What drove the large increase in Alcoa's 2006 earnings?

Mainly higher realized prices for alumina and aluminum, as LME prices rose about 37% over 2005 levels. Strong demand in aerospace, building and construction, commercial transportation, and distribution also contributed. Sales rose 19% to $30.4 billion, and the company benefited from a $26 million legal settlement and higher interest and dividend income. These gains were partly offset by energy and raw material inflation, restructuring charges, and higher stock-based compensation.

How exposed is Alcoa to aluminum price swings?

Significantly. Aluminum and alumina make up about three-quarters of revenue, and aluminum is priced daily on the LME. Alcoa hedges part of this exposure with futures and options, covering about 595 kmt of fixed-price commitments and about 767 kmt of future production at year-end 2006. A 10% move in aluminum prices changes the fair value of its aluminum derivatives by about $146 million. Energy is also a major cost, at about 30% of primary aluminum costs.

What are the biggest legal and environmental risks disclosed?

The largest environmental item is the Grasse River PCB remediation at Massena, NY, where the 2002 analysis put remedy costs between $2 million and $525 million; the company has reserved $30 million plus $35 million for a pilot study, and the EPA's final remedy could add liability. Other matters include a Brazilian tax claim of about $304 million that Alcoa Aluminio contests, a possible loss of Italian preferential power tariffs (about $17 million per month) under EU state-aid review, a class action over PCB and PAH emissions in Quebec, and a DOJ antitrust grand jury investigation into aluminum fluoride. Management believes adequate reserves exist for these matters.

What growth projects are expected to drive future production?

Key projects include the 344,000 mtpy Fjardaal smelter in Iceland, expected to start production in Q2 2007 and yield about 100 kmt in its first year; the Sao Luis (Alumar) alumina expansion in Brazil, targeted for 2008 and beyond; the Juruti bauxite mine in Brazil (2,600 kmt per year, targeted for 2008); the Clarendon/Jamalco refinery early works in Jamaica (146 kmt); and an anode plant in Mosjoen, Norway. The Intalco second potline restart should add about 95 kmt in 2007. Some projects remain subject to power, financing, and regulatory conditions.

How is Alcoa returning capital to shareholders and managing its balance sheet?

In January 2007 the quarterly dividend was raised 13%, from $0.15 to $0.17 per share. Alcoa repurchased about 9.1 million shares in 2006 for $290 million, and a new program authorizes up to 87 million shares (about 10% of shares outstanding at year-end 2006) over three years. To manage debt maturities, Alcoa issued $2.0 billion of senior notes in January 2007, used proceeds to repay $1.1 billion of commercial paper, and tendered for $333 million of 4.25% notes due 2007. Ratings are BBB+ (S&P, stable) and A2 (Moody's, negative outlook, revised December 2006).

HWM 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 15, 2007. Cited figures are marked; the original filing is the authoritative source.

Alcoa Inc. (the filing is from Alcoa, not Howmet Aerospace; Howmet was a subsidiary at the time) reported a record 2006.

Sales rose 19% to $30.4 billion^a, the highest in company history, driven by a 30-31% increase in realized aluminum and alumina prices as LME prices rose 37%. Income from continuing operations was $2.16 billion, or $2.47 per diluted share, up from $1.43 in 2005. Net income was $2.25 billion ($2.57 per diluted share), including an $87 million gain from discontinued operations, mainly the $110 million after-tax gain on the sale of the home exteriors business.

Cash from operations reached $2.57 billion^b, and the debt-to-capital ratio fell to 30.6%, the lowest in five years. Profitability was held back by cost inflation in energy and raw materials, a $543 million pretax restructuring program (about $379 million after tax and minority interests) that targets roughly 6,700 job eliminations and a soft alloy extrusion joint venture with Sapa, and higher stock-based compensation. Management expects roughly $130 million in annual pretax savings from the program.

Growth capital spending is heavy: capital expenditures were $3.2 billion^c in 2006 (about 61% growth-related), with 2007 guidance of $3.0 to $3.2 billion. Key projects include the 344,000 mtpy Fjardaal smelter in Iceland (production expected in Q2 2007), alumina refinery expansions in Brazil and Jamaica, and the Juruti bauxite mine. The filing also flags material risks.

Environmental exposure includes the Grasse River PCB cleanup at Massena, NY, where remedy costs could range from $2 million to $525 million^d. Other matters include the St. Croix red-dust class action, a Brazilian tax claim of about $304 million (which Alcoa contests), a possible loss of Italian power tariffs of roughly $17 million per month under EU state-aid review, and a DOJ antitrust grand jury investigation into aluminum fluoride. Post-year-end, Alcoa raised its quarterly dividend 13% (to $0.17), issued $2.0 billion of senior notes, and approved a new buyback of up to 10% of shares outstanding over three years.

02—Key points

Key Highlights

Record 2006 sales of $30,379 million, up 19% from $25,568 million, with realized aluminum prices up 30% and alumina prices up 31%
Income from continuing operations of $2,161 million, or $2.47 per diluted share, versus $1.43 in 2005 (up about 73%)
Net income of $2,248 million ($2.57 per diluted share), including an $87 million gain from discontinued operations, mainly the home exteriors sale
Cash from operations of $2,567 million, the second highest in company history, including $236 million of discretionary pension contributions
Restructuring charges of $543 million pretax in 2006 for about 6,700 positions, expected to yield roughly $130 million in annual savings
Capital expenditures of $3,205 million (about 61% growth-related), with 2007 guidance of $3.0 to $3.2 billion; debt-to-capital ratio improved to 30.6%
Shareholder returns increased: the annual dividend rose from $0.60 to $0.68 per share in January 2007, and a new buyback authorizes up to 10% of shares outstanding over three years

03—Questions

Frequently Asked Questions

What drove the large increase in Alcoa's 2006 earnings?
Mainly higher realized prices for alumina and aluminum, as LME prices rose about 37% over 2005 levels. Strong demand in aerospace, building and construction, commercial transportation, and distribution also contributed. Sales rose 19% to $30.4 billion, and the company benefited from a $26 million legal settlement and higher interest and dividend income. These gains were partly offset by energy and raw material inflation, restructuring charges, and higher stock-based compensation.
How exposed is Alcoa to aluminum price swings?
Significantly. Aluminum and alumina make up about three-quarters of revenue, and aluminum is priced daily on the LME. Alcoa hedges part of this exposure with futures and options, covering about 595 kmt of fixed-price commitments and about 767 kmt of future production at year-end 2006. A 10% move in aluminum prices changes the fair value of its aluminum derivatives by about $146 million. Energy is also a major cost, at about 30% of primary aluminum costs.
What are the biggest legal and environmental risks disclosed?
The largest environmental item is the Grasse River PCB remediation at Massena, NY, where the 2002 analysis put remedy costs between $2 million and $525 million; the company has reserved $30 million plus $35 million for a pilot study, and the EPA's final remedy could add liability. Other matters include a Brazilian tax claim of about $304 million that Alcoa Aluminio contests, a possible loss of Italian preferential power tariffs (about $17 million per month) under EU state-aid review, a class action over PCB and PAH emissions in Quebec, and a DOJ antitrust grand jury investigation into aluminum fluoride. Management believes adequate reserves exist for these matters.
What growth projects are expected to drive future production?
Key projects include the 344,000 mtpy Fjardaal smelter in Iceland, expected to start production in Q2 2007 and yield about 100 kmt in its first year; the Sao Luis (Alumar) alumina expansion in Brazil, targeted for 2008 and beyond; the Juruti bauxite mine in Brazil (2,600 kmt per year, targeted for 2008); the Clarendon/Jamalco refinery early works in Jamaica (146 kmt); and an anode plant in Mosjoen, Norway. The Intalco second potline restart should add about 95 kmt in 2007. Some projects remain subject to power, financing, and regulatory conditions.
How is Alcoa returning capital to shareholders and managing its balance sheet?
In January 2007 the quarterly dividend was raised 13%, from $0.15 to $0.17 per share. Alcoa repurchased about 9.1 million shares in 2006 for $290 million, and a new program authorizes up to 87 million shares (about 10% of shares outstanding at year-end 2006) over three years. To manage debt maturities, Alcoa issued $2.0 billion of senior notes in January 2007, used proceeds to repay $1.1 billion of commercial paper, and tendered for $333 million of 4.25% notes due 2007. Ratings are BBB+ (S&P, stable) and A2 (Moody's, negative outlook, revised December 2006).

04—Continue

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