Alcoa 2006 Annual Report Download - page 38

result in additional liability. Alcoa may be required to
record a subsequent reserve adjustment at the time the
EPA’s Record of Decision is issued.
Based on the foregoing, it is possible that Alcoa’s results
of operations, in a particular period, could be materially
affected by matters relating to these sites. However, based
on facts currently available, management believes that
adequate reserves have been provided and that the dis-
position of these matters will not have a materially adverse
effect on the financial position or liquidity of the company.
Alcoa’s remediation reserve balance was $334 and $389
at December 31, 2006 and December 31, 2005 (of which
$49 and $39 was classified as a current liability),
respectively, and reflects the most probable costs to
remediate identified environmental conditions for which
costs can be reasonably estimated. In 2006, the remediation
reserve was decreased by approximately $14 due to an
adjustment for the ongoing monitoring program at the
Massena, NY facility and an adjustment for the liabilities at
the Russian fabricating facilities acquired in January 2005.
The adjustment to the reserve for the Russian fabricating
facilities was made after further investigations were com-
pleted whereby Alcoa was able to obtain additional
information about the environmental condition and the
associated liabilities with these facilities. The adjustment for
the acquired facilities was recorded as an opening balance
sheet adjustment and had no impact on net income.
Remediation expenses charged against the reserve were
approximately $41 in 2006, $53 in 2005, and $46 in 2004.
These amounts include expenditures currently mandated, as
well as those not required by any regulatory authority or
third-party.
Included in annual operating expenses are the recurring
costs of managing hazardous substances and environ-
mental programs. These costs are estimated to be
approximately 2% of cost of goods sold.
Liquidity and Capital Resources
Alcoa takes a disciplined approach to cash management and
strengthening its balance sheet, as it undertook aggressive
capital controls, management of working capital, continued
monitoring of growth projects, and continued focus on
divestitures in 2006. Capital spending increased 50%, as
Alcoa made continued progress on brownfield expansions in
refining and smelting and continued construction on the
greenfield smelter project in Iceland.
Cash from
Operations
millions of dollars
2002 2003 2004 2005 2006
1,844
2,434
2,199
1,676
2,567
Cash provided from operations and from financing activ-
ities is anticipated to be adequate to cover dividends, debt
repayments, capital expenditures, and other business needs
over the next 12 months.
Cash from Operations
Cash from operations in 2006 was $2,567 compared with
$1,676 in 2005, resulting in an increase of $891, or 53%.
Cash inflows were principally due to a significant increase in
earnings in 2006, partially offset by a $593 increase in
receivables and inventories, primarily due to increased
prices; $397 in pension contributions; and a $294 decrease
in accounts payable and accrued expenses.
Cash from operations in 2005 was $1,676 compared
with $2,199 in 2004, resulting in a decrease of $523, or
24%. Cash outflows were principally due to increases in
receivables and inventories of $936 due to increased sales
and higher prices; $383 in pension contributions; a reduc-
tion in tax liabilities of $96; and the payment of $93
associated with the long-term aluminum supply contract
entered into as part of the acquisition of two Russian fab-
ricating facilities. These items were partially offset by an
increase in accounts payable and accrued expenses of $659
due to increased raw materials costs and increased payment
terms.
Financing Activities
Cash used for financing activities was $20 in 2006 com-
pared with $324 in 2005. The change of $304 was
primarily due to an increase in net borrowings of $368 in
2006 as compared to 2005, and an $84 increase in common
stock issued for stock compensation plans. Partially off-
setting these cash inflows was an increase of $182 in cash
paid for the repurchase of approximately nine million shares
of common stock related to Alcoa’s share repurchase pro-
gram.
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 agreements
with varying expiration dates as backup to its commercial
paper program. In April 2005, Alcoa refinanced its $1,000
revolving-credit agreement that was to expire in April 2005
into a new $1,000 revolving-credit agreement that will
expire in April 2010. Alcoa also has a $1,000 revolving-
credit agreement that will expire in April 2008 and a $1,000
revolving-credit agreement that will expire in April 2009.
Under these agreements, a certain ratio of indebtedness to
consolidated net worth must be maintained. There were no
amounts outstanding under the revolving-credit agreements
at December 31, 2006 and 2005. The interest rate on the
agreements expiring in 2008 and 2009, if drawn upon, is
Libor plus 17 basis points, which is subject to adjustment if
Alcoa’s credit rating changes, to a maximum interest rate of
Libor plus 83.5 basis points. The interest rate on the agree-
ment expiring in 2010 is Libor plus 18 basis points, which is
subject to adjustment if Alcoa’s credit rating changes, to a
maximum interest rate of Libor plus 60 basis points. Alcoa
had $3,000 of available borrowings at December 31, 2006.
Debt of $843 will mature in 2007.
Standard and Poor’s Rating Services’ (S&P) long-term
debt rating of Alcoa is BBB+ and its short-term rating is
A-2. The current outlook, which was revised in January
2007, is stable, as S&P cited Alcoa’s implementation of
necessary strategic initiatives at its upstream operations to
maintain its long-term competitive business position as a
result of inflationary pressures and growth prospects in the
aluminum markets. Moody’s Investors Service’s (Moody’s)
long-term debt rating of Alcoa is A-2, and its short-term
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