Alcoa 2006 Annual Report Download - page 28

excess cash from operations for other uses; managing our
debt portfolio in order to maintain our debt-to-capital
ratio within the target range of 30% to 35%; and taking
the necessary actions to strengthen our volume, mix and
productivity in order to offset cost inflation.
ŠManaging our investment decisions and portfolio actions
on the basis of profitable growth.
Results of Operations
Earnings Summary
Alcoa’s income from continuing operations for 2006 was
$2,161, or $2.47 per diluted share, compared with $1,257,
or $1.43 per share in 2005. The increase in income from
continuing operations was primarily due to the following:
higher realized prices for alumina and aluminum as LME
prices increased by 37% over 2005 levels; strong demand in
the downstream businesses serving the aerospace, building
and construction, commercial transportation and dis-
tribution markets; the absence of a $58 charge for the
closure of the Hamburger Aluminium-Werk facility in
Germany in 2005; a $26 favorable legal settlement related
to a former Reynolds distribution business; and higher
dividend and interest income.
Partially offsetting these increases were the following
items: continued cost increases for energy and raw materi-
als; increase in stock-based compensation expense due to the
adoption of a new accounting standard; labor contract and
strike-related costs; restructuring charges of $379 associated
with the re-positioning of downstream operations and the
formation of a joint venture related to the soft alloy
extrusions business and other assets to be disposed of; the
absence of the $180 gain related to the 2005 sale of Alcoa’s
stake in Elkem ASA (Elkem); and the absence of a $37 gain
on the sale of Alcoa’s railroad assets recognized in 2005.
Net income for 2006 was $2,248, or $2.57 per diluted
share, compared with $1,233, or $1.40, per share in 2005.
Net income of $2,248 in 2006 included income from dis-
continued operations of $87, comprised of $110 for the gain
on the sale of the home exteriors business, offset by $23
primarily related to net operating losses of discontinued
businesses.
Alcoa’s income from continuing operations for 2005 was
$1,257, or $1.43 per diluted share, compared with $1,369,
or $1.56 per share in 2004. The highlights for 2005 include:
higher realized prices for alumina and aluminum as LME
prices increased by 10% 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’s stake in Elkem; a $120
tax benefit related to the finalization of certain tax reviews
and audits during the second quarter of 2005; and a $37
gain on the sale of railroad assets.
These positive contributions were more than offset in
2005 by the following: significant cost increases for energy
and raw materials; the impact of a weakened U.S. dollar
against other currencies, primarily the Canadian dollar and
the Euro; restructuring charges of $190 associated with the
global realignment of Alcoa’s organization structure
designed to streamline operations; operating losses of $69
related to the acquired facilities in Russia; a $58 charge for
the closure of the Hamburger Aluminium-Werk facility in
Germany; an increase in environmental reserves, principally
related to the closed East St. Louis, IL facility; an increase in
legal reserves, primarily due to litigation involving a closed
Howmet facility; and higher costs associated with hurri-
canes and business interruptions.
Net income for 2005 was $1,233, or $1.40 per diluted
share, compared with $1,310, or $1.49 per share, in 2004.
Net income of $1,233 in 2005 included losses from dis-
continued operations of $22, comprised of $43 related to
net losses on businesses impaired or sold, partially offset by
$21 in net operating income.
Net Income
millions of dollars
2002 2003 2004 2005 2006
420
938
1,310 1,233
2,248
Sales—Sales for 2006 were $30,379 compared with sales
of $25,568 in 2005, an increase of $4,811, or 19%. Almost
one-half of this increase was the result of a 31% increase in
the realized price of alumina and a 30% increase in the
realized price of aluminum. Volumes also increased as
demand remained strong primarily in the downstream
businesses serving the aerospace, building and construction,
commercial transportation and distribution markets. Parti-
ally offsetting these positive contributions were unfavorable
foreign currency exchange movements.
Sales for 2005 were $25,568 compared with sales of
$22,609 in 2004, an increase of $2,959, or 13%. The 9%
increase in the realized price of aluminum and the 14%
increase in the realized price of alumina contributed to the
increase in sales over the prior year, as approximately
one-half of the increase in sales was due to higher realized
prices. Demand increased in upstream businesses and in
downstream businesses serving the aerospace, commercial
transportation, industrial products, distribution, packaging,
and building and construction markets. The acquisition of
two Russian fabricating facilities provided $449 in addi-
tional revenue in 2005. In addition, higher sales related to
metal purchased and subsequently resold and favorable
foreign currency exchange movements positively impacted
2005. These positive contributions more than offset the
sales decreases from the divestitures in 2004 of Alcoa’s
specialty chemicals business, the Russellville, AR and St.
Louis, MO foil facilities, and the European and Brazilian
extrusion facilities.
Cost of Goods Sold—COGS as a percentage of sales was
76.8% in 2006 compared with 81.0% in 2005. Higher
realized prices for alumina and aluminum and strong
volumes more than offset global cost inflation, primarily
related to energy, raw materials, labor and transportation,
and increases in last-in, first-out (LIFO) inventory reserves.
A $36 favorable legal settlement related to a former Rey-
nolds distribution business also contributed to the
percentage improvement.
COGS as a percentage of sales was 81.0% in 2005
compared with 79.3% in 2004. Increased realized prices for
alumina and aluminum and higher volumes were more than
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