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October 7, 2008

Alcoa Reports Third Quarter 2008 Results; Taking Action to Preserve Profitability, Liquidity Through the Downturn

Highlights:
  • Net income of $268 million, or $0.33 per share, includes $29 million or $0.04 per share for restructuring.
  • The sequential impact of currency translation was a negative $52 million or $0.06 per share.
  • Revenues of $7.2 billion, up from $6.5 billion in 3rd quarter of 2007, excluding divested businesses.
  • Alumina segment improved ATOI over 2nd quarter, and Engineered Products segment had strongest 3rd quarter profitability in history.
  • Segment ATOI of $633 million, with two of four segments higher than 3rd quarter of 2007.
  • Completed purchase of two percent of shares in the quarter, bringing total share buy-back to 12 percent, or roughly half of the authorized levels.
  • Cash on hand at $831 million and debt-to-capital stands at 36.3 percent.
  • Trailing 12-month ROC stands at 11.5 percent excluding investments in growth.
  • Taking action to preserve and enhance strong balance sheet during unprecedented volatility in financial markets.
  • Curtailing non-critical capital programs, suspending share repurchases.


NEW YORK--Alcoa (NYSE: AA) today reported third quarter net income of $268 million, or $0.33 per diluted share. The results include a previously announced $31 million after-tax charge, or $0.04 per share, for the temporary curtailment of the Rockdale, TX aluminum smelter. The negative impact of currency translation on a sequential basis was $52 million, or $0.06 per share.

Net income in the third quarter of 2007 was $555 million, or $0.63 per share. Included in the third quarter 2007 results was the net benefit of $218 million, or $0.25 per share, for the gain on the sale of the company’s stake in Chalco, restructuring, and transaction costs. Net income in the second quarter of 2008 was $546 million, or $0.66 per share.

“Despite rising costs and sluggish end markets, combined profitability in the four business segments was in line with last year’s third quarter,” said Klaus Kleinfeld, Alcoa President and Chief Executive Officer.

“Recently, aluminum prices have fallen steeply and demand has softened further, while input costs remain high,” said Kleinfeld. “The resulting margin squeeze will have a greater impact going forward, but will be somewhat mitigated by the easing of energy prices and a stronger U.S. dollar. We will continue to manage our business to keep it competitive in a turbulent global environment.

“We have taken action to conserve cash and maximize profitability through very adverse economic conditions,” said Kleinfeld. “Given the sharp decline in metal prices and increasingly soft demand in our key markets, we are stopping all non-critical capital projects, making targeted reductions to match market conditions, and are adjusting our manufacturing capacity to meet demand in rapidly changing upstream and downstream markets. We are halting production at our smelter in Rockdale, Texas, adjusting alumina capacity accordingly, and are continually reviewing under-performing assets throughout our portfolio. And, we are suspending our share buy-back program.

“While we face volatile and uncertain markets today, longer term trends will drive a rebound in global aluminum demand and the forward market reflects underlying optimism on medium term aluminum pricing,” said Kleinfeld. “During difficult times, we will examine opportunities across the industry to improve our competitiveness, use every lever to improve profitability, and position the company to deliver stronger value when demand improves.”

Revenues for the quarter were $7.2 billion, down slightly from $7.6 billion in the second quarter of 2008 due to lower metal prices, seasonal downturns in Europe, and weak end markets, particularly the automotive sector. Revenues in the third quarter 2007 were $6.5 billion after excluding the divested businesses.

In the first nine months of 2008, net income was $1.1 billion, or $1.36 per share, and revenues were $22.2 billion. Year-to-date, cash from operations was $626 million, which includes a discretionary $400 million pension contribution in the third quarter.

Capital expenditures for the quarter were $877 million, with 65 percent dedicated to growth projects. The Company’s debt-to-capital ratio stood at 36.3 percent at the end of the quarter. The 12-month trailing return on capital (ROC) stood at 11.5 percent at the end of the third quarter, excluding investments in growth.

Segment and Other Results

Alumina

After-tax operating income (ATOI) was $206 million, an increase of $16 million, or 8 percent, from the prior quarter. Overall production declined slightly in the quarter (30 kmt lower) because of the production loss from the Point Comfort refinery (60 kmt), which was closed during Hurricane Ike. Strong operating performance and a stronger U.S. dollar offset the lower production and higher input costs. Net of insurance recovery, the natural gas supply disruption in Western Australia lowered ATOI by $9 million on a sequential basis.

The company is on track to complete its expansion of the Sao Luis refinery and the new Juruti bauxite mine in Brazil. Those expansions are well under way and will begin to deliver positive cash flow to the company in 2009.

Primary Metals

ATOI was $297 million, a decrease of $131 million, or 31 percent, from the prior quarter. Third-party realized ingot price decreased sequentially from $3,058/mt to $2,945/mt due to lower LME pricing coupled with a less favorable product mix and lower regional pricing premiums. Meanwhile, escalating market prices for carbon products and energy continue to negatively impact earnings.

The company's newest smelter (Fjardaal) produced at nameplate capacity for the second consecutive quarter and is currently the highest-quality metal in Alcoa’s global system.

Flat-Rolled Products

ATOI was $29 million, a decrease of $26 million, or 47 percent, from the prior quarter. This decline is slightly higher than the typical 35 percent seasonal decline that was forecasted during last quarter’s analysts’ call. The higher than expected decline is due to weaker than expected market conditions in North America and Europe as well as the impact of the machinists’ strike at Boeing. In addition, alloying materials such as manganese, silicon, and magnesium have experienced substantial price increases year-over-year.

Engineered Products and Solutions

ATOI was $101 million, a record third quarter. This was a decrease of $56 million, or 36 percent, from the prior quarter. This decline is slightly higher than the typical 25 to 30 percent seasonal decline that we forecasted during last quarter’s analysts’ call. The greater decline is primarily a result of weakening market conditions. Due to tighter credit conditions and high gas prices, annual automotive build rates are now projected to decline 14 percent in North America. Commercial transportation markets have also been weaker than expected. North America Class 8 truck builds dropped 13 percent quarter-over-quarter. Also, lower demand for spares in the aerospace after-market has been driven by little or no growth in global airline capacity.

ATOI to Net Income Reconciliation

The largest variance in reconciling items was in the "Other" line item which includes a $90 million unfavorable sequential change due to currency translation.

Alcoa will hold its quarterly conference call at 5:00 PM Eastern Time on Tuesday, October 7, 2008 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."

About Alcoa

Alcoa is the world leader in the production and management of primary aluminum, fabricated aluminum and alumina combined, through its active and growing participation 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 including flat-rolled products, hard alloy extrusions, and forgings, Alcoa also markets Alcoa® wheels, fastening systems, precision and investment castings, and building systems. The Company has 97,000 employees in 34 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 Statements

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. Alcoa disclaims any obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law. 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, aerospace, building and construction, distribution, packaging, industrial gas turbine and other markets; (c) Alcoa's inability to mitigate impacts from energy supply interruptions or from unfavorable currency fluctuations or from increased energy, transportation and raw materials costs or other cost inflation; (d) continued volatility and further deterioration in the financial markets, including severe disruptions in the commercial paper, capital and credit markets; (e) Alcoa’s inability to achieve the level of cash generation or conservation, return on capital improvement, cost reductions, or earnings or revenue growth anticipated by management; (f) Alcoa's inability to complete its growth projects or achieve efficiency improvements at newly constructed or acquired facilities as planned and by targeted completion dates; (g) unfavorable changes in laws, governmental regulations or policies, foreign currency exchange rates or competitive factors in the countries in which Alcoa operates; (h) significant legal proceedings or investigations adverse to Alcoa, including environmental, product liability, safety and health and other claims; and (i) the other risk factors summarized in Alcoa's Form 10-K for the year ended December 31, 2007, Forms 10-Q for the quarters ended March 31, 2008 and June 30, 2008, and other reports filed with the Securities and Exchange Commission.

Alcoa and subsidiaries
Statement of Consolidated Income (unaudited)
(in millions, except per-share, share, and metric ton amounts)
 
Quarter ended
September 30,   June 30,   September 30,
200720082008
Sales $ 7,387 $ 7,620 $ 7,234
 
Cost of goods sold (exclusive of expenses below) 5,910 6,090 5,944
Selling, general administrative, and other expenses 365 306 283
Research and development expenses 64 64 64
Provision for depreciation, depletion, and amortization 338 321 316
Goodwill impairment charge 133
Restructuring and other charges 444 2 43
Interest expense 151 87 97
Other (income) expenses, net   (1,731 )   (97 )   17  
Total costs and expenses 5,674 6,773 6,764
 
Income from continuing operations before taxes on income 1,713 847 470
Provision for taxes on income   1,079     231     117  
Income from continuing operations before minority interests’ share 634 616 353
Less: Minority interests’ share   76     70     84  
 
Income from continuing operations 558 546 269
 
Loss from discontinued operations   (3 )       (1 )
 
NET INCOME $555   $546   $268  
 
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.64 $ 0.67 $ 0.33
Loss from discontinued operations            
Net income $0.64   $0.67   $0.33  
 
Diluted:
Income from continuing operations $ 0.64 $ 0.66 $ 0.33
Loss from discontinued operations   (0.01 )        
Net income $0.63   $0.66   $0.33  
 
Average number of shares used to compute:
Basic earnings per common share 867,664,875 815,990,095 807,570,516
Diluted earnings per common share 877,700,035 825,387,079 815,207,909
 
Shipments of aluminum products (metric tons) 1,328,000 1,407,000 1,342,000
Alcoa and subsidiaries
Statement of Consolidated Income (unaudited), continued
(in millions, except per-share, share, and metric ton amounts)
 
Nine months ended
September 30,
2007   2008
Sales $ 23,361 $ 22,229
 
Cost of goods sold (exclusive of expenses below) 18,095 17,926
Selling, general administrative, and other expenses 1,089 917
Research and development expenses 171 194
Provision for depreciation, depletion, and amortization 959 956
Goodwill impairment charge 133
Restructuring and other charges 413 83
Interest expense 320 283
Other income, net   (1,835 )   (22 )
Total costs and expenses 19,345 20,337
 
Income from continuing operations before taxes on income 4,016 1,892
Provision for taxes on income   1,768     553  
Income from continuing operations before minority interests’ share 2,248 1,339
Less: Minority interests’ share   301     221  
 
Income from continuing operations 1,947 1,118
 
Loss from discontinued operations   (15 )   (1 )
 
NET INCOME $1,932   $1,117  
 
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 2.24 $ 1.37
Loss from discontinued operations   (0.02 )    
Net income $2.22   $1.37  
 
Diluted:
Income from continuing operations $ 2.22 $ 1.36
Loss from discontinued operations   (0.02 )    
Net income $2.20   $1.36  
 
Average number of shares used to compute:
Basic earnings per common share 869,245,090 813,550,439
Diluted earnings per common share 877,964,737 821,471,192
 
Common stock outstanding at the end of the period 852,046,355 800,317,368
 
Shipments of aluminum products (metric tons) 4,057,000 4,106,000
Alcoa and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
   

 

December 31,
2007

September 30,
2008

ASSETS
Current assets:
Cash and cash equivalents $ 483 $ 831

Receivables from customers, less allowances of $72 in 2007 and $57 in 2008

2,602 2,700
Other receivables 451 588
Inventories 3,326 3,844
Prepaid expenses and other current assets   1,224     1,309  
Total current assets   8,086     9,272  
 
Properties, plants, and equipment 31,601 32,877
Less: accumulated depreciation, depletion, and amortization   14,722     14,901  
Properties, plants, and equipment, net   16,879     17,976  
Goodwill 4,806 5,084
Investments 2,038 2,689
Other assets 4,046 4,014
Assets held for sale   2,948     3  
Total assets $38,803   $39,038  
 
LIABILITIES
Current liabilities:
Short-term borrowings $ 569 $ 498
Commercial paper 856 1,207
Accounts payable, trade 2,787 2,791
Accrued compensation and retirement costs 943 896
Taxes, including taxes on income 644 380
Other current liabilities 1,165 1,217
Long-term debt due within one year   202     54  
Total current liabilities   7,166     7,043  
Long-term debt, less amount due within one year 6,371 8,370
Accrued pension benefits 1,098 858
Accrued postretirement benefits 2,753 2,577
Other noncurrent liabilities and deferred credits 1,943 1,852
Deferred income taxes 545 532
Liabilities of operations held for sale   451     1  
Total liabilities   20,327     21,233  
 
MINORITY INTERESTS   2,460     2,740  
 
SHAREHOLDERS' EQUITY
Preferred stock 55 55
Common stock 925 925
Additional capital 5,774 5,842
Retained earnings 13,039 13,600
Treasury stock, at cost (3,440 ) (4,326 )
Accumulated other comprehensive loss   (337 )   (1,031 )
Total shareholders' equity   16,016     15,065  
Total liabilities and equity $38,803   $39,038  
Alcoa and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in millions)
 

Nine months ended
September 30,

2007   2008
CASH FROM OPERATIONS
Net income $ 1,932 $ 1,117
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion, and amortization 959 957
Deferred income taxes 518 (15 )
Equity income, net of dividends (79 ) (66 )
Goodwill impairment charge 133
Restructuring and other charges 413 83
Gains from investing activities – asset sales (1,772 ) (30 )
Provision for doubtful accounts 13 8
Loss from discontinued operations 15 1
Minority interests 301 221
Stock-based compensation 83 85
Excess tax benefits from stock-based payment arrangements (77 ) (15 )
Other (33 ) (32 )
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments:
Decrease (increase) in receivables 224 (213 )
Decrease (increase) in inventories 184 (595 )
(Increase) in prepaid expenses and other current assets (100 ) (73 )
Increase in accounts payable, trade 28 56
(Decrease) in accrued expenses (173 ) (369 )
Increase in taxes, including taxes on income 341 4
Cash received on long-term aluminum supply contract 93
Pension contributions (297 ) (485 )
Net change in noncurrent assets and liabilities (188 ) (16 )
(Increase) decrease in net assets held for sale   (49 )   4  
CASH PROVIDED FROM CONTINUING OPERATIONS 2,469 627
CASH USED FOR DISCONTINUED OPERATIONS   (1 )   (1 )
CASH PROVIDED FROM OPERATIONS   2,468     626  
 
FINANCING ACTIVITIES
Net change in short-term borrowings 102 (76 )
Net change in commercial paper (1,116 ) 351
Additions to long-term debt 2,049 2,105
Debt issuance costs (126 ) (13 )
Payments on long-term debt (848 ) (192 )
Common stock issued for stock compensation plans 819 177
Excess tax benefits from stock-based payment arrangements 77 15
Repurchase of common stock (1,548 ) (1,082 )
Dividends paid to shareholders (447 ) (420 )
Dividends paid to minority interests (310 ) (193 )
Contributions from minority interests   369     429  
CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES   (979 )   1,101  
 
INVESTING ACTIVITIES
Capital expenditures (2,615 ) (2,421 )
Acquisitions, net of cash acquired (15 ) (276 )
Acquisitions of minority interests (141 )
Proceeds from the sale of assets and businesses 87 2,684
Additions to investments (123 ) (1,276 )
Sales of investments 1,981 72
Net change in short-term investments and restricted cash (23 ) (2 )
Other   2     (27 )
CASH USED FOR INVESTING ACTIVITIES   (706 )   (1,387 )
 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

25

   

8

 
Net change in cash and cash equivalents 808 348
Cash and cash equivalents at beginning of year   506     483  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,314   $831  

Alcoa and subsidiaries

Segment Information (unaudited) (1)

(dollars in millions, except realized prices; production and shipments in thousands of metric tons [kmt])

               
1Q072Q073Q074Q07   20071Q082Q083Q08
Alumina:
Alumina production (kmt) 3,655 3,799 3,775 3,855 15,084 3,870 3,820 3,790

Third-party alumina
 shipments (kmt)

1,877 1,990 1,937 2,030 7,834 1,995 1,913 2,010
Third-party sales $ 645 $ 712 $ 664 $ 688 $ 2,709 $ 680 $ 717 $ 805
Intersegment sales $ 579 $ 587 $ 631 $ 651 $ 2,448 $ 667 $ 766 $ 730
Equity income (loss) $ 1 $ $ (1 ) $ 1 $ 1 $ 2 $ 2 $ 2
Depreciation, depletion, and amortization $ 56 $ 62 $ 76 $ 73 $ 267 $ 74 $ 67 $ 68
Income taxes $ 100 $ 102 $ 89 $ 49 $ 340 $ 57 $ 67 $ 91
After-tax operating income (ATOI)   $ 260   $ 276   $ 215     $ 205     $ 956   $ 169   $ 190   $ 206
 
Primary Metals:
Aluminum production (kmt) 899 901 934 959 3,693 995 1,030 1,011
Third-party aluminum shipments (kmt) 518 565 584 624 2,291 665 750 704
Alcoa’s average realized price per metric ton of aluminum

$

2,902

$

2,879

$

2,734

$

2,646

$

2,784

$

2,801

$

3,058

$

2,945

Third-party sales $ 1,633 $ 1,746 $ 1,600 $ 1,597 $ 6,576 $ 1,877 $ 2,437 $ 2,127
Intersegment sales $ 1,477 $ 1,283 $ 1,171 $ 1,063 $ 4,994 $ 1,105 $ 1,108 $ 1,078
Equity income $ 22 $ 18 $ 11 $ 6 $ 57 $ 9 $ 10 $ 1
Depreciation, depletion, and amortization $ 95 $ 102 $ 102 $ 111 $ 410 $ 124 $ 128 $ 131
Income taxes $ 214 $ 196 $ 80 $ 52 $ 542 $ 116 $ 131 $ 29
ATOI   $ 504   $ 462   $ 283     $ 196     $ 1,445   $ 307   $ 428   $ 297
 
Flat-Rolled Products:
Third-party aluminum shipments (kmt) 597 612 632 600 2,441 610 591 580
Third-party sales $ 2,467 $ 2,535 $ 2,494 $ 2,436 $ 9,932 $ 2,492 $ 2,525 $ 2,488
Intersegment sales $ 65 $ 77 $ 70 $ 71 $ 283 $ 77 $ 77 $ 58
Depreciation, depletion, and amortization $ 60 $ 61 $ 64 $ 59 $ 244 $ 60 $ 63 $ 54
Income taxes $ 31 $ 37 $ 32 $ 7 $ 107 $ 22 $ 23 $ 21
ATOI   $ 60   $ 97   $ 62     $ (15 )   $ 204   $ 41   $ 55   $ 29
 
Engineered Products and Solutions:
Third-party aluminum shipments (kmt) 55 52 51 49 207 48 49 45
Third-party sales $ 1,676 $ 1,715 $ 1,662 $ 1,666 $ 6,719 $ 1,772 $ 1,873 $ 1,716
Depreciation, depletion, and amortization $ 41 $ 41 $ 44 $ 45 $ 171 $ 42 $ 42 $ 42
Income taxes $ 49 $ 52 $ 46 $ 17 $ 164 $ 56 $ 70 $ 42
ATOI   $ 105   $ 119   $ 82     $ 76     $ 382   $ 138   $ 157   $ 101
 
Packaging and Consumer (2):
Third-party aluminum shipments (kmt) 35 40 37 45 157 19
Third-party sales $ 736 $ 837 $ 828 $ 887 $ 3,288 $ 497 $ 19 $
Depreciation, depletion, and amortization $ 30 $ 30 $ 29 $ $ 89 $ $ $
Income taxes $ 7 $ 17 $ 17 $ 27 $ 68 $ 10 $ $
ATOI   $ 19   $ 37   $ 36     $ 56     $ 148   $ 11   $   $

Alcoa and subsidiaries       

Segment Information (unaudited), continued

(in millions)

               
 

Reconciliation of ATOI to consolidated net income:

1Q072Q073Q074Q0720071Q082Q083Q08
Total segment ATOI $ 948 $ 991 $ 678 $ 518 $ 3,135 $ 666 $ 830 $ 633
Unallocated amounts (net of tax):
Impact of LIFO (27 ) (16 ) 10 9 (24 ) (31 ) (44 ) (5 )
Interest income 11 9 10 10 40 9 12 10
Interest expense (54 ) (56 ) (98 ) (53 ) (261 ) (64 ) (57 ) (63 )
Minority interests (115 ) (110 ) (76 ) (64 ) (365 ) (67 ) (70 ) (84 )
Corporate expense (86 ) (101 ) (101 ) (100 ) (388 ) (82 ) (91 ) (77 )
Restructuring and other charges (18 ) 21 (311 ) 1 (307 ) (30 ) (2 ) (29 )
Discontinued operations (11 ) (1 ) (3 ) 8 (7 ) (1 )
Other     14       (22 )     446       303       741       (98 )     (32 )     (116 )
Consolidated net income   $ 662     $ 715     $ 555     $ 632     $ 2,564     $ 303     $ 546     $ 268  

The difference between certain segment totals and consolidated amounts
is in Corporate.

 

(1) In the first quarter of 2008, management approved a realignment of
    Alcoa's reportable segments to better reflect the core businesses
    in which Alcoa operates and how it is managed. This realignment
    consisted of eliminating the Extruded and End Products segment and
    realigning its component businesses as follows: the building and
    construction systems business is reported in the Engineered
    Products and Solutions segment; the hard alloy extrusions business
    and the Russian extrusions business are reported in the Flat-
    Rolled Products segment; and the remaining segment components,
    consisting primarily of the equity investment/income of Alcoa's
    interest in the Sapa AB joint venture, and the Latin American
    extrusions business, are reported in Corporate. Additionally, the
    Russian forgings business was moved from the Engineered Products
    and Solutions segment to the Flat-Rolled Products segment, where
    all Russian operations are now reported. Prior period amounts were
    reclassified to reflect the new segment structure. Also, the
    Engineered Solutions segment was renamed the Engineered Products
    and Solutions segment.

 

(2) On February 29, 2008, Alcoa completed the sale of its packaging
    and consumer businesses to Rank Group Limited. In the 2008 second
    quarter, Alcoa received regulatory and other approvals for a small
    number of locations that did not close in the 2008 first quarter.
    Also, in the 2008 third quarter, one final remaining location was
    transferred to Rank. The Packaging and Consumer segment no longer
    contains any operations.

Alcoa and subsidiaries

Calculation of Financial Measures (unaudited)

(in millions)

 

Bloomberg Return on Capital (1)

Bloomberg Return on Capital,

Excluding Growth Investments (1)

 
Twelve months endedTwelve months ended
September 30,September 30,
2007   2008

2007

2008
 
Net income $ 2,291 $ 1,749 Net income $ 2,291 $ 1,749
 

Minority
 interests

399 285

Minority
 interests

399 285
 

Interest
 expense

Interest
 expense

(after tax)   246     312   (after tax)   246     312  
 
Numerator $2,936   $2,346   Numerator 2,936 2,346
 

Net losses of
 growth
 investments
 (3)

  57     132  
 
Adjusted numerator$2,993   $2,478  
 

Average
Balances

Average
Balances

Short-term
 borrowings

$ 497 $ 537

Short-term
 borrowings

$ 497 $ 537

Short-term
 debt

525 126

Short-term
 debt

525 126

Commercial
 paper

1,275 782

Commercial
 paper

1,275 782

Long-term
 debt

5,390 7,351

Long-term
 debt

5,390 7,351

Preferred
 stock

55 55

Preferred
 stock

55 55

Minority
 interests

1,927 2,532

Minority
 interests

1,927 2,532

Common
 equity (2)

  15,255     15,435  

Common
 equity (2)

  15,255     15,435  
 
Denominator $24,924   $26,818   Denominator 24,924 26,818
 

Capital
 projects in
 progress and
 capital base
 of growth
 investments
 (3)

  (4,430 )   (5,244 )
 

Adjusted
 denominator

$20,494   $21,574  
 

Return on capital

11.8

%

8.7

%

Return on
capital,
excluding
growth
investments

14.6

%

11.5

%

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 (September 2008
    ending balance + September 2007 ending balance) divided by 2 for
    the twelve months ended September 30, 2008, and (September 2007
    ending balance + September 2006 ending balance) divided by 2 for
    the twelve months ended September 30, 2007.

(2) Calculated as total shareholders' equity less preferred stock.

(3) For all periods presented, growth investments include Russia,
    Bohai, and Kunshan.

Alcoa and subsidiaries
Calculation of Financial Measures (unaudited), continued
(in millions)
 
Third-party Sales
Quarter ended
September 30,

2007

  September 30,

2008

 
Alcoa $ 7,387 $ 7,234
 
Divested businesses (a)   885  
 
 
Alcoa, excluding divested businesses

$

6,502

$

7,234

Third-party sales excluding divested businesses is a non-GAAP
financial measure. Management believes that this measure is meaningful
to investors because management reviews the operating results of Alcoa
excluding divested businesses since they are no longer reflective of
Alcoa's continuing operations.

 

(a) Divested businesses include the businesses within the Packaging
    and Consumer segment, certain U.S. locations of the Soft Alloy
    Extrusions business that were not contributed to the Sapa AB joint
    venture, and the Automotive Castings business.