Alcoa 2004 Annual Report Download - page 30

Income Taxes — Alcoa’s effective tax rate was 25.3% in 2004
compared with the statutory rate of 35% and Alcoa’s effective
tax rates of 24.4% in 2003 and 31.5% in 2002. The effective tax
rate in 2004 reflects a number of discrete tax items that are
required to be excluded from management’s estimate of the
annual effective tax rate:
●Reversal of valuation reserves on foreign net operating losses
resulted in a reduction of the rate by approximately 1.0%;
●An agreement to sell a portion of Alcoa’s interest in the Juruti
bauxite reserves resulted in a reduction of the rate by .6%;
and
●The sale of the specialty chemicals business in the first
quarter of 2004 resulted in a reduction of the rate by .5%.
Management anticipates that the tax rate in 2005 will be
similar to the tax rates for 2004 and 2003 excluding the impact
of discrete tax items.
In October of 2004, the American Job Creation Act of 2004
(AJCA) was signed into law. The AJCA allows companies to
repatriate earnings from foreign subsidiaries at a reduced U.S.
tax rate. Alcoa is evaluating the consequences of repatriating
up to $1,000 with a related potential range of income tax effects
of zero to $90. The company expects to complete its review
by December 31, 2005, and will recognize the income tax effect,
if any, in the period when a decision whether to repatriate
is made. Alcoa has also considered the impact of the Qualified
Domestic Production Deduction provision of the AJCA and
believes that the 2005 impact will be immaterial.
Minority Interests — Minority interests’ share of income
from operations was $245 in 2004 compared with $238 in
2003. The $7 increase in 2004 was due to higher earnings at
AWAC , attributed to higher realized prices, increased volumes,
and the gain associated with the termination of an alumina
tolling arrangement. This increase was partially offset by
Alcoa’s acquisition of the minority interest in Alcoa Aluminio
in August 2003 and the sale of the specialty chemicals business
in 2004.
Minority interests’ share of income from operations was
$238 in 2003 compared with $172 in 2002. The increase of $66,
or 38%, in 2003 was primarily due to higher earnings at AWAC ,
due to higher realized prices and higher volumes. This increase
was somewhat offset by lower minority interests’ share of
income at Alcoa Aluminio resulting from Alcoa’s acquisition
of the remaining 40.9% shareholding from Camargo Correa
Group in August 2003.
Loss From Discontinued Operations — Loss from discontin-
ued operations was $92 in 2004 compared with $70 in 2003
and$132in2002.Thelossof$92wascomprisedofanimpair-
ment of $89 related to a reduction in the estimated fair values
of the telecommunications business, the protective packaging
business, and a small casting business; $8 of net operating
losses; and a net gain of $5 on divested businesses in 2004.
The loss of $70 in 2003 was comprised of an impairment of
$45 related to a reduction in the estimated fair value of the
automotive fasteners business and $25 of operating losses. The
loss of $132 in discontinued operations in 2002 was comprised
of an impairment of $59 to reduce the carrying values of certain
businesses to be divested to their estimated fair values less costs
to sell, $53 of operating losses, and $20 for the impairment of
goodwill in the telecommunications business. See Note B to the
Consolidated Financial Statements for further information.
Cumulative Effect of Accounting Change — The cumulative
effect of accounting changes resulted in a charge of $47 in
2003 compared with income of $34 recognized in 2002. The
adoption of SFAS No. 143, ‘‘Accounting for Asset Retirement
Obligations’’ in 2003 resulted in a cumulative effect adjustment
of $47, consisting primarily of costs to establish assets and
liabilities related to spent pot lining disposal for pots currently
in operation. The adoption of SFAS No. 141, ‘‘Business Combi-
nations’’ and SFAS No. 142, ‘‘Goodwill and Other Intangibles’’
in 2002 resulted in a cumulative effect adjustment of $34,
consisting of income from the write-off of negative goodwill
from prior acquisitions of $49, offset by a $15 write-off for
the impairment of goodwill in the automotive business resulting
from a change in measurement criteria for impairments. See
Notes A, C, and E to the Consolidated Financial Statements
for further information.
Segment Information
Alcoa’s operations consist of five worldwide segments:
Alumina and Chemicals, Primary Metals, Flat-Rolled Products,
Engineered Products, and Packaging and Consumer. Alcoa
businesses that are not reported to management as part of one
of these five segments are combined and reported as ‘‘Other.’’
Alcoa’s management reporting system measures the after-tax
operating income
(ATOI) of each segment. Certain items, such
as interest income, interest expense, foreign currency trans-
lation gains/losses, the effects of LIFO inventory accounting,
minority interests, restructuring and other charges, discontin-
ued operations, and accounting changes are excluded from
segment ATOI . In addition, certain expenses, such as corporate
general administrative expenses and depreciation and amorti-
zation on corporate assets, are not included in segment ATOI .
Segment assets exclude cash, cash equivalents, short-term
investments, and all deferred taxes. Segment assets also exclude
items such as corporate fixed assets, LIFO reserves, goodwill
allocated to corporate, assets held for sale, and other amounts.
ATOI for all segments totaled $2,169 in 2004, $1,740 in 2003,
and$1,549in2002.SeeNoteQtotheConsolidatedFinancial
Statements for additional information. The following discussion
provides shipment, sales, and ATOI data for each segment for
each of the three years in the period ended December 31, 2004.
The financial information and data on shipments of all prior
periods have been adjusted to remove the results of discontinued
operations.
Effective January 2005, Alcoa realigned its organization
structure, creating global groups to better serve customers and
increase the ability to capture efficiencies. Alcoa is currently
evaluating the effect, if any, upon its segment reporting.
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