Term Paper on "Alcoa, Inc"

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Alcoa Company Analysis

Company Description

Alcoa is one of the global leaders in the production of alumina, aluminum and the coordination of supply chains specifically for the natural materials used for creating these products. The company's center of operations is located in Pittsburg, PA employing 129,000 people in over 350 operating locations in 42 countries.

Raw material prices are critical to the present and future profitability of Alcoa, and as such company concentrates its operations throughout the entire value chain of the products it produces. Vertically integrated in the areas of bauxite mining, alumina refining and aluminum smelting, Alcoa creates efficiencies in its value chains by taking a global portfolio approach to managing raw materials. Alcoa is known throughout the metals and aluminum industry as having best practices in sourcing, supply chain management, and lean manufacturing. The company sells its products into the aerospace, automotive, construction and packaging industries. In addition to these market segments, Alcoa also completes in the closures, fastening systems, precision castings, and electronics and electrical distribution systems for automobiles, specifically in-vehicle electrical systems. While Alcoa has gone through a series of reorganizations to become more centered on its core markets, the current six divisions are organized to take advantage of the company's depth of value chain expertise. These divisions include alumina, engineered solutions, extruded and end products, flat-rolled products, primary metals, and packaging and consumer markets.

This last business division is what many consumers know the company from, given the branding of Reynolds Wrap, Diamond, Alcoa wheels, and Cut-Rite wax paper.

Company Analysis

Included in this analysis of Alcoa is an overview of their latest reported financial results, in addition to a SWOT Analysis (Strengths Weaknesses Opportunities & Threats) analysis of the company.

What is central to the growth of the Alcoa is their focus on an integrated value chain, with heavy emphasis on their supply chains and the role of multiple sourcing. Figure 1 shows an analysis of Alcoa's value chain and the integrative aspects to its supply chain. The source for Figure 1 is 4Q06 Analyst Presentation (2006).

Figure 1:

Alcoa's Value Chain encompasses its core businesses

What follows is an analysis of each of the company's business segments:

Alumina: This is one of the more volatile areas of Alcoa's business, as it is heavily influenced by the pricing and sourcing of bauxite and other key raw materials. The company has chosen a vertical integration strategy to overcome the significant fluctuations in raw materials prices in this market. In the latest financial period of results available, this division generated After Tax Operating Income (ATOI) $259MM in Q4'06 vs. $271MM in Q3'06 and $183MM in Q4'05. The yr/yr increase is due to higher alumina prices. The Australian Export Price (AEP), which is the benchmark for alumina pricing, was $300 / metric ton (mt) in Q3'06, down from $309/mt in Q2'06 and up from $249/mt in Q3'05. (the AEP is the average price realization from all alumina exported from Australia) 4Q06 Analyst Presentation (2006). Clearly the sizable year-over-year rise in the AEP price is a large factor driving profitability. Alumina production was down 3% to 3.79 mmt in Q4 with the continued Pinjarra ramp-up offset by a power outage in Pinjarra and lower output at Pt. Comfort. For the year, production reached a record 15.1 mmt. Costs were about $10/mt higher than was estimated. Costs were hurt by a stronger Australian dollar, which was down 1% sequentially and 3% year over year.

Primary Metals. - This business segment of Alcoa generated After Tax Operating Income (ATOI) $480MM in Q4'06 vs. $346MM in Q2'06 and $242MM in Q4'05. This segment is benefiting year-over-year from rising aluminum prices and higher production offset by start-up costs at the new state-of-the-art smelter in Iceland and higher carbon and pitch costs that affect production costs. This specific operation of Alcoa is also heavily influenced by aluminum prices, and performance in this specific segment will also be heavily influenced by the efficiency of their supply chain.

Flat-rolled Products - After Tax Operating Income (ATOI) was $2,127MM in Q4'06, above last quarter's sales of $2,115MM and higher than $1,739MM in Q4'05. Shipments were 564 (kore metric tons) kmt in Q4'06 vs. 568 kmt in Q3'06 and 544 kmt in Q4'05. ATOI was $62MM in Q4'06 (our estimate of $41MM) vs. $48MM in Q3'06 and $62MM in Q4'05. The company's Kitts Green and Bohai mills were back at more normal operating levels in Q4 after unexpected outage in Q3. This helped offset typical seasonal weakness and shutdown costs at the Swansea mill. Strength in the aerospace market also helped the segment and going into 2007, Alcoa will continue to gain significant revenue from this market. Commercial trucks in the U.S. should be down sharply (possibly 40%) and the U.S. automotive market should be lackluster given forecasts Alcoa has received from companies in this segment. Also, the largest product in this segment is can sheet, which is a steadier market that should be up about 1% in '07.

Extruded and End Products - This is one of the more difficult business units for Alcoa to consistently generate a profit in as their soft alloy business can be one of the most cost-sensitive and most highly affected by fluctuations in materials costs. Losses due to raw material costs in the recent quarters, specifically in Q3 for example, are being offset by growth in the aerospace portions of their business. Revenue was $1,070MM in Q4'06 vs. $1,146MM in Q3'06 and $892MM in Q4'05. Shipments were 203 kmt in Q4'06 vs. 220 kmt in Q3'06 and 204 kmt in Q4'05. Correspondingly, After Tax Operating Income was $27MM in Q4'06 vs. $16MM in Q3'06 and ($2MM) in Q4'05.

Engineered Solutions - as with many other areas of Alcoa's business, this segment also enjoyed significant growth due to the increasing strength of the company overall in Aerospace. The reductions in orders throughout truck and bus segments were offset by the higher margin opportunities in special projects with aerospace manufacturers. The focus Revenue was $1,346MM in Q4'06 vs. $1,345MM in Q3'06 and $1,271MM in Q4'05. Shipments were 30 kmt in Q4'06 vs. 34 kmt in Q3'06 and 34 kmt in Q4'05. ATOI was $73MMin Q4'06 vs. $75MM in Q3'06 and $47MM in Q4'05.

Packaging and Consumer - the most troubled financially of all segments within Alcoa primarily in the plastic packaging product lines, it is clearly a possibility that Alcoa will either sell this entire division or at the very least, its IVEX assets. The overall growth of this division however has been impressive. Revenue was $837MM in Q4'06 vs. $815MM in Q3'06 and $798MM in Q4'05. Shipments were 46 kmt in Q4'06 vs. 39 kmt in Q3'06 and 40 kmt in Q4'05. ATOI was $26MM in Q4'06 vs. $24MM in Q3'06, and $20MM in Q4'05. Consumer products (ex. Reynolds Wrap) were stronger than expected. However, it appears that plastic packaging (like the IVEX assets) were worse than expected 4Q06 Analyst Presentation (2006). Looking forward, there are going to be significant problems with Reynolds Food Packaging, which includes the IVEX assets, due to resin costs and likely structural problems.

SWOT Analysis

Alcoa's business units are all being positively influenced by the growth of spending in aerospace and the specific alloys, resins and the need for customized engineering projects specifically focused on unique design and engineering requirements. The following is a SWOT Analysis of the company's entire set of operations.

Strengths

Strong vertical integration - as is evidenced by the graphic at the beginning of this report, Alcoa has a solid grasp on its supply chains, their integrations across business units and the need to vertically integrate raw materials sourcing that has wide fluctuations in their pricing.

Diversity of Market focus - Alcoa has a leadership position in several key market segments including aerospace, automotive, industrial products, both consumer and commercial packaging, building and construction, and in the consumer packaging segment as well. Nearly 25% of total revenues come from the consumer packaging segment, which is profitable in core areas of Reynolds's Wrap, yet struggling in the IVEX product line area, Desjardins Materials Conference (2006).

The company's leadership in flat-rolled products and primary metals businesses continues - Flat-rolled products are the company's largest and fastest growing division, expecting to achieve 19% CAGR through 2010. The focus on primary metals, also expected to be a significant revenue growth potential for the company, is also contributing to the combined 44% of revenue contributions both divisions make to the company.

Weaknesses

Cash flow from operations is getting squeezed - Alcoa is being plagued with a rapidly declining cash flow in recent years, driven primarily through a series of acquisitions where the company chose to pay cash rather than dilute its stock, and also with a run-up of inventories in the last three years.

Sluggish financial performance - the company lags behind its closest competitors on key financial ratio performance, and in addition struggles with increasing gross margins while at the same time maintaining profitability. Despite… READ MORE

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