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Alcoa:
Seizing Global
Opportunities
2005 Annual Report

Table of contents

  • Page 1
    Alcoa: Seizing Global Opportunities 2005 Annual Report

  • Page 2
    ... solution to customers. • In addition to aluminum products and components, Alcoa also makes and markets consumer brands including Reynolds Wrap®, Alcoa® wheels, and Baco® household wraps. Among its other businesses are closures, fastening systems, precision castings, and electrical distribution...

  • Page 3
    ... and technology. Our strategy takes advantage of unique brownfield opportunities; our large project management capabilities and experience in dealing with governments all over the world; unparalleled product, process and market knowledge; and the strength of the Alcoa brand. In alumina, we...

  • Page 4
    ...-cost countries. In other segments - packaging, fasteners, investment castings, wire harness and electronic components - we are actively following customers, leveraging our brand and innovating with new products and applications. It is these types of opportunities - investing where we create value...

  • Page 5
    ... our business in 2005. We introduced hurricane-resistant panels for the building products market, using proprietary Alcoa technology for a growing market. A new Defense Market Sector Team was formed to capture opportunities for Alcoa solutions in the defense industry. Demand for aluminum bottles...

  • Page 6
    ... world. To reï¬,ect this growth, the company changed its name in 1999 from the Aluminum Company of America to Alcoa. Since that time, the company has catapulted its global expansion with a number of growth projects including those in Europe (Iceland, Hungary and Russia); Asia (China); South America...

  • Page 7
    ... to our customers in markets from aerospace to automotive to packaging ...the right material for the right solution. We are uniquely positioned to capture growth around the world where global aluminum consumption is projected to double by 2020. It is for this reason it may be apropos to say Alcoa is...

  • Page 8
    ...rolled products. As managing partner, Alcoa will be the first global supplier of high-quality lithographic sheet to have a local presence in China. Smart Move Kyungki Bus Company of Korea converted its entire ï¬,eet of 3,000 buses to Alcoa aluminum forged wheels to reduce fuel and maintenance costs...

  • Page 9
    ... of Alcoa Foundation, which invested $40,000 in the project to build community relations and support business interests in Qinghuangdao, where Alcoa operates a joint venture, Alcoa Bohai Aluminum. Supporting Infrastructure Alcoa Fastening Systems created two new manufacturing sites near Shanghai...

  • Page 10
    ...sign a power supply pact through 2038. Pepsi milk chillers Locking a Deal Alcoa Fastening Systems' Huck® brand U-Spin™ fasteners are standard for Volvo Trucks North America's Class 8 trucks, making Volvo the first manufacturer to offer the locking U-bolts to its customers. Supply Chain Direct...

  • Page 11
    ...by 2020. Annual aluminum consumption in the U.S. and Canada is 48 and 54 pounds per person, respectively. The use of aluminum in automobiles has more than doubled from 1990 to 145 pounds in 2006 model cars. Crushing Records Alcoa's Can Reclamation facility in Tennessee set a new production record...

  • Page 12
    ... 10,000 people visit the park annually. Investment in Itapissuma A $30 million expansion of the Itapissuma aluminum rolling mill in Brazil will increase capacity by 30% by 2007. Power for Development The first power generation unit of the Barra Grande hydropower plant, of which Alcoa Alumínio is...

  • Page 13
    ... program. Close technical and commercial collaboration between Alcoa and the aircraft manufacturer has helped the business relationship to improve substantially. Best Company Alcoa CSI operations in Argentina, Chile, Colombia and Brazil were ranked among the best places to work in Latin America...

  • Page 14
    ... Framework Set Alcoa signed an agreement with the Government of Guinea that sets forth the framework for developing a jointly owned, 1.5-million-mtpy alumina refinery in the country. Qualified Supplier CSI Egypt has qualified as a supplier of closures to several well-known international beverage...

  • Page 15
    .... Plans are in place to double production to at least 2.8 million mtpy at the Jamalco alumina refinery, making it among the world's lowestcost refineries. All Aboard! Jamalco is investing $500,000 in seed money to spearhead the Clarendon Express, a tourism initiative that would use the company...

  • Page 16
    ...quality and ability to absorb noise and vibrations. Pioneering Technology Alcoa is upgrading its Avilés and La Coruña plants with advanced smelting technology, paving the way for environmental leadership within its class and sustainable development for the Spanish operations. Board Visits Russia...

  • Page 17
    ...new Alcoa products and solutions than any other aircraft in Alcoa's 100+ years of aviation - some supplied by Alcoa operations in Europe. Leveraging its Brand Baco, part of Alcoa Consumer Products, is reaching new customers with its Tub-Its!â„¢ line of reusable food-storage containers. Asda, a unit...

  • Page 18
    ... the growing markets for aluminum wine screw-cap closures in Australia and New Zealand, and beverage cans in Asia. Cogeneration Project Alcoa's partnership with gas utility Alinta to build two 140 MW cogeneration power plants is nearly complete, paving the way for environmental improvements. The...

  • Page 19
    ... of aluminum per person annually. Aluminum Boat Supplier Telwater, the largest builder of aluminum boats in Australia, with brands Quintrex and Stacer, selected Alcoa as its top aluminum sheet supplier due to Alcoa's superior product quality and service. Greenhouse Innovation Alcoa scientists...

  • Page 20
    ... can monitor their energy use while at a summer camp. Customer Connection Two Alcoa businesses - AFL Europe and Closure Systems International (CSI) - each opened a new technology center in Europe. The centers, in the Czech Republic and Spain, support regional and global development and enhance...

  • Page 21
    ... a prototype aircraft, the first of many freighter conversions that ASCC will develop to meet demands of the air cargo industry. Refining Success By putting critical production information in the hands of operators, problem solving, and using Alcoa Business System tools, Alcoa's Pinjarra, Wagerup...

  • Page 22
    ...contains no toxic chemicals. Commitment to Product Development Alcoa's Kawneer U.K. and France businesses launched the AA® 120 Sunshade system designed to improve the overall energy efficiency of a building by reducing the need for air conditioning. The new system limits direct solar radiation in...

  • Page 23
    ... the community together. This included workshops for local schools such as Yangebup Primary School. Financial and Corporate Data 22 Trends in Alcoa's Major Markets 24 Selected Financial Data 25 Management's Discussion and Analysis 40 Management's Reports 41 Report of Independent Registered Public...

  • Page 24
    ... Solutions, Extruded and End Products, Flat-Rolled Products Alcoa supplies a wide range of parts and systems to this market: from wheels and suspension components, to wire harnesses, closure panels and body structures. Automotive production in the traditional manufacturing regions (North America...

  • Page 25
    ...$3.4 billion Alcoa segments that sell products to this market: Flat-Rolled Products, Engineered Solutions, Extruded and End Products Alcoa's revenues from this market include sales of aluminum sheet, plate and extrusions to distributors and sales of products and services for power generation. After...

  • Page 26
    ... strike, the sale of a portion of Alcoa's interest in the Juruti bauxite project, environmental charges, the termination of an alumina tolling arrangement, and discontinued operations 2003: Acquisitions and dispositions of businesses, restructuring and other charges, insurance settlements related to...

  • Page 27
    ... 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 42 countries. North America is...

  • Page 28
    ...in downstream businesses serving the aerospace, commercial transportation, industrial products, distribution, packaging, and building and construction markets; a $180 net gain related to the sale of Alcoa's stake in Elkem ASA; a $120 tax benefit related to the finalization of certain tax reviews and...

  • Page 29
    ... and hourly employees, spread globally across the company; $131 related to asset impairments for structures, machinery, and equipment; and $16 for exit costs, consisting primarily of accelerated depreciation associated with assets for which the useful life has been changed due to plans to close...

  • Page 30
    ...) on the sale of Alcoa's specialty chemicals business and $15 resulting from adjustments to prior year reserves; offset by charges of $41 related to additional layoff reserves associated with approximately 4,100 hourly and salaried employees (located primarily in Mexico and the U.S.), as the company...

  • Page 31
    ... Financial Statements for further information. Segment Information Alcoa's operations consist of six worldwide segments: Alumina, Primary Metals, Flat-Rolled Products, Extruded and End Products, Engineered Solutions, and Packaging and Consumer. Alcoa's management reporting system measures the after...

  • Page 32
    ... to external customers, aluminum traders, and commodity markets. Results from the sale of aluminum powder, scrap, and excess power are also included in this segment, as well as the results of aluminum derivative contracts. Aluminum ingot produced by Alcoa and used internally is transferred to other...

  • Page 33
    ... principal business is the production and sale of aluminum plate, sheet, and foil. This segment includes rigid container sheet (RCS), which is sold directly to customers in the packaging and consumer market and is used to produce aluminum beverage cans. Seasonal increases in RCS sales are generally...

  • Page 34
    ...; forgings and fasteners; electrical distribution systems; aluminum wheels; and integrated aluminum structural systems used in the aerospace, automotive, commercial transportation, and power generation markets. These products are sold directly to customers and through distributors. Third-party sales...

  • Page 35
    ... impairment losses recognized in 2004 on the protective packaging and telecommunications businesses; and Å An increase in Other, primarily due to the $180 net gain on the sale of Alcoa's stake in Elkem ASA and a $120 tax benefit related to the finalization of certain tax reviews and audits during...

  • Page 36
    ...in the market prices or rates that existed at December 31, 2005. Fair value Index change gain/(loss) of + / - 10% Environmental Matters Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include approximately 35 owned or operating facilities and...

  • Page 37
    ... long-term aluminum supply contract entered into as part of the acquisition of two Russian fabricating facilities. These items were partially offset by an increase in accounts payable and accrued expenses of $573 due to increased raw materials costs and increased payment terms. Cash from operations...

  • Page 38
    ... the construction of the Iceland smelter, the investment in the Mosjøen anode facility, the expansion of the Alumar smelter, and the alumina refinery expansions in Jamaica, Australia, and Brazil. Also included are costs related to environmental control in new and expanded facilities totaling...

  • Page 39
    ... the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, and working capital changes. Management considers historical experience and all available information at the time the fair values of its reporting units...

  • Page 40
    ... 2004) "Share-Based Payment." This standard requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Alcoa will begin expensing stock options in the first quarter of 2006, using the modified...

  • Page 41
    ... equipment. Estimated minimum required pension funding and postretirement benefit payments are based on actuarial estimates using current assumptions for discount rates, expected return on long-term assets, rate of compensation increases, and health care cost trend rates. The minimum required cash...

  • Page 42
    ... 32 in the Company's Form 10-K. In addition, in 2005, the Company's Chief Executive Officer provided to the New York Stock Exchange the annual CEO certification regarding the Company's compliance with the New York Stock Exchange's corporate governance listing standards. Alain J. P. Belda Chairman...

  • Page 43
    ...express opinions on management's assessment and on the effectiveness of Alcoa's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United...

  • Page 44
    Statement of Consolidated Income (in millions, except per-share amounts) Alcoa and subsidiaries For the year ended December 31 Sales (Q) Cost of goods sold Selling, general administrative, and other expenses Research and development expenses Provision for depreciation, depletion, and amortization ...

  • Page 45
    ... Properties, plants, and equipment, net (H) Goodwill (E and F) Investments (I) Other assets (J) Assets held for sale (B) Total Assets Liabilities Current liabilities: Short-term borrowings (K and X) Commercial paper (K and X) Accounts payable, trade Accrued compensation and retirement costs Taxes...

  • Page 46
    ...paid on early retirement of debt and interest rate swap settlements (K) Cash (paid) received on long-term aluminum supply contract Pension contributions Net change in other noncurrent assets and liabilities Reduction in net assets held for sale Cash provided from continuing operations Cash (used for...

  • Page 47
    ...per share Common @ $.60 per share Stock issued: Alcoa Alumínio minority interest acquisition (F) Stock issued: compensation plans Balance at end of 2003 Comprehensive income-2004: Net income-2004 Other comprehensive income (loss): Change in minimum pension liability, net of $11 tax benefit Currency...

  • Page 48
    ... the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, and working capital changes. Management considers historical experience and all available information at the time the fair values of its reporting units...

  • Page 49
    ... dates in accordance with Statement of Financial Accounting Standards (SFAS) Nos. 123 and 148, "Accounting for Stock-Based Compensation." 2005 2004 2003 Net income, as reported Less: compensation cost determined under the fair value method, net of tax Pro forma net income Basic net income per share...

  • Page 50
    ... the dates of the acquisitions. See Note F for additional information. Discontinued Operations and Assets Held For Sale. For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If...

  • Page 51
    ...) "Share-Based Payment" was issued in December 2004. This standard requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Alcoa will begin expensing stock options in the first quarter of...

  • Page 52
    ... and hourly employees, spread globally across the company; $131 related to asset impairments for structures, machinery, and equipment; and $16 for exit costs, consisting primarily of accelerated depreciation associated with assets for which the useful life has been changed due to plans to close...

  • Page 53
    ...) on the sale of Alcoa's specialty chemicals business and $15 resulting from adjustments to prior year reserves, offset by charges of $41 related to additional layoff reserves associated with approximately 4,100 hourly and salaried employees (located primarily in Mexico and the U.S.), as the company...

  • Page 54
    ... to sell foil products to customers throughout Asia. The transaction resulted in $2 of goodwill. On March 31, 2005, Alcoa finalized an agreement with Fujikura Ltd. of Japan in which Alcoa obtained complete ownership of the AFL automotive business and Fujikura obtained complete ownership of the AFL...

  • Page 55
    ... in Europe for $37 in cash. Alcoa also sold its flexible packaging business in South America, which had been included in discontinued operations. There was no material gain or loss recognized on these transactions. In the first quarter of 2004, Alcoa completed the sale of its specialty chemicals...

  • Page 56
    ...and cash provided from operations. Alcoa recognized a net gain of $58 in other income on the early retirement of long-term debt and the associated settlement of interest rate swaps. The net gain of $58 is comprised of the following: Å a premium paid for early retirement of debt and related expenses...

  • Page 57
    ... of $58 on the early retirement of long-term debt and the associated settlement of interest rate swaps. Other income in 2003 included a $105 gain from insurance settlements of a series of historical environmental matters in the United States. P. Cash Flow Information Cash payments for interest and...

  • Page 58
    ...castings; forgings and fasteners; electrical distribution systems; aluminum wheels; and integrated aluminum structural systems used in the aerospace, automotive, commercial transportation, and power generation markets. These products are sold directly to customers and through distributors. Packaging...

  • Page 59
    Alcoa's reportable segments, as reclassified for discontinued operations and assets held for sale, follow. Segment information Alumina Primary Metals Flat-Rolled Products Extruded and End Products Engineered Solutions Packaging and Consumer Total 2005 Sales: Third-party sales Intersegment sales ...

  • Page 60
    ...a par value of $1 per share. As of December 31, 2005, 133 million shares of common stock were reserved for issuance under the long-term stock incentive plans. Stock options under the company's stock incentive plans have been granted, at not less than market prices on the dates of grant. Stock option...

  • Page 61
    ... (number of shares) Common stock Treasury Net outstanding $ 183 1,750 $1,933 $ 269 1,896 $2,165 $ 335 1,335 $1,670 Balance at end of 2002 Stock issued: Alcoa Alumínio minority interest acquisition (F) Compensation plans Balance at end of 2003 Treasury shares purchased Stock issued: Compensation...

  • Page 62
    ... funded to ensure that all plans can pay benefits to retirees as they become due. Most U.S. salaried and non-union hourly employees hired after March 1, 2006 will participate in a defined contribution plan instead of the current defined benefit plan. Alcoa maintains health care and life insurance...

  • Page 63
    ... on plan assets Acquisitions Employer contributions Participants' contributions Benefits paid Administrative expenses Other transfers, net Exchange rate Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss Unrecognized net prior service cost (benefit) Net amount...

  • Page 64
    ... 2005 2004 Discount rate Rate of compensation increase 5.70% 4.00 6.00% 4.50 The discount rate is determined using a yield curve model developed by the company's external actuaries. The plan's projected benefit obligation cash flows are discounted using yields on high quality corporate bonds to...

  • Page 65
    ... carrying value. Available-for-Sale Investments. The fair value of investments is based on readily available market values. Investments in marketable equity securities are classified as "available for sale" and are carried at fair value. Long-Term Debt. The fair value is based on interest rates that...

  • Page 66
    ...gains and losses on these contracts. For further information on Alcoa's hedging and derivatives activities, see Notes A and K. Y. Environmental Matters Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include approximately 35 owned or operating...

  • Page 67
    ... of the Grasse River, adjacent to Alcoa's Massena, NY plant site, under order from the U.S. Environmental Protection Agency (EPA) issued under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund. Sediments and fish in the river contain varying levels of...

  • Page 68
    ...information. First 2005 Sales Income from continuing operations (Loss) income from discontinued operations (B) Cumulative effect of accounting change (C) Net income Earnings (loss) per share: Basic: Income from continuing operations (Loss...Number of Employees 2005 2004 2003 U.S. Other Americas Europe...

  • Page 69
    ...measure. Management believes that this measure is meaningful to investors because it provides greater insight with respect to the underlying operating performance of the company's productive assets. The company has significant growth investments underway in its upstream and downstream businesses, as...

  • Page 70
    ...share†1.40 Dividends declared .600 Book value (based on year-end outstanding shares) 15.30 Price range: High 32.29 Low 22.28 Shareholders (number) 271,000 Average shares outstanding (thousands) 871,721 Operating Data Alumina shipments‡ 7,857 (thousands of metric tons) Aluminum product shipments...

  • Page 71
    ...5,398 4,219 5,141 3,539 4,395 $ 1,102 142,000 1999 $ 15,871 12,168 823 126 879 - 195 124 537 228 1,039 15 - 1,054 1,477 1,388 2 296 8,620 17,066 3,055 1,458 6,318 1....1,832 2 160 6,524 13,643 1,897 1,609 4,445 1.11 1.10 .225 6.23 15.06 9.22 83,600 712,072 6,407 673 1,909 2,582 1,905 2,428 1,506 2,037 $...

  • Page 72
    ..., a venture capital firm, since 2001. He was chairman and chief executive officer of TRW Inc., a global company serving the automotive, space, and information systems markets, 1988-2001. Director of Alcoa since 1991. Judith M. Gueron, 64, scholar in residence since September Klaus Kleinfeld, 48...

  • Page 73
    ... Franklin L. Feder Executive Vice President Group President, Global Rolled Products, Hard Alloy Extrusions and Asia John M. Wilson Assistant General Counsel William J. O'Rourke, Jr. Vice President President, Alcoa Latin America Brenda A. Hart Vice President President, Alcoa Russia Dale C. Perdue...

  • Page 74
    ...Corporate Communications at the corporate center address. Investor Information Securities analysts and investors may write to Director - Investor Relations at 390 Park Avenue, New York, NY 10022-4608, call 1 212 836 2674, or e-mail [email protected]. Stock Listing Common: New York Stock...

  • Page 75
    ...aspires to be the best company in the world. Values Integrity Alcoa's foundation is our integrity. We are open, honest and trustworthy in dealing with customers, suppliers, coworkers, shareholders and the communities where we have an impact. Environment, Health and Safety We work safely in a manner...

  • Page 76
    The aluminum industry is at an unprecedented point in history ...along with most of our markets. Consumption of aluminum is expected to double by 2020. And Alcoa is uniquely positioned to seize this growth.