content_image/121029.jpg
• Continued success in implementing the ATI Business System, which is driving lean manufacturing throughout our operations. For example, even though costs of our major raw materials increased approximately 27% during 2003, gross inventory increased by less than 1%, reflecting our ATI Business System initiatives. At December 31, 2003, managed working capital was 30.7% of annualized sales compared to 32.4% of annualized sales at 2002 year-end. We define managed working capital as accounts receivable and gross inventories less accounts payable. 

• Significant improvement in safety. As a result of our continuing focus on and commitment to safety, in 2003 our OSHA Total Recordable Incident Rate improved by 29% and Lost Time Case Rate improved by 38% compared to 2002. 

• Improved and more stable financial liquidity. During the 2003 second quarter, we entered into a $325 million four- year senior secured domestic revolving credit facility. 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 $150 million in letters of credit. While there were no borrowings under the secured credit facility during 2003, a portion of the letters of credit capacity is being utilized. Cash flow from operations for 2003 was $82.0 million and cash on hand increased to $79.6 million at December 31, 2003, $20.2 million higher than at the end of 2002. 

As a result of actions taken in 2003, we believe ATI should benefit from improving business conditions in 2004. Our goal is to achieve profitability in our Flat-Rolled Products segment and improve operating earnings in our High Performance Metals and Engineered Products segments in 2004. Reducing costs will remain a focus, and our 2004 cost reduction objective is $104 million. While retirement benefit expense will again be a significant negative to financial results, it will remain largely non-cash. Retiree medical benefits represent a significant portion of our retirement benefit expense and we are exploring ways to reduce these costs. While we are concerned about raw material and energy price volatility, especially for nickel and natural gas, we are taking actions to manage the impact of this volatility internally and we are increasing selling prices for many of our products. Our current 2004 capital expenditures are expected to be between $60 and $70 million, which is within our forecasted depreciation expense of $72 million. 

## Results of Operations 

Sales were $1.94 billion in 2003, $1.91 billion in 2002 and $2.13 billion in 2001. International sales represented approximately 23 percent of total sales for all years. 

Operating profit was $19.9 million in 2003, $27.3 million in 2002 and $54.3 million in 2001. Losses before taxes were $280.2 million, $103.8 million and $36.4 million, respectively. These results included restructuring charges and litigation expense in 2003 of $84.9 million, and restructuring charges of $42.8 million and $74.2 million in 2002 and 2001, respectively. Our measure of operating profit, which we use to analyze the results of our business segments, excludes corporate expenses, net interest expense, management transition and restructuring costs, other costs net of gains on asset sales, and retirement benefit expense or income. We believe operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level. 

A severe decline in the equity markets in 2000 through 2002 and higher benefit liabilities from long-term labor contracts negotiated in 2001 resulted in retirement benefit expenses of $134.4 million in 2003 and $21.8 million for 2002, compared to retirement benefit income of $53.1 million for 2001. 

Net losses, before the cumulative effect of change in accounting principle, were $313.3 million, $65.8 million and $25.2 million for 2003, 2002 and 2001, respectively. The net loss for 2003 included a $138.5 million charge for a valuation allowance on 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 and 2001 pretax losses were reduced by income tax benefits of $38.0 million and $11.2 million, respectively. 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. 2001 included charges of $74.2 million for the permanent idling of the Houston, PA melt shop in the Flat-Rolled Products segment, workforce reductions and other asset impairments. Operating results for 2003 and 2002 exclude goodwill amortization expense while 2001 included goodwill amortization expense of $5.8 million. 

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: 

<img src='content_image/121029.jpg'>

