Alcoa 2009 Annual Report Download - page 55

management expects to maintain inventory levels comparable to 2009; however, this will not generate LIFO income in
the first quarter of 2010 and is not expected to generate LIFO income for the remainder of 2010.
COGS as a percentage of Sales was 82.4% in 2008 compared with 77.9% in 2007. The increase in the percentage was
mainly the result of continued cost increases in raw materials, energy, and other inputs; unfavorable foreign currency
movements due to a significantly weaker U.S. dollar; the production at the Iceland smelter that did not occur in 2007;
and the impacts of the gas outage in Western Australia and the 2008 smelter curtailment at Rockdale. These items were
primarily offset by the absence of the businesses within the Packaging and Consumer segment for 10 months (84.0%);
the absence of the soft alloy extrusion business (97.1% in 2007); productivity improvements in most of the businesses
within the Engineered Products and Solutions segment; and the absence of certain costs incurred in 2007 as a result of
production curtailments associated with the Tennessee and Rockdale smelters and startup costs at the Iceland smelter,
among others.
Selling, General Administrative, and Other Expenses—SG&A expenses were $1,009, or 5.5% of Sales, in 2009
compared with $1,167, or 4.3% of Sales, in 2008. The decline of $158 was primarily due to reductions in labor costs,
mainly as a result of implemented severance programs; decreases in expenses for travel, contractors and consultants,
information technology, selling and marketing, and various other administrative items as part of Alcoa’s cost reduction
initiatives; the absence of the businesses within the former Packaging and Consumer segment ($37 in 2008); and a
decrease in bad debt expense; all of which was partially offset by an increase in deferred compensation, mostly the
result of the plans’ improved performance, and an increase due to SG&A of the acquired smelters in Norway.
SG&A expenses were $1,167, or 4.3% of sales, in 2008 compared with $1,444, or 4.9% of sales, in 2007. The decrease
of $277 was mostly due to the absence of 10 months of expenses ($180) from the businesses within the Packaging and
Consumer segment; the absence of transaction costs related to the 2007 offer for Alcan Inc. ($46); and the absence of
expenses from the soft alloy extrusion business ($33 in 2007).
Research and Development Expenses—R&D expenses were $169 in 2009 compared with $246 in 2008 and $238 in
2007. The decline in 2009 as compared to 2008 was principally due to the implementation of Alcoa’s cost reduction
initiatives and the absence of the businesses within the former Packaging and Consumer segment ($3 in 2008). The
increase in 2008 as compared to 2007 was mainly driven by expenditures related to various projects for the businesses
within the Flat-Rolled Products segment and the Primary Metals segment, partially offset by the absence of 10 months
of expenditures ($16) from the businesses within the Packaging and Consumer segment.
Provision for Depreciation, Depletion, and Amortization—The provision for DD&A was $1,311 in 2009 compared
with $1,234 in 2008. The increase of $77, or 6%, was mostly due to the acquired smelters in Norway and assets placed
into service during 2009, including the Juruti bauxite mine and São Luis refinery in Brazil, the new Bohai (China) flat-
rolled product facility, and a high-quality coated sheet line at the Samara (Russia) facility. These increases were
slightly offset as a result of the cessation of DD&A, which began in January 2009, related to the Global Foil and
Transportation Products Europe businesses due to the classification of these businesses as held for sale and a reduction
in DD&A as a result of the extension of depreciable lives for the majority of rolled products and hard alloy extrusions
locations based upon a review, which was completed in mid-2008, of estimated useful lives ($11).
The provision for DD&A was $1,234 in 2008 compared with $1,244 in 2007. The decline of $10, or 1%, was
principally the result of the absence of nine months of depreciation from the businesses within the Packaging and
Consumer segment ($89 in 2007), which was classified as held for sale, and the extension of depreciable lives for the
majority of refining and smelting locations and various rolled products and hard alloy extrusions locations based upon
a review of estimated useful lives completed during 2008 ($61). Offsetting these reductions was a significant increase
($83) in depreciation expense related to the Iceland smelter and Norway anode facility being in service for a full year
and unfavorable foreign currency movements as a result of a weaker U.S. dollar.
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