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. Exams that contain references to materials or information that is not contained in the case will receive a grade of zero!

 

BE SPECIFIC!

 

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.



AluminaAfter-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 ProductsATOI 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 ProductsATOI 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 SolutionsATOI 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. Exams that contain references to materials or information that is not contained in the case will receive a grade of zero!

 

BE SPECIFIC!

  • 7 years ago
assignment
NOT RATED

Purchase the answer to view it

blurred-text
  • attachment
    alcoas_case_study_final_.doc