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.

(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

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.