Alcoa 2010 Annual Report Download - page 55

LME prices, and a significantly smaller reduction in LIFO inventory quantities; increases in energy costs; and higher
operating costs for Brazil growth projects placed in service.
COGS as a percentage of Sales was 91.7% in 2009 compared with 82.4% in 2008. The percentage was negatively
impacted by significant declines in realized prices for alumina and aluminum, lower demand in the midstream and
downstream operations, and a charge related to a European Commission’s decision on electricity pricing for smelters in
Italy ($250). These items were somewhat offset by procurement and overhead cost savings across all businesses, net
favorable foreign currency movements due to a stronger U.S. dollar, and positive LIFO adjustments. In 2009, Alcoa
recognized $361 ($235 after-tax) in income due to the reductions in LIFO inventory quantities and the considerable
drop in LME prices. Of this amount, 71% occurred in the second half of the year.
Selling, General Administrative, and Other Expenses—SG&A expenses were $961, or 4.6% of Sales, in 2010
compared with $1,009, or 5.5% of Sales, in 2009. The decline of $48 was mostly due to continued reductions in
expenses for contractors and consultants; lower deferred compensation, as a result of a decline in plan performance;
and decreases in bad debt expense and information technology expenditures. An increase in labor costs, principally due
to higher annual incentive and performance compensation and employee benefits costs (employer matching savings
plan contributions for U.S. salaried participants were suspended during 2009) somewhat offset the aforementioned
expense reductions.
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.
Research and Development Expenses—R&D expenses were $174 in 2010 compared with $169 in 2009 and $246 in
2008. The increase in 2010 as compared to 2009 was mainly driven by incremental increases across varying expenses
necessary to support R&D activities. 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).
Provision for Depreciation, Depletion, and Amortization—The provision for DD&A was $1,450 in 2010 compared
with $1,311 in 2009. The increase of $139, or 11%, was principally the result of the assets placed into service during
the second half of 2009 related to the Juruti bauxite mine development and São Luís refinery expansion in Brazil, the
smelters in Norway (acquired on March 31, 2009), the new Bohai (China) flat-rolled product facility, and a high-
quality coated sheet line at the Samara (Russia) facility, slightly offset by the cessation in DD&A due to the decision to
permanently shutdown and demolish two U.S. smelters in early 2010 (see Restructuring and Other Charges below).
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 flat-rolled product facility, and a high-quality coated sheet line at the
Samara 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).
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