Alcoa 2009 Annual Report Download - page 52

(LME) and priced daily based on market supply and demand. Aluminum and alumina represent more than three-fourths
of Alcoa’s revenues, and the price of aluminum influences the operating results of Alcoa. Nonaluminum products
include precision castings and aerospace and industrial fasteners. Alcoa’s products are used worldwide in aircraft,
automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial
applications.
Alcoa is a global company operating in 31 countries. Based upon the country where the point of sale occurred, the U.S.
and Europe generated 52% and 27%, respectively, of Alcoa’s sales in 2009. In addition, Alcoa has investments and
operating activities in Australia, Brazil, China, Iceland, Guinea, Russia, and the Kingdom of Saudi Arabia, all of which
present opportunities for substantial growth. Governmental policies, laws and regulations, and other economic factors,
including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations
in these countries.
Management Review of 2009 and Outlook for the Future
In 2009, management was faced with the challenge of preserving Alcoa’s future while navigating the Company
through a global economic downturn that coupled an unprecedented decline in LME pricing levels (began in the second
half of 2008) with a collapse in demand from aluminum product end markets. Management adopted a holistic response
to this situation by initiating various actions, including: curtailing additional refinery and smelter capacity
(necessitating further layoffs); instituting programs to identify procurement efficiencies, overhead rationalization, and
working capital improvements; reducing the quarterly common stock dividend; and issuing new equity and debt
instruments. All of these actions were aimed at reducing costs, improving cash levels, and preserving liquidity. Certain
financial and nonfinancial information reflecting these challenges and management’s actions were as follows:
• Sales of $18,439 and a loss from continuing operations of $985, or $1.06 per diluted share;
• Cash from operations of $1,365 and cash on hand at the end of the year of $1,481, almost double the level at
December 2008;
• Reduction in total debt of $759 and debt-to-capital ratio of 38.7%, a 380 basis point improvement from 2008;
• Capital expenditures of $1,622, a more than 50% reduction from 2008;
• The completion and start-up of the expanded refinery and new bauxite mine in Brazil, new lithographic sheet
operations in Bohai (China), and a new can sheet and end and tab line in Russia;
• Secured long-term power contracts on approximately 2,000 kmt (Canada, Spain, and the U.S.) of the global
smelting system (85% of system secured through at least 2025);
• Optimized Alcoa’s business and investment portfolio through the following actions: monetized the
investment in Shining Prospect ($1,021); exchanged an equity interest in a soft alloy extrusion joint venture
(Sapa AB) for full ownership of two smelters and an anode facility in Norway; acquired BHP Billiton’s
interests in bauxite mines and a refinery in the Republic of Suriname; entered into an agreement with the
Saudi Arabian Mining Company (known as “Ma’aden”) to develop a complete industrial complex that will
encompass the aluminum manufacturing process from bauxite mining to aluminum fabrication; and
completed the divestiture of the Electronic and Electrical Solutions (EES) business.
In 2010, management expects market conditions for aluminum products in certain end markets to improve, particularly
in automotive and commercial transportation, while others are expected to decline, including aerospace, building and
construction, and industrial gas turbines. Management is also projecting an increase in the consumption of primary
aluminum, especially in China. On the cost side, increases in energy prices and continued currency movements are
expected to be a challenge. Management is committed to achieving the following goals in 2010:
• securing and improving on the savings realized in 2009 from procurement, overhead, and working capital
programs;
• continuing to strengthen the balance sheet using operating cash flows to further reduce debt levels; and
44