ACG 6175 Final Examination

ACG6175 – Final Examination

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NEW YORK–(.businesswire.com/” style=”font-size: x-small; font-weight: normal;”>BUSINESS WIRE)—01/09/2008
Alcoa (NYSE: AA) today announced it achieved record results in revenues, income from
continuing operations and cash from operations for the full year 2007. Revenues
for 2007 were $30.7 billion, compared to $30.4 billion in 2006. Annual income
from continuing operations rose to $2.6 billion, or $2.95 per diluted share,
for 2007, a 19 percent increase compared to $2.2 billion, or $2.47, in 2006.
And, cash from operations for 2007 increased 21 percent to more than $3.1
billion from $2.6 billion in 2006.

“For the second year in a row, Alcoa has achieved company
all-time records in revenues, income from continuing operations and cash
generation,” said Alain Belda, Alcoa Chairman and CEO. “We battled
substantially higher material input and energy costs, and currency impacts
while simultaneously continuing to execute on the largest capital investment
program in our history.

“We have invested in new plants, expanded production
at others, modernized operations, renegotiated long-term power agreements, and
built new energy facilities to extend our energy access at
competitive rates, while also continuing to invest in growth markets such as
Brazil, China and Russia,” Belda said.

“These actions, combined with portfolio and cash flow
management, our share repurchase program, conservative leverage, and our
commitment to sustainability delivered results now, and will continue
to generate quality profitable growth for decades,” added Belda. “In
2007, Alcoans delivered yet again. This is what builds a stronger Company for
our stakeholders.”

Fourth quarter income from continuing operations was $624
million, or $0.74. Included in the results are a favorable restructuring
adjustment and a tax benefit totaling $323 million or $0.38 per share, almost
all of which stems from the recent agreement to sell the packaging and consumer
businesses. Income from continuing operations in the 2006 fourth quarter was
$258 million, or $0.29, and $558 million, or $0.64, in the third quarter 2007.

Net income for the fourth quarter 2007 was $632 million,
or $0.75, which includes the restructuring adjustment and the benefit from the
agreement to sell the packaging and consumer business. Net income for the
fourth quarter 2006 was $359 million, or $0.41, and $555 million, or $0.63, in
the 2007 third quarter.

Revenues for the 2007 fourth quarter were $7.4 billion,
compared to $7.8 billion a year ago as a result of lower LME prices and the
exclusion of results from the soft alloy extrusion business which is now part
of a joint venture. The soft alloy extrusion business had revenues of
approximately $560 million in the fourth quarter of 2006.

LME = LONDON METAL EXCHANGE.Prices for aluminum, copper and nickel, unlike steel,
are set by contracts traded on commodity exchanges such as the London Metal
Exchange and the New York Mercantile Exchange.

Cash Generation, ROC, and
Growth

Cash from operations in the fourth quarter 2007 was $643
million, bringing full-year cash from operations to more than $3.1 billion,
compared to $2.6 billion in 2006 and helping to keep the Company’s
debt-to-capital ratio within its targeted range at 30.2 percent.

The Company’s trailing 12-month return on capital (ROC)
was 16.1 percent, excluding investments in growth projects. Including
investments in growth projects, ROC stands at 12.7 percent, well above the cost
of capital.

In 2007, the Company completed major growth projects,
including its first greenfield smelter in 20 years in Iceland, a new anode
plant in Mosjoen, Norway, and its third flat-rolled products facility in China
(Kunshan). In addition, major progress was made on several other growth
projects including the Juruti bauxite mine, the expansion of the Bohai rolling
mill in China, and expansion of the Sao Luis alumina refinery.

The Company made significant progress to extend the life
of existing facilities through renegotiating long-term power agreements
including those in Massena, NY and Wenatchee, WA in 2007. The Company also
continued investments in Brazil including the Serra do Facao hydroelectric
project to further increase its self-sufficiency there.

The Company is now operating primary aluminum production
at a run rate of approximately four million metric tons per year.

The Company made major progress in 2007 on its portfolio
management plan. During the year, the Company reached agreement to sell its
packaging and consumer businesses; divested the automotive castings business;
monetized its stake in Chalco to enable redeployment of capital into other
value-adding options, including projects in China; and formed a joint venture
with Sapa for its soft alloy extrusion business.

In 2007, Alcoa also increased its share repurchase program
from 10 percent to 25 percent of outstanding shares and increased its dividend
by 13 percent during the year. Through the end of the fourth quarter the
Company has repurchased 68 million shares, or approximately eight percent of
shares outstanding, as part of its share repurchase program, leaving
approximately 150 million shares, or 18 percent of shares outstanding,
remaining within the authorization.

Segment and Other Results

NOTE:All comparisons are on a sequential quarter basis,
unless noted. ATOI = “AFTER TAX OPERATING INCOME.”ATOI is similar to
Net Operating Profit After Tax, or NOPAT.

Alumina –After-tax
operating income (ATOI) was $205 million, a decrease of $10 million, or five
percent, from the prior quarter. System production increased by a net of 80 kmt
as Suralco, San Ciprian and Pinjarra set quarterly production records and
Jamalco continued its recovery from Hurricane Dean. However, higher freight and
energy costs and unfavorable currency offset production gains.

Primary Metals –ATOI was $196 million, down $87 million, or 31 percent, compared to the
prior quarter. The majority of the decrease resulted from lower LME prices and
unfavorable currency. These items were partially offset by the recovery at the
Rockdale and Tennessee smelters and a three percent production increase. The
company purchased approximately 55 kmt of primary metal for internal use.

Flat-Rolled Products –ATOI was a loss of $16 million for the quarter, down $77 million from the
prior quarter. Weak performance in Russia and China accounted for 50 percent of
the ATOI decline in the quarter. For Russia specifically, the increased loss
was due to higher operational and energy costs and unfavorable currency. The
remaining decline in the segment’s ATOI is mostly due to general market
weakness in the U.S. and Europe flat-rolled businesses, weaker product mix, and
de-stocking by aerospace customers. Finally, results for the Australian
flat-rolled business declined following restructuring last quarter that is
designed to reduce headcount and simplify product mix. In addition, the weakening
U.S. dollar has had a negative impact in this business.

Extruded and End Products –ATOI was $16 million, up $3 million, or 23 percent, from the prior
quarter. Market and operating conditions were comparable to the prior quarter
with margin improvements accounting for the increase.

Engineered Solutions –ATOI was $58 million or essentially flat to the prior quarter ATOI of $60
million. Improvements from the wire harness business restructuring offset the
weaker market conditions in forgings and investment castings. On a year over
year basis, the Fastening Systems and Power & Propulsion (Howmet)
businesses had outstanding years with ATOI up 36 percent and 47 percent,
respectively.

Packaging & Consumer –ATOI was $56 million, up $20 million, or 56 percent, from the prior
quarter. The normal seasonal decrease in the closures business was offset by
seasonal improvements in the consumer products business. With the pending sale,
depreciation was ceased in the segment leading to a positive impact of approximately
$20 million.

Recent
Earnings Forecasts:

Qtr.4
2007 Qtr.3 2007 Qtr.2 2007 Qtr.1
2007
Estimate
0.33 0.65 0.81 0.76

Actual
0.36 0.64 0.81 0.79

Alcoa and subsidiaries

Statement of Consolidated Income (unaudited), continued

(in millions, except per-share, share, and metric ton
amounts)

Year ended

December 31,

2006

2007

Sales

$

30,379

$

30,748

Cost of goods sold (exclusive of expenses below)

23,318

24,248

Selling, general administrative, and other expenses

1,402

1,472

Research and development expenses

213

249

Provision for depreciation, depletion, and amortization

1,280

1,268

Goodwill impairment charge

–

133

Restructuring and other charges

543

399

Interest expense

384

401

Other income, net

(193)

(1,913)

Total costs and
expenses

26,947

26,257

Income from
continuing operations before taxes on income

3,432

4,491

Provision for taxes on income

835

1,555

Income from continuing operations before minority
interests’ share

2,597

2,936

Less: Minority interests’ share

436

365

Income from
continuing operations

2,161

2,571

Income (loss) from discontinued operations

87

(7)

NET INCOME

$

2,248

$

2,564

Earnings (loss) per common share:

Basic:

Income from continuing operations

$

2.49

$

2.98

Income (loss) from discontinued operations

.10

–

Net income

$

2.59

$

2.98

2006

2007

Average number of shares used to compute:

Basic earnings per common share

868,819,955

860,771,021

Common stock outstanding at the end of the period

867,739,544

827,401,800

Shipments of aluminum products (metric tons)

5,545,000

5,393,000

Alcoa and subsidiaries Consolidated Balance Sheet (a =
unaudited) – in millions

December 31, 2006 (a)

December 31, 2007

ASSETS

Current assets:

Cash and cash equivalents

$

506

$

483

Receivables from customers, less allowances of
$68 in 2006 and $72 in 2007

2,788

2,602

Other receivables

301

451

Inventories

3,380

3,326

Prepaid expenses and other current assets

1,378

1,224

Total current
assets

8,353

8,086

Properties, plants, and equipment

27,689

31,601

Less: accumulated depreciation, depletion, and
amortization

13,682

14,722

Properties, plants, and equipment, net

14,007

16,879

Goodwill

4,885

4,806

Investments

1,718

2,038

Other assets

3,939

4,046

Assets held for sale

4,281

2,948

Total assets

$

37,183

$

38,803

LIABILITIES

Current liabilities:

Short-term borrowings

$

462

$

569

Commercial paper

340

856

Accounts payable, trade

2,407

2,787

Accrued compensation and retirement costs

949

943

Taxes, including taxes on income

851

644

Other current liabilities

1,360

1,165

Long-term debt due within one year

510

202

Total current
liabilities

6,879

7,166

Commercial paper

1,132

–

Long-term debt, less amount due within one year

4,777

6,371

Accrued pension benefits

1,540

1,098

Accrued postretirement benefits

2,956

2,753

Other noncurrent liabilities and deferred credits

2,002

1,943

Deferred income taxes

762

545

Liabilities of operations held for sale

704

451

Total liabilities

20,752

20,327

MINORITY INTERESTS

1,800

2,460

SHAREHOLDERS’
EQUITY

Preferred stock

55

55

Common stock

925

925

Additional capital

5,817

5,774

Retained earnings

11,066

13,039

Treasury stock, at cost

(1,999)

(3,440)

Accumulated other comprehensive loss

(1,233)

(337)

Total shareholders’ equity

14,631

16,016

Total liabilities and equity

$

37,183

$

38,803

(a) The Consolidated Balance Sheet as of
December 31, 2006 has been reclassified to reflect the movement of the
automotive castings and packaging and consumer businesses to held for sale in
the third quarter of 2007.

QUESTIONS:1.) Decompose Alcoa’s ROE for 2006 and 2007. In what direction do you see the company’s performance moving? What other information would you like to see (be specific)? 2.) Alcoa’s net income for the 3rd quarter of 2007 increased 86% over 3rd quarter results from 2006. Why then did the stock price drop 6% after the company announced those earnings? 3.) Based on the data presented, what operating segments comprise Alcoa’s business? Based on the reconciliation of ATOI to Net Income, what can you say about the quality of Alcoa’s income? Be specific in your answer. 4.) How would you classify (from an economic perspective) the products sold by Alcoa? What external factors limit Alcoa’s flexibility in pricing those products? Which segments of Alcoa’s operations do you think are most directly impacted by this pricing limitation? 5.) Given the pricing limitations on their products, on what basis does Alcoa compete? Why might that make it difficult to compete with rising entities in diverse global locations, such as United Company Rusal, that that has access to low-cost hydropower in Russia?REQUIRED:
Compose your answers in Standard
English.
Answer all parts of each question
separately.
Label each of your responses
accordingly.
Provide and label the elements of
any supporting calculations.