Alcoa 2010 Annual Report Download - page 52

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 50% and 27%, respectively, of Alcoa’s sales in 2010. In addition, Alcoa has investments and
operating activities in Australia, Brazil, China, Guinea, Iceland, Russia, and 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 2010 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); reducing the quarterly common stock dividend; issuing new equity and debt
instruments; optimizing Alcoa’s business and investment portfolio; and instituting a two-year program to achieve
targets related to procurement efficiencies, overhead rationalization, and working capital improvements. All of these
actions were aimed at reducing costs, improving cash levels, and preserving liquidity. Upon achieving the established
performance targets in year one of this program, management continued to steer the Company through the downturn
during 2010, by seeking to increase procurement efficiencies, overhead rationalization, and working capital
improvements above and beyond levels that had been achieved in 2009. In addition, management set out to reduce debt
and refinance long-term debt set to mature over the next three years. The following financial information reflects the
results of management’s achievements in 2010:
• Sales of $21,013, a 14% increase over 2009;
• Selling, general administrative, and other expenses of less than $1,000, the lowest level since 1999;
• Income from continuing operations of $262, or $0.25 per diluted share, an improvement of $1,247 compared
to 2009;
• Cash from operations of $2,261, highest since 2007;
• Capital expenditures of $1,015, a reduction of more than $600 from 2009;
• Cash on hand at the end of the year of $1,543, in excess of $1,000 for the second consecutive year;
• Reduction in total debt of $654, and $1,413 over the past two years; and
• Debt-to-capital ratio of 34.9%, a 380 basis point improvement for the second consecutive year.
Management is projecting a 12% increase in the global consumption of primary aluminum in 2011, similar to the
improvement in 2010. China, India, Brazil, and Russia are all expected to have double-digit increases in aluminum
demand. Management also anticipates market conditions for aluminum products in all global end markets to improve,
particularly in aerospace, automotive, and industrial gas turbine. On the cost side, energy prices and currency
movements are expected to continue to be a challenge. Management has established and is committed to achieving the
following specific goals in 2011:
• sustaining the savings realized in 2010 and 2009 from procurement, overhead, and working capital programs;
• generating positive cash flow from operations that will exceed capital spending; and
• maintaining a debt-to-capital ratio between 30% and 35%.
Looking ahead over the next three-to-five years, the Company has established aggressive goals, focusing on cost
reductions for the upstream operations and significant profitable growth in the midstream and downstream operations.
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