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ACG6175 ? Final Examination-Alcoa and subsidiaries




Question;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!


Paper#38119 | Written in 18-Jul-2015

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