Alcoa 2004 Annual Report Download - page 26

Management's Discussion and
Analysis of Financial Condition
and Results of Operations
(dollars in millions, except per-share amounts 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,
and the price of aluminum influences the operating results
of Alcoa. Nonaluminum products include precision castings,
industrial fasteners, vinyl siding, consumer products, food
service and flexible packaging products, plastic closures, and
electrical distribution systems for cars and trucks. Alcoa’s
products are used worldwide in aircraft, automobiles, commer-
cial transportation, packaging, consumer products, building
and construction, and industrial applications.
Alcoa is a global company operating in 43 countries. North
America is the largest market with 64% of Alcoa’s revenues.
Europe is also a significant market with 22% of the company’s
revenues. Alcoa also has investments and activities in Australia,
Brazil, China, Iceland, Jamaica, Russia, and Trinidad, 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 2004
and Outlook for the Future
Alcoa aspires to be the best company in the 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 be successful in the future.
In 2004, 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 financial achievements:
●Significant improvement in income from continuing
operations, rising 33% from $1,055 in 2003 to $1,402 in 2004,
as four of the company’s six segments increased in profitability;
●Highest annual sales in company history, with revenue
growth of $2,386 over 2003;
●Strong cash flow generation of approximately $2,200 in cash
from operations;
●Strengthened balance sheet and continued cash generation
through disciplined capital spending and payment of approxi-
mately $2,000 in debt over the past two years, which facilitated
a reduction in the debt-to-capital ratio from 35.1% in 2003 to
30.0% in 2004; and
●The substantial completion of our divestiture plan with
the sales of the specialty chemicals business, the automotive
fasteners business, the packaging equipment business, the
South American flexible packaging business, the Russellville,
AR and St. Louis, MO foil facilities, and extrusion facilities
in Europe and Brazil.
During 2004, the company was faced with a number of
challenges including increased costs for energy, raw materials,
and a weakening U.S. dollar. Additionally in 2004, significant
efforts continued in globalizing 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. The actions
surrounding the globalization provide unique challenges
including exposure to foreign currency movement against
the U.S. dollar, as well as the general business 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 position ourselves for success in 2005 and beyond,
we will work toward the following financial goals:
●Continuing to reduce costs in conjunction with the three-year
cost savings challenge initiated in 2004, aimed at eliminating
$1,200 in costs by the end of 2006. Cost savings are targeted
to help offset anticipated higher energy and input costs for
materials such as resin and caustic. The cost savings will be
achieved through continued implementation of the Alcoa
Business System
(ABS) , procurement savings, and headcount
reductions;
●Striving to join the first quintile of S&P Industrials in return
on capital
(ROC) performance and, in pursuit of that goal,
we will seek to provide returns in excess of cost of capital,
which is currently 9%;
●Maintaining a strong balance sheet with a long-term target
for a 25% –35% debt-to-capital ratio; and
●Strengthening our asset base and improving its productivity,
as well as expanding our global reach and positioning our
primary businesses lower on the cost curve through various
strategies including: expanding alumina refinery capacity in
Australia, Jamaica, and Suriname; constructing a smelter in
Iceland and expanding smelting capacity in Brazil, China, and
Trinidad; expanding fabricating capabilities in Russia; investing
in energy projects in Brazil, as well as various other projects
throughout other segments of the business. Capital expenditures
for these major growth projects and other sustaining projects
are projected to be approximately $2,500 in 2005. These projects
are outlined in more detail below under Segment Information,
Liquidity and Capital Resources, and Contractual Obligations
and Off-Balance Sheet Arrangements.
Forward-Looking Statements
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 state-
ments also include those containing such words as ‘‘anticipates,’’
‘‘believes,’’ ‘‘estimates,’’ ‘‘expects,’’ ‘‘hopes,’’ ‘‘targets,’’ ‘‘should,’’
‘‘will,’’ ‘‘will likely result,’’ ‘‘forecast,’’ ‘‘outlook,’’ ‘‘projects,’’
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