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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#38973 | Written in 18-Jul-2015

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