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ACG 6175 Final Examination




Question;ACG6175 ? Final Examination;Name;Panther ID;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.;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.


Paper#37841 | Written in 18-Jul-2015

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