Alcoa 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 Alcoa annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 84

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84

Delivering Now…
…and Building for the Future
Annual Report
2006

Table of contents

  • Page 1
    ...w o N g n i r e v i l De e r u ut F he t or f g n i d l i u B nd a ... t or p e lR a nu An 06 20

  • Page 2
    ... serves the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets, bringing design, engineering, production, and other capabilities of Alcoa's businesses as a single solution to customers. • In addition to aluminum products and components...

  • Page 3
    ...; Primary Metals, Engineered Solutions, and Extruded • Increase the dividend on our common stock by more and End Products segments showed higher full-year than 13 percent to $0.68 per share annually; and margins, which is what profitable growth is all • Continue to invest in new primary plants...

  • Page 4
    ... Safety: Zero Incident Locations Business System (ABS), the operating philosophy of the Rates by Years Company. This year we celebrated the 10th anniver10 sary of ABS. To ensure we further embed this philoso9 phy into the way we operate, we opened the North 8 American Rolling and Extrusion Center...

  • Page 5
    ... the next product solution, the next process fabricating facilities. improvement. This year we strengthened our global The same underlying growth rate trends can be research connection with research centers in Russia, seen in aerospace, transportation, defense and energy China, India and Europe, and...

  • Page 6
    ... and the Bohai rolling mill and two new fastening system facilities near Shanghai. Elsewhere in our downstream businesses, the engineered solutions business expanded its fastening operations with two new facilities in China, and made investments to ramp-up production in aerospace castings in the...

  • Page 7
    ... and began work to expand its sister alumina refinery. As we expand we are also taking steps to limit our environmental footprint. As leading stewards of the environment, Alcoa joined a group of U.S. companies and NGOs to call for action to address climate change issues in the United States. The...

  • Page 8
    ... plate alloys from our Davenport (USA) plant are used throughout the aircraft, where high-strength, toughness, crack resistance and corrosion resistance are required. Integrity of Closure Products Alcoa CSI Japan has seen its innovative VT-Lok and Hi-Lok aluminum closures used on aluminum bottles...

  • Page 9
    ... the Boeing 737 (one of the best-selling commercial aircraft in aviation history), and a wing component for the Boeing 747. Creating Value for Customers Alcoa established its fourth ï¬,at-rolled products plant in China - Alcoa Kunshan Aluminum Products Co., Ltd. - designed to produce 50,000 tons of...

  • Page 10
    ... the technical issues. New Wheel Plant in Monterrey Alcoa Wheel Products Mexico is the newest facility to produce the Dura-Bright® with XBR™ technology line of forged aluminum wheels. The facility began operating earlier this year and will serve customers primarily in the U.S., Latin America and...

  • Page 11
    ... addition, Alcoa is working with Boeing to specify advanced aluminum alloys and concepts for new aircraft. Investment Plans Alcoa is investing more than $30 million in Alcoa Howmet to increase global production capacity and boost efficiencies throughout its turbine airfoil manufacturing sites. The...

  • Page 12
    ... Up Brazil Alcoa's plans for energy selfsufficiency in Latin America gained ground in 2006 with three milestones in sustainable hydropower. Investors created a company to construct the 210-MW Serra do Facão hydropower plant in central Brazil. Alcoa owns 35% of this project, scheduled to go on line...

  • Page 13
    ...will extend the life of the plant. Chilean National Quality Award for Alcoa CSI Alcoa Closure Systems International (CSI) in Chile received the country's prestigious National Quality Award for quality management in production and service. Alcoa was presented the award by President of Chile Michelle...

  • Page 14
    ... closures for the 2006 World Cup soccer tournament. Alcoa customers, Coca-Cola and Pepsi, ordered the closures with under-the-cap promotions tailored specially for the event. Guinea Project Plan Moves Ahead The President of Guinea signed into law an agreement officially forming a partnership...

  • Page 15
    .... Alcoa Wheels Roll into South Africa Alcoa opened its first South African sales office in Johannesburg last September, specializing in aluminum forged truck wheels for commercial transportation. The new office brings just-intime sales and service to distributors, dealers and OEM customers in...

  • Page 16
    ... aluminum production facilities in the world. The smelter was designed with state-of-the-art technology. Leveraging Best Practices Alcoa Electrical and Electronic Solutions (formerly AFL Automotive) was awarded wiring systems business by DAF Trucks N.V., a division of PACCAR Inc., for the new...

  • Page 17
    ... brand in Italy, uses CSI's allaluminum Alu-Star® closure with a unique security skirt that reduces risk of injury when opening. CSI Germany supplies two-thirds of the overall metal closure demand of Nestlé Waters in Europe. New Plant Serves Ferrari Alcoa opened its new automotive assembly plant...

  • Page 18
    ...are aimed at continually improving environmental performance. Community and government stakeholders who helped frame the plans will review progress toward the goals. Portland Turns 20 The Portland Aluminum smelter, one of the most efficient smelters in the world, celebrated its 20th anniversary in...

  • Page 19
    ...of the region and share the benefits of the project. Competitive Edge A new end line - an aluminum sheet processing line - was launched at the Yennora rolled products plant. The upgrade increases production capacity of food cans and screw cap wine bottle closures. Last year, a new cleaning and cut...

  • Page 20
    ... system. A New Frontier Alcoa presented its advanced technologies to Toyota in a sustainability-themed exhibition at the automaker's supplier center at its headquarters in Japan and its U.S. technical center. The two Aluminum-Lithium Sheet for Aerospace Airbus will use Alcoa's Al-Li alloy...

  • Page 21
    ...buy back used Alcoa aluminum wheels when customers replace them. The program provides customers with high-quality products that offer a lifetime of value and an environmentally friendly solution. Sustainability in Action An Outstanding Stewardship of America's Rivers Award was given to Alcoa by the...

  • Page 22
    ....) plant provides the tube. Operational Excellence Ten years ago, Alcoa adopted the Alcoa Business System (ABS) to drive continuous process improvement. Today, learning continues through regional Centers of Excellence opened or planned for the U.S., Europe and Asia. Examples of ABS at work include...

  • Page 23
    ... Financial and Corporate 22 Trends in Alcoa's Major Markets 24 Selected Financial Data 25 Management's Discussion and Analysis 42 Management's Reports 43 Report of Independent Registered Public Accounting Firm 44 Consolidated Financial Statements 48 Notes to Consolidated Financial Statements 73...

  • Page 24
    ...Markets Commercial Transportation Building and Construction $2.4 Automotive $2.7 $2.1 $9.0 Aluminum and Alumina Aerospace 10% $3.1 billion Alcoa segments that sell products to this market: Flat-Rolled Products, Engineered Solutions, Extruded and End Products Alcoa aerospace products are widely used...

  • Page 25
    ... $4.2 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
    ...Cumulative effect of accounting changes Net income Alcoa's average realized price per metric ton of aluminum ingot LME average 3-month price per metric ton of aluminum ingot Cash dividends paid per common share Total assets Short-term borrowings Commercial paper Long-term debt, including amounts due...

  • Page 27
    ...closures, 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 44 countries. North...

  • Page 28
    ...over 2004 levels; increased sales across all segments; higher demand in upstream businesses and 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...

  • Page 29
    ... its soft alloy extrusion business with Sapa's Profiles extruded aluminum business. The new venture will be majority-owned by Orkla and operated by Sapa. It is anticipated that the joint venture will be formed early in 27 Selling, General Administrative, and Other Expenses as a percent of sales...

  • Page 30
    ... $47 related to a global flat-rolled product asset portfolio review and rationalization. - Restructuring and consolidation of the Engineered Solutions segment's automotive and light vehicle wire harness and component operations, including the closure of the manufacturing operations of the AFL Seixal...

  • Page 31
    ... divestitures of the telecommunications business and the protective packaging business were completed in 2005. See Note F to the Consolidated Financial Statements for additional information. 29 Alumina Primary Metals Flat-Rolled Products Extruded and End Products Engineered Solutions Packaging and...

  • Page 32
    ... Statements for additional 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 33
    ... of Alcoa's worldwide smelter system. Primary Metals receives alumina, primarily from the Alumina segment, and produces primary aluminum to be used by Alcoa's fabricating businesses, as well as sold to external customers, aluminum traders, and commodity markets. Results from the sale of aluminum...

  • Page 34
    ... super-alloy investment 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...

  • Page 35
    ... $180 net gain on the sale of Alcoa's stake in Elkem and a $120 tax benefit related to the finalization of certain tax reviews and audits during the second quarter of 2005, slightly offset by the $58 charge related to the closure of the Hamburger Aluminium-Werk facility in Germany. ATOI Unallocated...

  • Page 36
    ...changing commodity prices, foreign exchange rates, and interest rates. Alcoa's commodity and derivative activities are subject to the management, direction, and control of the Strategic Risk Management Committee (SRMC). The SRMC is composed of the chief executive officer, the chief financial officer...

  • Page 37
    ... 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 38
    ... stock related to Alcoa's share repurchase program. Cash used for financing activities was $324 in 2005 compared with $1,525 in 2004. The change of $1,201 was primarily due to net debt repayments of $898 in 2004 compared with net borrowings of $311 in 2005. Alcoa maintains $3,000 of revolving-credit...

  • Page 39
    ...61% related to growth projects, including the construction of the Iceland smelter, the investment in the Mosjøen anode facility, the alumina refinery expansions in Jamaica and Brazil, and the development of the Juruti bauxite mine. Also included are costs related to environmental control in new and...

  • Page 40
    ... markets and market share, sales volumes and prices, costs to produce, discount rate, and working capital changes. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, fair values that could be realized...

  • Page 41
    ... in an increased stock award expense in comparison to 2005. Taxes. As a global company, Alcoa records an estimated liability for income and other taxes based on what it determines will likely be paid in the various tax jurisdictions in which it operates. Management uses its best judgment in the...

  • Page 42
    ...1, 2007. Management has determined that the adoption of FIN 48 will not have a material impact on Alcoa's consolidated financial statements. Contractual Obligations and Off-Balance Sheet Arrangements The company is obligated to make future payments under various contracts such as long-term purchase...

  • Page 43
    ...; the expansion of an alumina refinery in São Luis, Brazil; the development of a bauxite mine in Juruti, Brazil; global rolled products expansion projects in Russia and China; and the continued investment in several hydroelectric power construction projects in Brazil. These projects are in various...

  • Page 44
    ...in 2006, 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 and Chief Executive Officer Charles D. McLane...

  • Page 45
    ... 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 46
    ... Consolidated Income (in millions, except per-share amounts) Alcoa and subsidiaries For the year ended December 31, Sales (Q) Cost of goods sold (exclusive of expenses below) Selling, general administrative, and other expenses Research and development expenses Provision for depreciation, depletion...

  • Page 47
    ... 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 48
    ...stock Dividends paid to shareholders Dividends paid to minority interests Contributions from minority interests Net change in commercial paper Additions to long-term debt Payments on long-term debt Excess tax benefits from stock-based payment arrangements Cash used for financing activities Investing...

  • Page 49
    ... of $34: Net change from periodic revaluations Net amount reclassified to income Net unrecognized losses on derivatives Comprehensive income Cash dividends: Preferred @ $3.75 per share Common @ $.60 per share Common stock issued: compensation plans Repurchase of common stock Balance at end of 2004...

  • Page 50
    ... markets and market share, sales volumes and prices, costs to produce, discount rate and working capital changes. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, fair values that could be realized...

  • Page 51
    ... assets over their remaining useful life. Certain conditional asset retirement obligations (CAROs) related to alumina refineries and aluminum smelters have not been recorded in the consolidated financial statements because the fair value of such potential retirement obligations cannot be reasonably...

  • Page 52
    ..., 2005 or 2004. Alcoa accounts for interest rate swaps related to its existing long-term debt and hedges of firm customer commitments for aluminum as fair value hedges. As a result, the fair values of the derivatives and changes in the fair values of the underlying hedged items are reported in other...

  • Page 53
    ... quarter of 2006, Alcoa reclassified the Hawesville, KY automotive casting facility to discontinued operations upon closure of the facility. The results of the Extruded and End Products segment and the Engineered Solutions segment have been reclassified to reflect the movement of the home exteriors...

  • Page 54
    ... automotive casting business, somewhat offset by $25 of net operating income of these businesses and a net gain of $5 on businesses sold in 2004. In addition to the businesses discussed above, in the fourth quarter of 2006, Alcoa reclassified its soft alloy extrusion business to assets held for sale...

  • Page 55
    ... its soft alloy extrusion business with Sapa's Profiles extruded aluminum business. The new venture will be majority-owned by Orkla and operated by Sapa. It is anticipated that the joint venture will be formed early in 2007, subject to customary government approvals. Alcoa recorded an impairment...

  • Page 56
    ...) on the sale of Alcoa's specialty chemicals business and $15 resulting from adjustments to prior year reserves, offset by charges of $40 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 57
    ...This contingent payment, if paid, will be recorded as an adjustment to the transaction value. AFL automotive business results are recorded in the Engineered Solutions segment. On January 31, 2005, Alcoa acquired two fabricating facilities located in the Russian Federation. The facilities, located in...

  • Page 58
    ... that owns and operates two aluminum smelters in Norway, and investments in several hydroelectric power construction projects in Brazil (See Note N for additional information). In 2005, Alcoa sold its 46.5% investment in Elkem and its 50% interest in Integris Metals Inc. (See Note F for additional...

  • Page 59
    ... shareholders' related to Alcoa World Alumina LLC and other interests in Brazil, Norway, Russia and China. N. Commitments and Contingencies L. Other Noncurrent Liabilities and Deferred Credits December 31, 2006 2005 Deferred alumina sales revenue Deferred aluminum sales revenue Environmental...

  • Page 60
    ... products. Aluminum and alumina represent approximately threefourths of Alcoa's revenues. Nonaluminum products include precision castings, industrial fasteners, consumer products, food service and flexible packaging products, plastic closures, and electrical distribution systems for cars and trucks...

  • Page 61
    ... super-alloy investment 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...

  • Page 62
    Alcoa's reportable segments, as reclassified for discontinued operations and assets held for sale, are as follows: Packaging Flat- Extruded Primary Rolled and End Engineered and Consumer Segment information Alumina Metals Products Products Solutions 2006 Sales: Third-party sales Intersegment sales ...

  • Page 63
    ... a new share repurchase program that authorizes the repurchase of up to 10% of the company's outstanding common stock at December 31, 2006 over the next three years. Share Activity (number of shares) Common stock Treasury Net outstanding Balance at end of 2003 Treasury shares purchased Stock issued...

  • Page 64
    ...: Stock option grants Stock award grants Total compensation expense before income taxes Income tax benefit Total compensation expense, net of income tax benefit $11 61 72 24 $48 $- 25 25 9 $16 $- 14 14 5 $ 9 Weighted average fair value per option Average risk-free interest rate Expected dividend...

  • Page 65
    ... Weighted average average contractual exercise Intrinsic price Value life Number Basic earnings per common share (EPS) amounts are computed by dividing earnings after the deduction of preferred stock dividends by the average number of common shares outstanding. Diluted EPS amounts assume the...

  • Page 66
    .... The exercise of employee stock options generated a tax benefit of $17 in 2006, $9 in 2005, and $21 in 2004. This amount was credited to additional capital and reduced current taxes payable. Reconciliation of the U.S. federal statutory rate to Alcoa's effective tax rate for continuing operations is...

  • Page 67
    ... are sufficiently 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...

  • Page 68
    ... at beginning of year Service cost Interest cost Amendments Actuarial (gains) losses Acquisitions Divestitures Benefits paid, net of participants' contributions Other transfers, net Exchange rate Projected benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning...

  • Page 69
    ... obligation and fair value of plan assets with accumulated benefit obligations in excess of plan assets were $10,413 and $9,244, respectively, as of December 31, 2006, and $10,163 and $8,504, respectively, as of December 31, 2005. The unrecognized net actuarial loss for pension benefit plans at...

  • Page 70
    ...4.00 5.70% 4.00 The discount rate is determined using a yield curve model developed by the company's external actuaries. The plans' projected benefit obligation cash flows are discounted using yields on high quality corporate bonds to produce a single equivalent rate. The plans' cash flows have an...

  • Page 71
    ... in power contracts in Iceland and Brazil and our share of losses on hedge contracts of Norwegian smelters that are accounted for under the equity method. Fair Value Hedges Aluminum. Customers often require Alcoa to enter into long-term, fixed-price commitments. These commitments expose Alcoa to...

  • Page 72
    ... derivatives to minimize its price risk related to other customer sales and pricing arrangements. Alcoa has not qualified these contracts for hedge accounting treatment and therefore, the fair value gains and losses on these contracts are recorded in earnings. The impact to earnings was a gain...

  • Page 73
    ... 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 74
    ...to the fact that this amount was refinanced with new long-term debt instruments. The remaining net proceeds were used to repay new commercial paper that was borrowed in January 2007 prior to the issuance of the Senior Notes and for general corporate purposes. The financing costs paid associated with...

  • Page 75
    ...information. Quarterly Data (dollars in millions, except per-share amounts) First 2006 Sales Income from continuing operations (Loss) income from discontinued operations (B) Net income Earnings (loss) per share...accounting change Net income Number of Employees 2006 U.S. Other Americas Europe Pacific...

  • Page 76
    ... assets. The company has significant growth investments underway in its upstream and downstream businesses, as previously noted, with expected completion dates over the next several years. As these investments generally require a period of time before they are productive, management believes that...

  • Page 77
    ..., a group of 33 companies which closely mirror the companies we use for return on capital comparisons to establish performance awards for senior management. Five-Year Cumulative Total Return Based upon an initial investment of $100 on December 31, 2001 with dividends reinvested. $200 Alcoa Inc. $150...

  • Page 78
    ... share) Diluted earnings per share (2) Dividends declared Book value (based on year-end outstanding shares) Price range: High Low Estimated number of shareholders Average shares outstanding - basic (thousands) Operating Data Alumina shipments (3) (thousands of metric tons) Aluminum product shipments...

  • Page 79
    ... 4,219 5,141 3,539 4,395 $ 1,102 142,000 1999 $15,346 11,731 777 124 867 - 195 122 526 228 1,020 34 - 1,054 1,477 1,388 2 296 8,067 17,066 3,041 1,458 6,...914 2,108 2,652 1,725 2,254 $ 913 81,600 1996 $12,238 9,426 656 162 734 195 134 60 328 202 461 54 - 515 1,609 1,536 2 232 6,426 13,450 2,056 1,...

  • Page 80
    ... and chief executive officer of Moxahela Enterprises, LLC, 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. chief executive of...

  • Page 81
    ...America Brenda A. Hart Vice President President, Alcoa Investment Cast and Forged Products Judith L. Nocito Executive Vice President Group President, Global Rolled Products and Hard Alloy Extrusions and Asia Russell C. Wisor Vice President - Government Affairs Mohammad A. Zaidi Assistant General...

  • Page 82
    ... Communications at the Corporate Center address. Shareowner Services Shareowners with questions on account balances, dividend checks, reinvestment, or direct deposit; address changes; lost or misplaced stock certificates; or other shareowner account matters may contact Alcoa's stock transfer agent...

  • Page 83
    ...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 84
    ...Fellowship program brings together many of the world's best minds from academia, government, NGOs and industry to find new paths toward sustainability. The initiative is designed to fund step change through innovation and concerted action. From Australia to Zambia, dozens of Alcoa Foundation fellows...