on cash flow from operations was offset by continuing investment in managed working capital to support the higher business levels and the impact of higher raw material costs. As part of managing the liquidity of the business, we focus on controlling inventory, accounts receivable and accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of the LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. During 2004, managed working capital, which we define as gross inventory plus accounts receivable less accounts payable, increased by $203.3 million, excluding working capital acquired as part of the J&L asset acquisition. This increase in managed working capital resulted from a $75.8 million increase in accounts receivable due to a higher level of sales in the 2004 fourth quarter compared to the fourth quarter of 2003, and a $210.2 million increase in inventory mostly as a result of higher raw material costs and increased business volumes, partially offset by a $82.7 million increase in accounts payable. Most of the increase in raw materials is expected to be recovered through surcharge and index pricing mechanisms. While the absolute amount of managed working capital employed in the business has increased over the past three years, managed working capital as a percent of annualized sales has declined to 29.5% in 2004 from 30.7% in 2003, and 32.4% in 2002 as we have continued to focus on being more efficient in operating our businesses. While inventory and accounts receivable balances increased during 2004, gross inventory turns, which exclude the effect of LIFO inventory valuation reserves, and days sales outstanding, which measures actual collection timing for accounts receivable both have improved over the past two years.

The components of managed working capital were as follows:

                                            December 31,      December 31,      December 31,
(In millions)                                  2004              2003              2002
---------------------------------------     -----------       -----------       -----------
Accounts receivable                         $     357.9       $     248.8       $     239.3
Inventory                                         513.0             359.7             392.3
Accounts payable                                 (271.2)           (172.3)           (171.3)
                                            -----------       -----------       -----------
Subtotal                                          599.7             436.2             460.3


Allowance for doubtful accounts                     8.4              10.2              10.1
LIFO reserve                                      223.9             111.7              74.7
Corporate and other                                20.6              17.4              18.6
                                            -----------       -----------       -----------
Managed working capital                     $     852.6       $     575.5       $     563.7
                                            ===========       ===========       ===========

Annualized prior 2 months sales             $   2,887.0       $   1,874.0       $   1,741.0
Managed working capital as a % of sales            29.5%             30.7%             32.4%

Capital expenditures for 2004 were $49.9 million compared to $74.4 million in 2003, as we completed our two major strategic capital projects begun in 2002:
two new electric arc furnaces at our flat-rolled products melt shop located in Brackenridge, PA, and investments to enhance the capabilities at our high performance metals long products rolling mill facility located in Richburg, SC. The second electric arc furnace in the Flat-Rolled Products segment commenced operations in the 2004 third quarter, with the first new furnace having commenced production in 2003 fourth quarter. The high performance metals long products facility commenced operations in the 2004 second quarter. Capital expenditures in 2002 were $48.7 million as we controlled our investment spending due to the uncertain economy and to preserve liquidity. Capital expenditures for 2005 are expected to be between $85 and $100 million.

Total debt outstanding increased $50.6 million, to $582.7 million at December 31, 2004, from $532.1 million at December 31, 2003. The increase was primarily related to $59.5 million in seller financing for the J&L asset acquisition, partially offset by net debt repayments primarily for industrial revenue bonds. In managing our overall capital structure, one of the measures on which we focus is net debt to total capitalization, which is the percentage of our debt to our total invested and borrowed capital. In determining this measure, debt and total capitalization are net of cash on hand which may be available to reduce borrowings. Our net debt to total capitalization ratio improved to 43.8% at December 31, 2004 from 72.1% at the end of 2003. The lower ratio results primarily from an increase in cash on hand and stockholders' equity resulting from the common stock offering and the improvement in results of operations, partially offset by an increase in outstanding debt due primarily to the seller financing for the J&L asset acquisition.

                               December 31,       December 31,
(In millions)                      2004               2003
--------------------------     ------------       ------------
Total debt                     $      582.7       $      532.1
Less: Cash                           (250.8)             (79.6)
                               ------------       ------------
Net debt                              331.9              452.5

Net debt                              331.9              452.5
Total stockholders' equity            425.9              174.7
                               ------------       ------------
Total capital                  $      757.8       $      627.2

Net debt to capital ratio              43.8%              72.1%

Interest rate swap contracts are used from time-to-time to manage our exposure to interest rate risks. In 2002, we entered into interest rate swap contracts with respect to a $150 million notional amount related to our 8.375% Notes due 2011 ("Notes"), which involved the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the contracts without an exchange of the underlying principal amount. These "receive fixed, pay floating" arrangements were designated as fair value hedges, and effectively converted $150 million of the Notes to variable rate debt. As a result, changes in the fair value of the swap contracts and the notional amount of the underlying fixed rate debt are recognized in the statement of operations. In 2003, we terminated the majority of these interest rate swap contracts and received $15.3 million in cash. Subsequent to the interest rate swap terminations, in 2003 we entered into new "receive fixed, pay floating" interest rate swap arrangements related to the Notes which re-established, in total, a $150 million notional amount that effectively converted this portion of the Notes to variable rate debt. In the 2004 third quarter in light of the prospect of increasing short- term interest rates, we terminated all remaining interest rate swap contracts still outstanding, and realized net cash proceeds of $1.5 million. These gains on settlement realized in 2004 and 2003 remain a component of the reported balance of the Notes, and are ratably recognized as a reduction to interest expense over the remaining life of the Notes, which is approximately seven years. At December 31, 2004, the deferred settlement gain was $13.7 million. The result of the "receive fixed, pay floating" arrangements was a decrease in interest expense of $4.4 million, $6.7 million and $4.9 million for the years ended December 31, 2004, 2003 and 2002, respectively, compared to the fixed interest expense of the ten-year Notes.

During the 2003 second quarter, we entered into a $325 million four-year senior secured domestic revolving credit facility ("the secured credit facility" or "the facility"), which was amended on April 15, 2004. The facility, which replaced a $250 million unsecured facility, is secured by all accounts receivable and inventory of our U.S. operations, and includes capacity for up to $175 million in letters of credit. As of December 31, 2004, there had been no borrowings made under either the secured credit facility or the former unsecured credit facility since the beginning of 2002. Outstanding letters of credit issued under the secured credit facility were approximately $121 million at December 31, 2004.

The secured credit facility limits capital expenditures, investments and acquisitions of businesses, new indebtedness, asset divestitures, paym