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ACG 6175 Final Examination 2014




Question;NEW YORK--(BUSINESS WIRE)01/09/2008Alcoa (NYSE: AA) today announced it achieved record results in revenues, incomefrom 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. Annualincome from continuing operations rose to $2.6 billion, or $2.95 per dilutedshare, 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 $3.1billion from $2.6 billion in 2006.For the second year in a row, Alcoa has achieved company all-time records inrevenues, income from continuing operations and cash generation, said AlainBelda, Alcoa Chairman and CEO. We battled substantially higher materialinput and energy costs, and currency impacts while simultaneously continuingto execute on the largest capital investment program in our history.We have invested in new plants, expanded production at others, modernizedoperations, renegotiated long-term power agreements, and built new energyfacilities to extend our energy access at competitive rates, while also continuingto invest in growth markets such as Brazil, China and Russia, Belda said."These actions, combined with portfolio and cash flow management, our sharerepurchase program, conservative leverage, and our commitment tosustainability delivered results now, and will continue to generate qualityprofitable growth for decades, added Belda. In 2007, Alcoans delivered yetagain. 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 taxbenefit totaling $323 million or $0.38 per share, almost all of which stems fromthe recent agreement to sell the packaging and consumer businesses. Incomefrom 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, whichincludes the restructuring adjustment and the benefit from the agreement to sellthe packaging and consumer business. Net income for the fourth quarter 2006was $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 billiona year ago as a result of lower LME prices and the exclusion of results from thesoft alloy extrusion business which is now part of a joint venture. The soft alloyextrusion business had revenues of approximately $560 million in the fourthquarter of 2006.LME = LONDON METAL EXCHANGE. Prices for aluminum, copper and nickel,unlike steel, are set by contracts traded on commodity exchanges such as theLondon Metal Exchange and the New York Mercantile Exchange.Cash Generation, ROC, and GrowthCash from operations in the fourth quarter 2007 was $643 million, bringingfull-year cash from operations to more than $3.1 billion, compared to $2.6billion in 2006 and helping to keep the Companys debt-to-capital ratio withinits targeted range at 30.2 percent.The Companys trailing 12-month return on capital (ROC) was 16.1 percent,excluding investments in growth projects. Including investments in growthprojects, ROC stands at 12.7 percent, well above the cost of capital.In 2007, the Company completed major growth projects, including its firstgreenfield smelter in 20 years in Iceland, a new anode plant in Mosjoen,Norway, and its third flat-rolled products facility in China (Kunshan). Inaddition, major progress was made on several other growth projects includingthe Juruti bauxite mine, the expansion of the Bohai rolling mill in China, andexpansion of the Sao Luis alumina refinery.The Company made significant progress to extend the life of existing facilitiesthrough renegotiating long-term power agreements including those in Massena,NY and Wenatchee, WA in 2007. The Company also continued investments inBrazil including the Serra do Facao hydroelectric project to further increase itsself-sufficiency there.The Company is now operating primary aluminum production at a run rate ofapproximately 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 andconsumer businesses, divested the automotive castings business, monetized itsstake in Chalco to enable redeployment of capital into other value-addingoptions, including projects in China, and formed a joint venture with Sapa forits soft alloy extrusion business.In 2007, Alcoa also increased its share repurchase program from 10 percent to25 percent of outstanding shares and increased its dividend by 13 percentduring the year. Through the end of the fourth quarter the Company hasrepurchased 68 million shares, or approximately eight percent of sharesoutstanding, as part of its share repurchase program, leaving approximately 150million shares, or 18 percent of shares outstanding, remaining within theauthorization.Segment and Other ResultsNOTE: All comparisons are on a sequential quarter basis, unless noted. ATOI =AFTER TAX OPERATING INCOME. ATOI is similar to Net OperatingProfit 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 productionincreased by a net of 80 kmt as Suralco, San Ciprian and Pinjarra set quarterlyproduction records and Jamalco continued its recovery from Hurricane Dean.However, higher freight and energy costs and unfavorable currency offsetproduction 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 lowerLME prices and unfavorable currency. These items were partially offset by therecovery at the Rockdale and Tennessee smelters and a three percentproduction increase. The company purchased approximately 55 kmt of primarymetal for internal use.Flat-Rolled Products ATOI was a loss of $16 million for the quarter, down $77million from the prior quarter. Weak performance in Russia and Chinaaccounted for 50 percent of the ATOI decline in the quarter. For Russiaspecifically, the increased loss was due to higher operational and energy costsand unfavorable currency. The remaining decline in the segments ATOI ismostly due to general market weakness in the U.S. and Europe flat-rolledbusinesses, weaker product mix, and de-stocking by aerospace customers.Finally, results for the Australian flat-rolled business declined followingrestructuring last quarter that is designed to reduce headcount and simplifyproduct mix. In addition, the weakening U.S. dollar has had a negative impactin this business.Extruded and End Products ATOI was $16 million, up $3 million, or 23percent, from the prior quarter. Market and operating conditions werecomparable to the prior quarter with margin improvements accounting for theincrease.Engineered Solutions ATOI was $58 million or essentially flat to the priorquarter ATOI of $60 million. Improvements from the wire harness businessrestructuring offset the weaker market conditions in forgings and investmentcastings. On a year over year basis, the Fastening Systems and Power &Propulsion (Howmet) businesses had outstanding years with ATOI up 36percent 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 businesswas offset by seasonal improvements in the consumer products business. Withthe pending sale, depreciation was ceased in the segment leading to a positiveimpact of approximately $20 million.Recent Earnings Forecasts:EstimateActualQtr.4 20070.330.36Qtr.3 20070.650.64Qtr.2 20070.810.81Qtr.1 20070.760.79Alcoa and subsidiariesStatement of Consolidated Income (unaudited), continued(in millions, except per-share, share, and metric ton amounts)Year endedDecember 31,20062007$ 30,379$ 30,748Cost of goods sold (exclusive of expenses below)Selling, general administrative, and other expensesResearch and development expensesProvision for depreciation, depletion, and amortizationGoodwill impairment chargeRestructuring and other chargesInterest expenseOther income, netTotal costs and expenses23,3181,4022131,280543384(193)26,94724,2481,4722491,268133399401(1,913)26,257Income from continuing operations before taxes onincome3,4324,491Provision for taxes on income8351,555Income from continuing operations before minorityinterests share2,5972,936Less: Minority interests share436365Income from continuing operations2,1612,571Income (loss) from discontinued operations87(7)SalesNET INCOME$ 2,248$ 2,564Earnings (loss) per common share:Basic:Income from continuing operations$ 2.49$ 2.98Income (loss) from discontinued operationsNet income.10$ 2.59$ 2.9820062007Average number of shares used to compute:Basic earnings per common share868,819,955Common stock outstanding at the end of the period867,739,544860,771,021827,401,800Shipments of aluminum products (metric tons)5,545,0005,393,000Alcoa and subsidiaries Consolidated Balance Sheet (a = unaudited) - in millionsDecember 31,December 31,2006 (a)2007ASSETSCurrent assets:Cash and cash equivalents$ 506$ 483Receivables from customers, less allowances of $682,7882,602in 2006 and $72 in 2007Other receivables301451Inventories3,3803,326Prepaid expenses and other current assets1,3781,224Total current assets8,3538,086Properties, plants, and equipmentLess: accumulated depreciation, depletion, andamortizationProperties, plants, and equipment, netGoodwillInvestmentsOther assetsAssets held for saleTotal assetsLIABILITIESCurrent liabilities:Short-term borrowingsCommercial paperAccounts payable, tradeAccrued compensation and retirement costsTaxes, including taxes on incomeOther current liabilitiesLong-term debt due within one year27,68931,60113,68214,72214,0074,8851,7183,9394,281$ 37,18316,8794,8062,0384,0462,948$ 38,803$ 4623402,4079498511,360510$ 5698562,7879436441,165202Total current liabilitiesCommercial paperLong-term debt, less amount due within one yearAccrued pension benefitsAccrued postretirement benefitsOther noncurrent liabilities and deferred creditsDeferred income taxesLiabilities of operations held for saleTotal liabilities6,8791,1324,7771,5402,9562,00276270420,7527,1666,3711,0982,7531,94354545120,327MINORITY INTERESTS1,8002,460559255,81711,066(1,999)(1,233)14,631$ 37,183559255,77413,039(3,440)(337)16,016$ 38,803SHAREHOLDERS' EQUITYPreferred stockCommon stockAdditional capitalRetained earningsTreasury stock, at costAccumulated other comprehensive lossTotal shareholders' equityTotal liabilities and equity(a) The Consolidated Balance Sheet as of December 31, 2006 has been reclassified toreflect the movement of the automotive castings and packaging and consumer businessesto 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])4Q06Alumina:Production (kmt)3,790Third-party alumina2,084shipments (kmt)Third-party sales$ 711Intersegment sales $ 550Equity income$1(loss)Depreciation,depletion, and$ 56amortizationIncome taxes$ 11520061Q072Q073Q074Q07200715,1283,6553,7993,7753,85515,0848,4201,8771,9901,9372,0307,834$ 2,785$ 2,144$ 645$ 579$ 712$ 587$ 664$ 631$ 688$ 651$ 2,709$ 2,448$ (2)$1$$ (1)$1$1$ 192$ 56$ 62$ 76$ 73$ 267$ 428$ 100$ 102$ 89$ 49$ 340After-taxoperating income $ 259(ATOI)Primary Metals:Aluminum (kmt)Third-partyaluminumshipments (kmt)Average realizedprice per kmt ofaluminum$ 1,050$ 260$ 276$ 215$ 205$ 9569083,5528999019349593,6935562,0875185655846242,291$ 2,766$ 2,665$ 2,902 $ 2,879 $ 2,734$ 2,646$ 2,7844Q06Third-party sales$ 1,698Intersegment sales $ 1,524Equity income$ 18Depreciation,depletion, and$ 97amortizationIncome taxes$ 180ATOI$ 4802006$ 6,171$ 6,208$ 821Q07 2Q07 3Q07$ 1,633 $ 1,746 $ 1,600$ 1,477 $ 1,283 $ 1,171$ 22$ 18$ 114Q07$ 1,597$ 1,063$62007$ 6,576$ 4,994$ 57$ 395$ 95$ 102$ 102$ 111$ 410$ 726$ 1,760$ 214$ 504$ 196$ 462$ 80$ 283$ 52$ 196$ 542$ 1,4452,2735685836025742,327Flat-RolledProducts:Third-partyaluminumshipments (kmt)Third-party salesIntersegment salesEquity lossDepreciation,depletion, andamortizationIncome taxesATOIExtruded and EndProducts:Third-partyaluminumshipments (kmt)564$ 2,127$ 66$ (1)$ 8,297$ 246$ (2)$ 2,275 $ 2,344 $ 2,309$ 60$ 63$ 59$$$$ 2,243$ 59$$ 9,171$ 241$$ 55$ 219$ 55$ 55$ 58$ 55$ 223$ (2)$ 62$ 68$ 255$ 26$ 62$ 33$ 93$ 31$ 61$5$ (16)$ 95$ 2002038772131467869506Third-party salesIntersegment salesEquity income(loss)Depreciation,depletion, andamortizationIncome taxesATOIPackaging andConsumer:Third-partyaluminumshipments (kmt)Third-party salesEquity incomeDep, depl, & amortIncome taxesATOI$ 4,419$ 99$ 1,175 $ 965$ 42$ 26$ 563$ 13$$$$9$ (2) $7$ 14$ 31$ 118$9$ 10$ 11$9$ 39$2$ 27$ 18$ 60$ 11$ 34$ 29$ 46$5$ 13$9$ 16$ 54$ 1094Q06EngineeredSolutions:Third-partyaluminumshipments (kmt)Third-party salesEquity lossDep, depl, & amortIncome taxesATOI$ 1,070$ 25$ 543$7$ 3,246$ 8820061Q072Q073Q074Q0720073013931302724112$ 1,346$ (5)$ 44$ (15)$ 73$ 5,456$ (4)$ 169$ 101$ 331$ 1,449$$ 41$ 44$ 93$ 1,478$$ 42$ 47$ 105$ 1,407$$ 46$ 38$ 60$ 1,391$$ 43$ 11$ 58$ 5,725$$ 172$ 140$ 3164616935403745157$ 837$1$ 32$ 11$ 26$ 3,235$1$ 124$ 33$ 95$ 736$$ 30$7$ 19$ 837$$ 30$ 17$ 37$ 828$$ 29$ 17$ 36$ 887$$$ 27$ 56$ 3,288$$ 89$ 68$ 148Reconciliation of ATOIto consolidated net4Q06income:Total segment ATOI$ 927Unallocated amounts(net of tax):Impact of LIFO(66)20061Q072Q073Q074Q072007$ 3,551$ 972$ 1,019 $ 668$ 515$ 3,1749(24)(170)(27)(16)10Interest income1458119101040Interest 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(386) (379) (18)21(311) 1(307)chargesDiscontinued operations 10187(11)(1)(3)8(7)Other10104(10)(50)456306702Consolidated net income $ 359$ 2,248 $ 662 $ 715$ 555 $ 632 $ 2,564The difference between certain segment financial information totals andconsolidated financial information is in Corporate.QUESTIONS:1.) Decompose Alcoas ROE for 2006 and 2007. In what direction do you see thecompanys performance moving? What other information would you like to see (bespecific)?2.) Alcoa's net income for the 3rd quarter of 2007 increased 86% over 3rd quarter resultsfrom 2006. Why then did the stock price drop 6% after the company announced thoseearnings?3.) Based on the data presented, what operating segments compriseAlcoa's business? Based on the reconciliation of ATOI to Net Income, what can you sayabout the quality of Alcoas income? Be specific in your answer.4.) How would you classify (from an economic perspective) the products sold by Alcoa?What external factors limit Alcoas flexibility in pricing those products? Whichsegments of Alcoa's operations do you think are most directly impacted by this pricinglimitation?5.) Given the pricing limitations on their products, on what basis does Alcoacompete? Why might that make it difficult to compete with rising entities indiverse global locations, such as United Company Rusal, that that has access to low-costhydropower 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#38965 | Written in 18-Jul-2015

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