Management’s Discussion and Analysis

Operations Results of Operations Liquidity and Capital Resources Market Risk Exposures Application of Critical Accounting Pronouncements Recent Accounting Pronouncements Forward-Looking Information

Overview Summary of Cash Flow Information Operating Activities Investing Activities Business Segment Cash Flows Financing Activities Capitalization Off Balance Sheet Arrangements Contractual Obligations Other Potential Use of Credit Other Contingent Gains and Losses

Liquidity and Capital Resources

Overview

Over the last three years, the Company has used the cash it has generated from operations and the divestiture of natural resources to strengthen its balance sheet by reducing debt and making contributions to the VEBA and its primary U.S. pension plan.

Since the beginning of 2001, the Company has reduced debt by over $120 million, despite the effects of foreign exchange changes on the reported value of non-U.S. dollar denominated debt and the inclusion of $43.2 million of DTA obligations as debt. Prior to the end of 2002, DTA obligations were classified in other long-term liabilities of the Company. In addition to debt reduction, over the last two years, the Company has contributed $82 million to the VEBA and $55 million to the U.S. pension plan.

Proceeds of natural resource asset sales have exceeded $185 million in 2002 and 2003. In addition to this benefit, with the sale of the coal business, the volatility in cash flows caused by the fluctuations in coal markets has been removed. The Company believes this should make future cash flows more stable as they will be more aligned with the performance of its three Business and Security Services businesses.

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