Notes to Consolidated Financial Statements

10 Financial Instruments

As a result of the company’s worldwide operating activities, it is exposed to changes in foreign currency exchange rates, which affect its results of operations and financial condition. The company and certain subsidiaries enter into forward exchange contracts to manage exposure to currency rate fluctuations, primarily related to anticipated purchases of inventory and equipment. At December 31, 2003 and 2002, the company had forward foreign exchange contracts, all having maturities of less than eighteen months, with notional amounts of $145,590 and $72,070, and fair values of $4,416 and $2,503, respectively. The forward foreign exchange contracts were entered into primarily by the company’s domestic entity to manage Euro exposures relative to the U.S. dollar and its European subsidiaries to manage Euro and U.S. dollar exposures. The realized and unrealized gains and losses on these contracts are deferred and included in inventory or property, plant and equipment, depending on the transaction. These deferred gains and losses are reclassified from accumulated other comprehensive loss and recognized in earnings when the future transactions occur, or through depreciation expense.

The carrying value of cash and cash equivalents, accounts receivable, commercial paper, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The fair value of the company's fixed-rate debt, based on quoted market prices, was $533,000 and $325,000 at December 31, 2003 and 2002, respectively. The carrying value of this debt was $546,000 and $308,000.

11 Research and Development

Expenditures committed to research and development amounted to approximately $53,000 in 2003 and 2002; and $54,000 in 2001. Such expenditures may fluctuate from year to year depending on special projects and needs.

12 Equity Investments

The company, prior to the Torrington acquisition, owned equity interests in certain joint ventures. As part of the Torrington acquisition, several additional equity interests were acquired. The balances related to investments accounted for under the equity method are reported in miscellaneous receivables and other assets on the consolidated balance sheets, which were approximately $34,000 and $25,100 at December 31, 2003 and 2002, respectively.

Equity investments are reviewed for impairment when circumstances (such as lower than expected financial performance or change in strategic direction) indicate that the carrying value of the investment may not be recoverable. If an impairment does exist, the equity investment is written down to its fair value with a corresponding charge to the consolidated statement of operations.

During 2000, the company’s Steel Group invested in a joint venture, PEL, to commercialize a proprietary technology that converts iron units into engineered iron oxides for use in pigments, coatings and abrasives. In the fourth quarter of 2003, the company concluded its investment in PEL was impaired due to the following indicators of impairment: history of negative cash flow and losses; 2004 operating plan with continued losses and negative cash flow; and the continued required support from the company or another party. In the fourth quarter of 2003, the company recorded a non-cash impairment loss of $45,700, which is reported in other expense-net on the consolidated statement of operations.

The company has guaranteed certain of PEL’s indebtedness. Refer to Note 7-Contingencies. The amounts outstanding on the debts underlying these guarantees totaled $26,500 at December 31, 2003, which approximates their fair value. During the fourth quarter of 2003, the company recorded these guarantees and has reported them in short-term debt on the consolidated balance sheet at December 31, 2003. Additionally, during its involvement with PEL that began in 2000, the company made advances to and investments in PEL, the net balance of which totaled $19,200, exclusive of the debt guarantees.

Through December 31, 2003, the company recorded its proportional share (20.5%) of PEL’s operating results using the equity method since the company does not own a majority voting interest in PEL. The company is currently evaluating the effects of the FASB Interpretation No. 46 on the accounting for its ownership interest in PEL. Based on its preliminary analysis, the company has concluded that PEL is a variable interest entity and that the company is the primary beneficiary. The company will adopt Interpretation No. 46 during the first quarter of 2004. The company does not expect that the adoption of FASB Interpretation No. 46 will have a material effect on the company’s financial position, results of operations or cash flows.

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