Alcoa 2003 Annual Report Download - page 27

areduction in the debt-to-capital ratio from 43.1% in 2002 to 35.1%
in 2003, and progress on our divestiture plan with the sales of
the Latin America
PET business andour equity interest in Latasa,
aLatin America aluminum can business, in 2003.
During 2003, the company was faced with a number of
challenges including increased costs for energy, raw materials,
employeebenefits, and foreign currency exchange movements.
Additionally in 2003, significant efforts were made to globalize the
production base as a means to better serve Alcoa’s customers and to
take advantage of lower costs to produce in certain global regions.
Theactionssurrounding the globalization provide unique challenges
including exposure to foreign currency appreciation against the
U.S. dollar, as wellasthegeneralbusiness and political risks involved
with expanding operations in global regions where Alcoa does not
currently have a significant presence. The company expects that
it will continue to face these and similar challenges in the future.
To p o s i t i on ourselves for success in 2004 and beyond, we will
work toward thefollowing financial goals:
●Reducing costs through a new three-year cost savings challenge
aimed at eliminating an additional $1.2 billion in costs by the end
of 2006.The new goal will be achieved through continued imple-
mentation of
ABS to eliminate waste and improve productivity, as
well as throughout other areas within the company.
●Striving to join the first quintile of S&P Industrials in return on
capital (ROC) performanceand,inpursuit of that goal, we will seek
to provide returns in excess of cost of capital, which is currently 9%;
●Completing our divestiture plan by mid-2004 with anticipated
total proceeds to be realized in the range of $750 to $850, to be used
to pay downdebt.[Thepackaging equipment business was sold in
January of 2004, and the sale of the specialty chemicals business is
expected to close in the first quarter of 2004.]
●Maintaining a strong balance sheet with a long-term target for
a25%–35% debt-to-capital ratio;
●Strengthening our asset base and improving its productivity,
as well as expanding our global reach and positioningourprimary
businesses lower on the cost curve through various strategies
including: expanding alumina refinery capacity in Jamaica, Suriname,
and Australia; constructing a smelter in Iceland and expanding
smelting capacity in China, Canada, and Bahrain; investing in
energy projects in Brazil and Rockdale, TX; as well as various other
projects throughout other segments of the business. These projects
are outlined in more detail below under Segment Information,
Liquidity and Capital Resources, and Contractual Obligations and
Off-BalanceSheetArrangements.
For ward-LookingStatements
Certain statements in this report under this caption and elsewhere
relate to future events and expectations and, as such, constitute
forward-looking statements. Forward-looking statements also
include those containing such words as ‘‘anticipates,’’ ‘‘believes,’’
‘‘estimates,’’ ‘‘expects,’’ ‘‘hopes,’’ ‘‘targets,’’ ‘‘should,’’ ‘‘will,’’ ‘‘will
likely result,’’ ‘‘forecast,’’ ‘‘outlook,’’ ‘‘projects,’’ or similar expressions.
Such forward-looking statements involve known and unknown
risks,uncertainties, and other factors that may cause actual results,
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
(dollars in millions, exceptper-shareamounts and ingot prices;
shipments in thousands of metric tons [mt])
Overview
Our Business
Alcoa is the world’s leading producer of primary aluminum,fabricated
aluminum, and alumina, and is active in all major aspects of the
industry: technology, mining, refining, smelting, fabricating, and
recycling. Aluminum is a commodity that is traded on the London
Metal Exchange
(LME) and priced daily based on market supply
and demand. Aluminum and alumina represent approximately
two-thirds of Alcoa’s revenues, andthepriceofaluminuminfluences
theoperating resultsofAlcoa. Nonaluminum products include
precision castings, industrial fasteners, vinyl siding, consumer
products, food service and flexible packaging products, plastic
closures, fiber-optic cables, and electrical distribution systems for
cars and trucks. Alcoa’s products are used worldwide in aircraft,
automobiles, commercial transportation, packaging, consumer
products, building and construction, and industrial applications.
Alcoa is a global company operating in 41 countries. North
America is the largest market with 65% of Alcoa’s revenues. Europe
is also a significant market with22%ofthecompany’s revenues.
Alcoa also has investments and activities in Iceland, Australia,
Brazil, China, and Bahrain, which present opportunities for
substantial growth. Governmental policies 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 2003
and Outlook fortheFuture
Alcoa aspires tobethebestcompanyinthe world. As part of that
mission,Alcoa strives to attain certain financial goals to improve
both short-term and long-term profitability, while positioning the
company to besuccessfulinthefuture.
In 2003, Alcoa’s focus on long-term value creation through living
our values, controlling costs and capital, managing our portfolio
of businesses, and focusing on profitable growth contributed to the
following financialachievements:
●Significant improvement in income from continuing operations,
rising from $476 in 2002 to $1,034 in 2003, as all segments
increased profitability;
●Achievement of our three-year, $1 billion cost savings goal
through manufacturing productivity improvements realized
from continued application of the Alcoa Business System (ABS) ,
procurement savings from improved purchasing practices and
global sourcing, and headcount reductions from prior restructuring
programs;
●Strengthened balance sheet and continued cash generation
through disciplined capital spending, improved working capital,
payment of more than $1 billion in debt which facilitated
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