Alcoa 2006 Annual Report Download - page 54

of the protective packaging and telecommunications busi-
nesses, as well as the U.K. 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 upon the determi-
nation that it would be disposed of including the signing of
a letter of intent with Orkla ASA’s SAPA Group (Sapa) to
create a joint venture that would combine the soft alloy
extrusion business with Sapa’s Profiles extruded aluminum
business (See Note D for additional information). This joint
venture will be accounted for on the equity method. The
consolidated financial statements for all prior periods pre-
sented have been reclassified to reflect these businesses as
held for sale.
The major classes of assets and liabilities of operations held
for sale in the Consolidated Balance Sheet are as follows:
December 31, 2006 2005
Assets:
Receivables, less allowances $342 $ 329
Inventories 226 263
Properties, plants, and equipment, net 382 600
Goodwill —140
Other assets 29 45
Total assets held for sale $979 $1,377
Liabilities:
Accounts payable, accrued expenses $238 $ 319
Other liabilities 15 13
Total liabilities of operations held for
sale $253 $ 332
For all of the businesses to be divested, the fair values
were estimated utilizing the best information available and
accepted valuation techniques. The fair values that are
ultimately realized upon the sale of the businesses to be
divested may differ from the estimated fair values reflected
in the consolidated financial statements.
C. Asset Retirement Obligations
Alcoa adopted FASB Interpretation No. 47, “Accounting for
Conditional Asset Retirement Obligations,” (FIN 47), effec-
tive December 31, 2005. FIN 47 clarifies the accounting for
conditional asset retirement obligations (CAROs), as refer-
enced in SFAS No. 143, “Accounting for Asset Retirement
Obligations.” A CARO is a legal obligation to perform an
asset retirement activity in which the obligation is uncondi-
tional, but uncertainty exists about the timing and (or)
method of settlement, which may or may not be under the
control of Alcoa, and which prevents the reasonable estima-
tion of the fair value of the CARO. Upon adoption, Alcoa
recognized a cumulative effect adjustment of $2, consisting
primarily of costs for regulated waste materials related to
the demolition of certain power facilities. Pro forma
amounts related to prior periods are not presented, as there
is no impact on prior period financial statements.
In addition to the above CAROs, Alcoa has recorded
AROs related to legal obligations associated with the
normal operations of bauxite mining, alumina refining, and
aluminum smelting facilities. These AROs consist primarily
of costs associated with spent pot lining disposal, closure of
bauxite residue areas, mine reclamation, and landfill clo-
sure.
The following table details the changes in the carrying
amount of AROs and CAROs:
December 31, 2006 2005
Balance at beginning of year $258 $233
Accretion expense 13 14
Payments (42) (31)
Liabilities incurred 51 46
Translation and other 11 (4)
Balance at end of year $291 $258
D. Restructuring and Other Charges
Restructuring and other charges for each of the three years
in the period ended December 31, 2006, were comprised of
the following:
2006 2005 2004
Asset impairments $442 $86 $ 6
Layoff costs 107 238 40
Other costs 37 16 —
Gain on sale of specialty
chemicals business —— (53)
Reversals of previously recorded
layoff and other exit costs* (43) (48) (15)
Restructuring and other charges $543 $292 $(22)
*Reversals of previously recorded layoff and other exit costs
resulted from changes in facts and circumstances that led to
changes in estimated costs.
Employee termination and severance costs were recorded
based on approved detailed action plans submitted by the
operating locations that specified positions to be eliminated,
benefits to be paid under existing severance plans, union
contracts or statutory requirements, and the expected time-
table for completion of the plans.
2006 Restructuring Program. In November 2006,
Alcoa executed a plan to re-position several of its down-
stream operations in order to further improve returns and
profitability, and to enhance productivity and efficiencies
through a targeted restructuring of operations, and the
creation of a soft alloy extrusion joint venture. The
restructuring program encompassed identifying assets to be
disposed of, plant closings and consolidations, and will lead
to the elimination of approximately 6,700 positions across
the company’s global businesses during the next year.
Restructuring charges of $543 ($379 after-tax and minority
interests) were recorded in 2006 and were comprised of the
following components: $107 of charges for employee termi-
nation and severance costs spread globally across the
company; $442 related to asset impairments for structures,
machinery, equipment, and goodwill, more than half of
which relates to the soft alloy extrusions business; and $37
for other exit costs, consisting primarily of accelerated
depreciation associated with assets for which the useful life
has been changed due to plans to close certain facilities in
the near term and environmental clean-up costs. Partially
offsetting these charges was $43 of income related to the
reversal of previously recorded layoff and other exit costs
resulting from new facts and circumstances that arose
subsequent to the original estimates. Alcoa estimates that it
will record additional charges of approximately $40 related
to this restructuring program in 2007, consisting primarily
of accelerated depreciation.
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