Alcoa 2014 Annual Report Download - page 74

Alcoa is also the world leader in the production and management of primary aluminum, fabricated aluminum, and
alumina combined, through its active participation in all major aspects of the industry: technology, mining, refining,
smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME)
and priced daily. Sales of primary aluminum and alumina represent approximately 40% of Alcoa’s revenues. The price
of aluminum influences the operating results of Alcoa.
Alcoa is a global company operating in 30 countries. Based upon the country where the point of sale occurred, the
United States and Europe generated 51% and 27%, respectively, of Alcoa’s sales in 2014. In addition, Alcoa has
investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi
Arabia, all of which present opportunities for substantial growth. Governmental policies, laws and regulations, and
other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect
the results of operations in these countries.
Management Review of 2014 and Outlook for the Future
In 2014, growth in global aluminum demand reached 7%, which was consistent with management’s projection at the
end of 2013. The LME price of aluminum remained relatively stable compared to 2013; however, regional premiums
increased substantially, significantly benefitting the smelting portion of Alcoa’s upstream operations. The refining
portion of the upstream operations continued to make progress in shifting customer pricing away from the LME
aluminum price to a mixture of alumina pricing index and spot pricing. Additionally, the midstream and downstream
operations continued to grow revenue through innovations and share gains. Cost headwinds continued to be a
challenge; however, management was able to more than offset these with net productivity improvements across all
operations. Alcoa also realized the benefit of a stronger U.S. dollar in 2014 compared to 2013. As a result of all of the
foregoing, each of Alcoa’s operations achieved improved results over 2013.
Separately from the 2014 operational results, management initiated a number of portfolio actions during the year. In
the upstream operations, following similar actions taken in 2013, smelting capacity of 424 kmt was permanently closed
(of which 150 kmt was previously curtailed) and 159 kmt was temporarily curtailed, which in turn led to the temporary
curtailment of 200 kmt in refining capacity. Additionally, in the midstream operations, 200 kmt of can sheet capacity
was permanently closed. Management also completed the divestiture of four operations within the upstream and
midstream operations that were no longer part of the strategic direction of Alcoa. These included a majority ownership
interest in both a mining and refining joint venture and a smelter and wholly-owned interests in three rolling mills and
an aluminum rod plant. From a growth perspective, Alcoa completed the acquisition of an aerospace business and
entered into an agreement to purchase another, both of which will enhance the portfolio of Alcoa’s downstream
operations.
Management continued its focus on liquidity and cash flows, generating incremental improvements in procurement
efficiencies, overhead rationalization, working capital, and disciplined capital spending. This focus and the related
results enabled Alcoa to end 2014 with a strengthened balance sheet.
The following financial information reflects certain key measures of Alcoa’s 2014 results:
• Sales of $23,906 and Net income of $268, or $0.21 per diluted share;
• Total segment after-tax operating income of $2,043, an increase of 68% from 2013;
• Cash from operations of $1,674, reduced by pension plan contributions of $501;
• Capital expenditures of $1,219, under $1,500 for the fifth consecutive year;
• Cash on hand at the end of the year of $1,877, in excess of $1,400 for the sixth consecutive year;
• Increase in total debt of $533, but a decline of $1,726 since 2008; and
• Debt-to-capital ratio of 37.4%, a decrease of 70 basis points from 2013.
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