Alcoa Reports Strongest 1st Quarter Income in Company History

Alcoa (NYSE:AA) today announced first quarter 2007 income from continuing operations of $673 million, or $0.77 per diluted share. Excluding previously announced restructuring charges, income from continuing operations was $691 million, or $0.79 per share, a 13 percent increase from the first quarter of 2006, and a 20 percent increase from the fourth quarter of 2006 which also included discrete tax items. Net income for the quarter was $662 million, or $0.75, a nine percent increase from the first quarter of 2006. Net income for the fourth quarter 2006 was $359 million, or $0.41. Revenues for the quarter increased 11 percent from a year ago to $7.9 billion, driven by higher metal prices and sales to the aerospace, building and construction, and industrial product markets. Fourth quarter 2006 revenues were $7.8 billion. Cash from operations in the first quarter rose to a record $527 million, a more than $700 million improvement from the first quarter of 2006. "Alcoans have delivered another strong quarter of top and bottom line growth, productivity improvements in cost of goods and overhead, and a dramatic improvement in cash flow from last year’s first quarter,” said Alain Belda, Alcoa Chairman and CEO. "Our focus on higher value-added solutions, such as aerospace products, and productivity programs helped to continue our momentum this quarter. "The momentum we built last year is carrying through in disciplined capital and portfolio management, growth projects coming on-stream, and continued improvement in our strong downstream operations,” said Belda. "Again, we have delivered a strong quarter while also investing in projects that will generate strong returns for years to come.” Cost of goods sold as a percent of revenues was 76 percent, a 220 basis point improvement versus the fourth quarter of 2006 as a result of productivity initiatives. Balance Sheet and Growth Projects The Company’s strong cash generation performance in the quarter of $527 million helped to continue to fund its growth programs. In the quarter, capital expenditures were $783 million, 67 percent of which was devoted to growth projects. "I am pleased our new Alcoa Fjardaal smelter in Iceland is moving from the construction phase to start-up and operational activities,” said Belda. "This state-of-the-art facility and other growth projects will begin to contribute this year.” The first electricity energizing pots for start-up of Alcoa Fjardaal began today in Iceland. Also, the Company’s Intalco smelter in Ferndale, WA expanded its production this quarter. The Company’s debt-to-capital ratio stood at 30.9 percent at the end of the quarter, within the Company’s target range. The Company's 12-month trailing ROC stood at 12.7 percent at the end of the first quarter 2007, following significant growth investments. Excluding investments in growth, the Company’s ROC was 15.6 percent. Segment and Other Results Alumina After-tax operating income (ATOI) was $260 million, flat compared to the prior quarter and up $18 million or 7% to the year-ago quarter. Sequentially, the higher price impact was completely offset by lower shipments, the impact of the Guinea strike and a stronger Australian dollar. Production was down 4%, or 135,000 metric tons, sequentially due primarily to a shorter quarter in terms of production days, the ramp-down of Point Comfort and the residual impact of the 4th quarter Pinjarra power outage. Primary Metals ATOI was $504 million, up $24 million, or 5%, compared to the prior quarter and up $59 million, or 13%, to the year-ago quarter. Sequentially, the ATOI increase was due to higher LME prices partially offset by Iceland start-up costs, Intalco restart costs, higher carbon costs and unfavorable currency. Third party realized price increased $136 per metric ton to $2,902 per metric ton. Primary metal production for the quarter decreased 9 kmt. The Company purchased approximately 46 kmt of primary metal for internal use as part of its strategy to sell value-added products. Flat Rolled Products ATOI was $62 million, flat with the prior quarter and down $4 million from the year-ago quarter. Increased productivity and higher sales volumes were offset by the elimination of the 4th quarter tax benefit. Extruded and End Products ATOI was $34 million, up $7 million from the prior quarter and $34 million from the year-ago quarter. Sequentially, the impact of higher volumes in the building and construction and aerospace markets more than offset declining volumes in the commercial transportation market. In addition, the improvement was driven by the ceasing of depreciation on assets held for sale. Engineered Solutions ATOI was $93 million, a 27% increase from the prior quarter and a 12% increase over the year-ago quarter. The record result was achieved despite the known decline in the commercial vehicle market and continued weakness in the U.S. automotive base. In addition, there was a positive tax item in the 4th quarter that did not repeat. Major drivers contributing to the quarter were higher aerospace sales and continued productivity improvements. Packaging and Consumer ATOI was $19 million, down $7 million from the prior quarter and up $11 million over the year-ago quarter. The sequential quarter decrease was driven by the normal seasonal demand in Consumer Products. The year over year improvement of 138% was driven by productivity improvements, largely due to restructurings hitting the bottom line. Alcoa will hold its quarterly conference call at 5:00 PM Eastern time on April 10th to present the quarter's results. The meeting will be webcast via alcoa.com. Call information and related details are available at www.alcoa.com under "Invest." Alcoa is the world's leading producer and manager of primary aluminum, fabricated aluminum and alumina facilities, and is active in all major aspects of the industry. Alcoa serves the aerospace, automotive, packaging, building and construction, commercial transportation and industrial markets, bringing design, engineering, production and other capabilities of Alcoa's businesses to customers. In addition to aluminum products and components, Alcoa also markets consumer brands including Reynolds Wrap® foils and plastic wraps, Alcoa® wheels, and Baco® household wraps. Among its other businesses are closures, fastening systems, precision castings, and electrical distribution systems for cars and trucks. The company has 122,000 employees in 44 countries and has been named one of the top most sustainable corporations in the world at the World Economic Forum in Davos, Switzerland. More information can be found at www.alcoa.com Forward Looking Statement Certain statements in this release relate to future events and expectations and as such constitute forward-looking statements involving known and unknown risks and uncertainties that may cause actual results, performance or achievements of Alcoa to be different from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or aluminum industry conditions generally, including global supply and demand conditions and fluctuations in London Metal Exchange-based prices for primary aluminum and other products; (b) material adverse changes in the markets served by Alcoa, including the transportation, building and construction, distribution, packaging, industrial gas turbine and other markets; (c) significant increases in energy costs or interruption of energy supplies; (d) Alcoa's inability to mitigate the effects of increases in the costs of raw materials (including caustic soda, calcined petroleum coke and resins), in addition to energy, through price increases, productivity improvements or cost reduction programs; (e) Alcoa’s inability to implement successfully its strategy for growth, to complete expansion projects as planned, or to realize the returns anticipated by management from such activities; (f) unfavorable changes in laws, governmental regulations or policies, foreign currency exchange rates or competitive factors in the countries in which Alcoa operates; (g) significant legal proceedings or investigations adverse to Alcoa, including environmental, product liability, safety and health and other claims; and (h) the other risk factors summarized in Alcoa's Form 10-K for the year ended December 31, 2006 and other reports filed with the Securities and Exchange Commission. Alcoa and subsidiaries Condensed Statement of Consolidated Income (unaudited) (in millions, except per-share, share, and metric ton amounts)   Quarter ended March 31, December 31, March 31, 2006 (a) 2006 2007 Sales $ 7,111  $ 7,840  $ 7,908    Cost of goods sold (exclusive of expenses below) 5,344  6,132  6,007  Selling, general administrative, and other expenses 355  367  357  Research and development expenses 47  63  52  Provision for depreciation, depletion, and amortization 306  325  304  Restructuring and other charges 1  554  26  Interest expense 92  93  83  Other income, net (35) (49) (44) Total costs and expenses 6,110  7,485  6,785    Income from continuing operations before taxes on income 1,001  355  1,123  Provision (benefit) for taxes on income 282  (1) 335  Income from continuing operations before minority interests’ share 719  356  788  Less: Minority interests’ share 105  98  115    Income from continuing operations 614  258  673    (Loss) income from discontinued operations (6) 101  (11)   NET INCOME $ 608  $ 359  $ 662    Earnings (loss) per common share: Basic: Income from continuing operations $ .71  $ .30  $ .77  (Loss) income from discontinued operations (.01) .11  (.01) Net income $ .70  $ .41  $ .76    Diluted: Income from continuing operations $ .70  $ .29  $ .77  (Loss) income from discontinued operations (.01) .12  (.02) Net income $ .69  $ .41  $ .75    Average number of shares used to compute: Basic earnings per common share 870,560,769  867,331,378  868,824,621  Diluted earnings per common share 875,971,920  873,059,079  875,753,052    Common stock outstanding at the end of the period 870,119,484  867,739,544  868,989,203    Shipments of aluminum products (metric tons) 1,350,000  1,399,000  1,365,000    (a) The Condensed Statement of Consolidated Income as of March 31, 2006 has been reclassified to reflect the movement of the home exteriors business to discontinued operations in the third quarter of 2006. Alcoa and subsidiaries Condensed Consolidated Balance Sheet (unaudited) (in millions)   December 31, 2006 March 31,2007 ASSETS Current assets: Cash and cash equivalents $ 506  $ 420  Receivables from customers, less allowances: $75 in 2006 and $71 in 2007 3,127  3,314  Other receivables 308  337  Inventories 3,805  3,780  Fair value of derivative contracts 295  251  Prepaid expenses and other current assets 1,116  1,136  Total current assets 9,157  9,238    Properties, plants and equipment 29,348  30,237  Less: accumulated depreciation, depletion and amortization 14,535  14,865  Properties, plants and equipment, net 14,813  15,372  Goodwill 6,166  6,169  Investments 1,722  1,903  Other assets 4,346  4,320  Assets held for sale 979  1,019  Total assets $ 37,183  $ 38,021    LIABILITIES Current liabilities: Short-term borrowings $ 475  $ 516  Commercial paper 340  272  Accounts payable, trade 2,680  2,570  Accrued compensation and retirement costs 995  878  Taxes, including taxes on income 875  757  Other current liabilities 1,406  1,250  Long-term debt due within one year 510  661  Total current liabilities 7,281  6,904  Commercial paper 1,132  –  Long-term debt, less amount due within one year 4,778  6,311  Accrued pension benefits 1,567  1,539  Accrued postretirement benefits 2,956  2,933  Other noncurrent liabilities and deferred credits 2,023  1,925  Deferred income taxes 762  763  Liabilities of operations held for sale 253  277  Total liabilities 20,752  20,652    MINORITY INTERESTS 1,800  1,947    SHAREHOLDERS' EQUITY Preferred stock 55  55  Common stock 925  925  Additional capital 5,817  5,790  Retained earnings 11,066  11,579  Treasury stock, at cost (1,999) (1,953) Accumulated other comprehensive loss (1,233) (974) Total shareholders' equity 14,631  15,422  Total liabilities and equity $ 37,183  $ 38,021  Alcoa and subsidiaries Condensed Statement of Consolidated Cash Flows (unaudited) (in millions) Three months ended March 31, 2006 (b) 2007 CASH FROM OPERATIONS Net income $ 608  $ 662  Adjustments to reconcile net income to cash from operations: Depreciation, depletion, and amortization 307  304  Deferred income taxes (4) 1  Equity income, net of dividends (9) (35) Restructuring and other charges 1  26  Gains from investing activities – sale of assets –  (1) Provision for doubtful accounts 3  3  Loss from discontinued operations 6  11  Minority interests 105  115  Stock-based compensation 28  24  Excess tax benefits from stock-based payment arrangements –  5  Other (c) (52) (6) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Increase in receivables (295) (139) (Increase) decrease in inventories (326) 49  Increase in prepaid expenses and other current assets (90) (60) Decrease in accounts payable and accrued expenses (294) (367) Increase (decrease) in taxes, including taxes on income (c) 23  (102) Cash received on long-term aluminum supply contract –  93  Pension contributions (77) (50) Net change in noncurrent assets and liabilities (28) (1) Increase in net assets held for sale (87) (4) CASH (USED FOR) PROVIDED FROM CONTINUING OPERATIONS (181) 528  CASH USED FOR DISCONTINUED OPERATIONS (32) (1) CASH (USED FOR) PROVIDED FROM OPERATIONS (213) 527    FINANCING ACTIVITIES Net change in short-term borrowings 69  38  Net change in commercial paper 760  (1,200) Additions to long-term debt 6  2,024  Debt issuance costs –  (96) Payments on long-term debt (5) (353) Common stock issued for stock compensation plans 46  82  Excess tax benefits from stock-based payment arrangements –  (5) Repurchase of common stock (60) (88) Dividends paid to shareholders (131) (148) Dividends paid to minority interests (115) (158) Contributions from minority interests –  114  CASH PROVIDED FROM FINANCING ACTIVITIES 570  210    INVESTING ACTIVITIES Capital expenditures (591) (783) Capital expenditures of discontinued operations (1) –  Additions to investments (33) (26) Net change in short-term investments and restricted cash (59) 6  Other 17  (25) CASH USED FOR INVESTING ACTIVITIES (667) (828)   EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 7  5  Net change in cash and cash equivalents (303) (86) Cash and cash equivalents at beginning of year 762  506  CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 459  $ 420    (b) The Condensed Statement of Consolidated Cash Flows as of March 31, 2006 has been reclassified to reflect the movement of the home exteriors business to discontinued operations and as held for sale in the third quarter of 2006, and the soft alloy extrusions business as held for sale in the fourth quarter of 2006.   (c) A reclassification of $53 related to income taxes was made in the March 31, 2006 period to conform to the current period presentation. Alcoa and subsidiaries Segment Information (unaudited) (dollars in millions, except realized prices;production and shipments in thousands of metric tons [kmt]) 1Q06 2Q06 3Q06 4Q06 2006 1Q07 Alumina: Alumina production (kmt) 3,702  3,746  3,890  3,790  15,128  3,655  Third-party alumina shipments (kmt) 2,023  2,108  2,205  2,084  8,420  1,877  Third-party sales $ 628  $ 713  $ 733  $ 711  $ 2,785  $ 645  Intersegment sales $ 555  $ 515  $ 524  $ 550  $ 2,144  $ 579  Equity (loss) income $ (1) $ –  $ (2) $ 1  $ (2) $ 1  Depreciation, depletion and amortization $ 43  $ 46  $ 47  $ 56  $ 192  $ 56  Income taxes $ 93  $ 112  $ 108  $ 115  $ 428  $ 100  After-tax operating income (ATOI) $ 242  $ 278  $ 271  $ 259  $ 1,050  $ 260    Primary Metals: Aluminum production (kmt) 867  882  895  908  3,552  899  Third-party aluminum shipments (kmt) 488  508  535  556  2,087  518  Alcoa’s average realized price per metric ton of aluminum $ 2,534  $ 2,728  $ 2,620  $ 2,766  $ 2,665  $ 2,902  Third-party sales $ 1,408  $ 1,589  $ 1,476  $ 1,698  $ 6,171  $ 1,633  Intersegment sales $ 1,521  $ 1,696  $ 1,467  $ 1,524  $ 6,208  $ 1,477  Equity income $ 20  $ 28  $ 16  $ 18  $ 82  $ 22  Depreciation, depletion and amortization $ 96  $ 102  $ 100  $ 97  $ 395  $ 95  Income taxes $ 197  $ 209  $ 140  $ 180  $ 726  $ 214  ATOI $ 445  $ 489  $ 346  $ 480  $ 1,760  $ 504    Flat-Rolled Products: Third-party aluminum shipments (kmt) 562  579  568  564  2,273  568  Third-party sales $ 1,940  $ 2,115  $ 2,115  $ 2,127  $ 8,297  $ 2,275  Intersegment sales $ 49  $ 66  $ 65  $ 66  $ 246  $ 60  Equity loss $ –  $ (1) $ –  $ (1) $ (2) $ –  Depreciation, depletion and amortization $ 50  $ 57  $ 57  $ 55  $ 219  $ 55  Income taxes $ 26  $ 25  $ 19  $ (2) $ 68  $ 26  ATOI $ 66  $ 79  $ 48  $ 62  $ 255  $ 62    Extruded and End Products: Third-party aluminum shipments (kmt) 223  231  220  203  877  213  Third-party sales $ 1,038  $ 1,165  $ 1,146  $ 1,070  $ 4,419  $ 1,175  Intersegment sales $ 23  $ 31  $ 20  $ 25  $ 99  $ 42  Depreciation, depletion and amortization $ 28  $ 30  $ 29  $ 31  $ 118  $ 9  Income taxes $ 1  $ 8  $ 7  $ 2  $ 18  $ 11  ATOI $ –  $ 17  $ 16  $ 27  $ 60  $ 34    Engineered Solutions: Third-party aluminum shipments (kmt) 37  38  34  30  139  31  Third-party sales $ 1,360  $ 1,405  $ 1,345  $ 1,346  $ 5,456  $ 1,449  Equity income (loss) $ –  $ –  $ 1  $ (5) $ (4) $ –  Depreciation, depletion and amortization $ 40  $ 42  $ 43  $ 44  $ 169  $ 41  Income taxes $ 37  $ 44  $ 35  $ (15) $ 101  $ 44  ATOI $ 83  $ 100  $ 75  $ 73  $ 331  $ 93    Packaging and Consumer: Third-party aluminum shipments (kmt) 40  44  39  46  169  35  Third-party sales $ 749  $ 834  $ 815  $ 837  $ 3,235  $ 736  Equity income $ –  $ –  $ –  $ 1  $ 1  $ –  Depreciation, depletion and amortization $ 31  $ 31  $ 30  $ 32  $ 124  $ 30  Income taxes $ 5  $ 9  $ 8  $ 11  $ 33  $ 7  ATOI $ 8  $ 37  $ 24  $ 26  $ 95  $ 19    Reconciliation of ATOI to consolidated net income:             Total segment ATOI $ 844  $ 1,000  $ 780  $ 927  $ 3,551  $ 972  Unallocated amounts (net of tax): Impact of LIFO (1) (36) (49) (19) (66) (170) (27) Interest income 11  10  23  14  58  11  Interest expense (60) (63) (66) (61) (250) (54) Minority interests (105) (124) (109) (98) (436) (115) Corporate expense (89) (82) (64) (82) (317) (86) Restructuring and other charges (1) 6  2  (386) (379) (18) Discontinued operations (6) (5) (3) 101  87  (11) Other 50  51  (7) 10  104  (10) Consolidated net income $ 608  $ 744  $ 537  $ 359  $ 2,248  $ 662    (1) Certain amounts for the first and second quarter of 2006 have been reclassified to Other so that this line reflects only the impact of LIFO. Presenting the Impact of LIFO as a separate line in the Reconciliation of ATOI started in the third quarter of 2006.   Financial information for the first and second quarter of 2006 included in the Extruded and End Products segment and the Reconciliation of ATOI has been reclassified to reflect the movement of the home exteriors business to discontinued operations in the third quarter of 2006.   The difference between certain segment financial information totals and consolidated financial information is in Corporate. Alcoa and subsidiaries Calculation of Financial Measures (unaudited) (in millions)   2007 Bloomberg Return on Capital (1) 2007 Bloomberg Return on Capital, Excluding Growth Investments (1)   Net income $ 2,302  Net income $ 2,302    Minority interests 446  Minority interests 446    Interest expense(after tax) 281  Interest expense(after tax) 281    Numerator $ 3,029  Numerator 3,029    Russia, Bohai and Kunshan net losses 79    Adjusted numerator $ 3,108    Average Balances Average Balances Short-term borrowings $ 441  Short-term borrowings $ 441  Short-term debt 360  Short-term debt 360  Commercial paper 972  Commercial paper 972  Long-term debt 5,767  Long-term debt 5,767  Preferred stock 55  Preferred stock 55  Minority interests 1,669  Minority interests 1,669  Common equity (2) 14,621  Common equity (2) 14,621    Denominator $ 23,885  Denominator 23,885    Capital projects in progress and Russia, Bohai and Kunshan capital base (3,945)   Adjusted denominator $ 19,940    Return on capital 12.7% Return on capital, excluding growth investments 15.6%   Return on capital, excluding growth investments is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because it provides greater insight with respect to the underlying operating performance of the company's productive 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 a return on capital measure excluding these growth investments is more representative of current operating performance.   (1) The Bloomberg Methodology calculates ROC based on the trailing four quarters. Average balances are calculated as (March 2007 ending balance + March 2006 ending balance) divided by 2.   (2) Calculated as total shareholders' equity less preferred stock. Alcoa and subsidiaries Calculation of Financial Measures (unaudited), continued (in millions)   2006 Bloomberg Return on Capital (3) 2006 Bloomberg Return on Capital, Excluding Growth Investments (3)   Net income $ 1,581  Net income $ 1,581    Minority interests 304  Minority interests 304    Interest expense(after tax) 274  Interest expense(after tax) 274    Numerator $ 2,159  Numerator 2,159    Russia and Bohai net losses 86    Adjusted numerator $ 2,245    Average Balances Average Balances Short-term borrowings $ 342  Short-term borrowings $ 342  Short-term debt 53  Short-term debt 53  Commercial paper 1,652  Commercial paper 1,652  Long-term debt 5,243  Long-term debt 5,243  Preferred stock 55  Preferred stock 55  Minority interests 1,280  Minority interests 1,280  Common equity (4) 13,611  Common equity (4) 13,611    Denominator $ 22,236  Denominator 22,236    Capital projects in progress and Russia and Bohai capital base (2,139)   Adjusted denominator $ 20,097    Return on capital 9.7% Return on capital, excluding growth investments 11.2%   Return on capital, excluding growth investments is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because it provides greater insight with respect to the underlying operating performance of the company's productive 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 a return on capital measure excluding these growth investments is more representative of current operating performance.   (3) The Bloomberg Methodology calculates ROC based on the trailing four quarters. Average balances are calculated as (March 2006 ending balance + March 2005 ending balance) divided by 2.   (4) Calculated as total shareholders' equity less preferred stock. Alcoa and subsidiaries Calculation of Financial Measures (unaudited), continued (in millions)   Days of Working Capital Quarter ended March 31, 2006 December 31, 2006 March 31, 2007   Receivables from customers, less allowances $ 2,963  $ 3,127  $ 3,314  Add: Inventories 3,524  3,805  3,780  Less: Accounts payable, trade 2,449  2,680  2,570  Working Capital $ 4,038  $ 4,252  $ 4,524    Sales $ 7,111  $ 7,840  $ 7,908    Days of Working Capital 51.1  49.9  51.5    Days of Working Capital = Working Capital divided by (Sales/number of days in the quarter) Alcoa and subsidiaries Calculation of Financial Measures (unaudited), continued (in millions, except per-share amounts)     Net Income Diluted EPS Quarter ended Quarter ended 1Q07 4Q06 1Q06 1Q07 4Q06 1Q06 Net income $ 662  $ 359  $ 608  $ 0.75  $ 0.41  $ 0.69    (Loss) income from discontinued operations (11) 101  (6)   Income from continuing operations   673    258    614    0.77    0.29    0.70    Discrete tax items –  (69) –    Restructuring and other charges   18    386    1    Income from continuing operations – excluding restructuring and other charges and discrete tax items $ 691  $ 575  $ 615  0.79  0.66  0.70    Income from continuing operations – excluding restructuring and other charges and discrete tax items is a non-GAAP financial measure. Management believes that this measure is meaningful to investors because management reviews the operating results of Alcoa excluding the impacts of restructuring and other charges and discrete tax items. There can be no assurances that additional restructuring and other charges and discrete tax items will not occur in future periods. To compensate for this limitation, management believes that it is appropriate to consider both income from continuing operations determined under GAAP as well as income from continuing operations – excluding restructuring and other charges and discrete tax items.