ACG6175 – Final Examination-Alcoa and subsidiaries

ACG6175 – Final Examination

Name ___________________________________________________

Panther ID ______________________________________________

Score:

Question:

1 / 4

2 / 4

3 / 4

4 / 4

5 / 4

Total / 20
NEW YORK–(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.

Alcoa and subsidiaries – Segment Information (unaudited) –
dollars in millions, except realized prices; production and shipments in
thousands of metric tons [kmt])

4Q06

2006

1Q07

2Q07

3Q07

4Q07

2007

Alumina:

Production (kmt)

3,790

15,128

3,655

3,799

3,775

3,855

15,084

Third-party alumina shipments (kmt)

2,084

8,420

1,877

1,990

1,937

2,030

7,834

Third-party sales

$

711

$

2,785

$

645

$

712

$

664

$

688

$

2,709

Intersegment sales

$

550

$

2,144

$

579

$

587

$

631

$

651

$

2,448

Equity income (loss)

$

1

$

(2 )

$

1

$

–

$

(1 )

$

1

$

1

Depreciation, depletion, and amortization

$

56

$

192

$

56

$

62

$

76

$

73

$

267

Income taxes

$

115

$

428

$

100

$

102

$

89

$

49

$

340

After-tax operating income (ATOI)

$

259

$

1,050

$

260

$

276

$

215

$

205

$

956

Primary Metals:

Aluminum (kmt)

908

3,552

899

901

934

959

3,693

Third-party aluminum shipments (kmt)

556

2,087

518

565

584

624

2,291

Average realized price per kmt of aluminum

$

2,766

$

2,665

$

2,902

$

2,879

$

2,734

$

2,646

$

2,784

4Q06

2006

1Q07

2Q07

3Q07

4Q07

2007

Third-party sales

$

1,698

$

6,171

$

1,633

$

1,746

$

1,600

$

1,597

$

6,576

Intersegment sales

$

1,524

$

6,208

$

1,477

$

1,283

$

1,171

$

1,063

$

4,994

Equity income

$

18

$

82

$

22

$

18

$

11

$

6

$

57

Depreciation, depletion, and amortization

$

97

$

395

$

95

$

102

$

102

$

111

$

410

Income taxes

$

180

$

726

$

214

$

196

$

80

$

52

$

542

ATOI

$

480

$

1,760

$

504

$

462

$

283

$

196

$

1,445

Flat-Rolled Products:

Third-party aluminum shipments (kmt)

564

2,273

568

583

602

574

2,327

Third-party sales

$

2,127

$

8,297

$

2,275

$

2,344

$

2,309

$

2,243

$

9,171

Intersegment sales

$

66

$

246

$

60

$

63

$

59

$

59

$

241

Equity loss

$

(1)

$

(2 )

$

–

$

–

$

–

$

–

$

–

Depreciation, depletion, and amortization

$

55

$

219

$

55

$

55

$

58

$

55

$

223

Income taxes

$

(2)

$

68

$

26

$

33

$

31

$

5

$

95

ATOI

$

62

$

255

$

62

$

93

$

61

$

(16 )

$

200

Extruded and End Products:

Third-party aluminum shipments (kmt)

203

877

213

146

78

69

506

Third-party sales

$

1,070

$

4,419

$

1,175

$

965

$

563

$

543

$

3,246

Intersegment sales

$

25

$

99

$

42

$

26

$

13

$

7

$

88

Equity income (loss)

$

–

$

–

$

–

$

9

$

(2

)

$

7

$

14

Depreciation, depletion, and amortization

$

31

$

118

$

9

$

10

$

11

$

9

$

39

Income taxes

$

2

$

18

$

11

$

29

$

5

$

9

$

54

ATOI

$

27

$

60

$

34

$

46

$

13

$

16

$

109

4Q06

2006

1Q07

2Q07

3Q07

4Q07

2007

Engineered Solutions:

Third-party aluminum shipments (kmt)

30

139

31

30

27

24

112

Third-party sales

$

1,346

$

5,456

$

1,449

$

1,478

$

1,407

$

1,391

$

5,725

Equity loss

$

(5 )

$

(4 )

$

–

$

–

$

–

$

–

$

–

Dep, depl, & amort

$

44

$

169

$

41

$

42

$

46

$

43

$

172

Income taxes

$

(15)

$

101

$

44

$

47

$

38

$

11

$

140

ATOI

$

73

$

331

$

93

$

105

$

60

$

58

$

316

Packaging and Consumer:

Third-party aluminum shipments (kmt)

46

169

35

40

37

45

157

Third-party sales

$

837

$

3,235

$

736

$

837

$

828

$

887

$

3,288

Equity income

$

1

$

1

$

–

$

–

$

–

$

–

$

–

Dep, depl, & amort

$

32

$

124

$

30

$

30

$

29

$

–

$

89

Income taxes

$

11

$

33

$

7

$

17

$

17

$

27

$

68

ATOI

$

26

$

95

$

19

$

37

$

36

$

56

$

148

Reconciliation of ATOI to consolidated net income:

4Q06

2006

1Q07

2Q07

3Q07

4Q07

2007

Total segment ATOI

$

927

$

3,551

$

972

$

1,019

$

668

$

515

$

3,174

Unallocated amounts (net of tax):

Impact of LIFO

(66 )

(170

)

(27)

(16)

10

9

(24)

Interest income

14

58

11

9

10

10

40

Interest expense

(61 )

(250

)

(54)

(56)

(98)

(53)

(261)

Minority interests

(98 )

(436

)

(115

)

(110)

(76)

(64)

(365)

Corporate expense

(82 )

(317

)

(86)

(101)

(101

)

(100

)

(388)

Restructuring and other charges

(386

)

(379

)

(18)

21

(311

)

1

(307)

Discontinued operations

101

87

(11)

(1)

(3)

8

(7)

Other

10

104

(10)

(50)

456

306

702

Consolidated net income

$

359

$

2,248

$

662

$

715

$

555

$

632

$

2,564

The difference between certain segment financial information
totals and consolidated financial information is in Corporate.

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.

BE SPECIFIC!