Name ___________________________________________________

Panther ID ______________________________________________

Alcoa (NYSE: AA) today announced it achieved record results in revenues, income from continuing operations and cash from operations for the full year 2007. Revenues for 2007 were $30.7 billion, compared to $30.4 billion in 2006. Annual income from continuing operations rose to $2.6 billion, or $2.95 per diluted share, for 2007, a 19 percent increase compared to $2.2 billion, or $2.47, in 2006. And, cash from operations for 2007 increased 21 percent to more than $3.1 billion from $2.6 billion in 2006.

“For the second year in a row, Alcoa has achieved company all-time records in revenues, income from continuing operations and cash generation,” said Alain Belda, Alcoa Chairman and CEO. “We battled substantially higher material input and energy costs, and currency impacts while simultaneously continuing to execute on the largest capital investment program in our history.

“We have invested in new plants, expanded production at others, modernized operations, renegotiated long-term power agreements, and built new energy facilities to extend our energy access at competitive rates, while also continuing to invest in growth markets such as Brazil, China and Russia,” Belda said.

"These actions, combined with portfolio and cash flow management, our share repurchase program, conservative leverage, and our commitment to sustainability delivered results now, and will continue to generate quality profitable growth for decades,” added Belda. “In 2007, Alcoans delivered yet again. This is what builds a stronger Company for our stakeholders.”

Fourth quarter income from continuing operations was $624 million, or $0.74. Included in the results are a favorable restructuring adjustment and a tax benefit totaling $323 million or $0.38 per share, almost all of which stems from the recent agreement to sell the packaging and consumer businesses. Income from continuing operations in the 2006 fourth quarter was $258 million, or $0.29, and $558 million, or $0.64, in the third quarter 2007.

Net income for the fourth quarter 2007 was $632 million, or $0.75, which includes the restructuring adjustment and the benefit from the agreement to sell the packaging and consumer business. Net income for the fourth quarter 2006 was $359 million, or $0.41, and $555 million, or $0.63, in the 2007 third quarter.

Revenues for the 2007 fourth quarter were $7.4 billion, compared to $7.8 billion a year ago as a result of lower LME prices and the exclusion of results from the soft alloy extrusion business which is now part of a joint venture. The soft alloy extrusion business had revenues of approximately $560 million in the fourth quarter of 2006.

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LME = LONDON METAL EXCHANGE.Prices for aluminum, copper and nickel, unlike steel, are set by contracts traded on commodity exchanges such as the London Metal Exchange and the New York Mercantile Exchange.

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Cash Generation, ROC, and Growth

Cash from operations in the fourth quarter 2007 was $643 million, bringing full-year cash from operations to more than $3.1 billion, compared to $2.6 billion in 2006 and helping to keep the Company’s debt-to-capital ratio within its targeted range at 30.2 percent.

The Company’s trailing 12-month return on capital (ROC) was 16.1 percent, excluding investments in growth projects. Including investments in growth projects, ROC stands at 12.7 percent, well above the cost of capital.

In 2007, the Company completed major growth projects, including its first greenfield smelter in 20 years in Iceland, a new anode plant in Mosjoen, Norway, and its third flat-rolled products facility in China (Kunshan). In addition, major progress was made on several other growth projects including the Juruti bauxite mine, the expansion of the Bohai rolling mill in China, and expansion of the Sao Luis alumina refinery.

The Company made significant progress to extend the life of existing facilities through renegotiating long-term power agreements including those in Massena, NY and Wenatchee, WA in 2007. The Company also continued investments in Brazil including the Serra do Facao hydroelectric project to further increase its self-sufficiency there.

The Company is now operating primary aluminum production at a run rate of approximately four million metric tons per year.

The Company made major progress in 2007 on its portfolio management plan. During the year, the Company reached agreement to sell its packaging and consumer businesses; divested the automotive castings business; monetized its stake in Chalco to enable redeployment of capital into other value-adding options, including projects in China; and formed a joint venture with Sapa for its soft alloy extrusion business.

In 2007, Alcoa also increased its share repurchase program from 10 percent to 25 percent of outstanding shares and increased its dividend by 13 percent during the year. Through the end of the fourth quarter the Company has repurchased 68 million shares, or approximately eight percent of shares outstanding, as part of its share repurchase program, leaving approximately 150 million shares, or 18 percent of shares outstanding, remaining within the authorization.

Segment and Other Results

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NOTE:All comparisons are on a sequential quarter basis, unless noted. ATOI = “AFTER TAX OPERATING INCOME.”ATOI is similar to Net Operating Profit After Tax, or NOPAT.

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Alumina –After-tax operating income (ATOI) was $205 million, a decrease of $10 million, or five percent, from the prior quarter. System production increased by a net of 80 kmt as Suralco, San Ciprian and Pinjarra set quarterly production records and Jamalco continued its recovery from Hurricane Dean. However, higher freight and energy costs and unfavorable currency offset production gains.

Primary Metals --ATOI was $196 million, down $87 million, or 31 percent, compared to the prior quarter. The majority of the decrease resulted from lower LME prices and unfavorable currency. These items were partially offset by the recovery at the Rockdale and Tennessee smelters and a three percent production increase. The company purchased approximately 55 kmt of primary metal for internal use.

Flat-Rolled Products –ATOI was a loss of $16 million for the quarter, down $77 million from the prior quarter. Weak performance in Russia and China accounted for 50 percent of the ATOI decline in the quarter. For Russia specifically, the increased loss was due to higher operational and energy costs and unfavorable currency. The remaining decline in the segment’s ATOI is mostly due to general market weakness in the U.S. and Europe flat-rolled businesses, weaker product mix, and de-stocking by aerospace customers. Finally, results for the Australian flat-rolled business declined following restructuring last quarter that is designed to reduce headcount and simplify product mix. In addition, the weakening U.S. dollar has had a negative impact in this business.

Extruded and End Products –ATOI was $16 million, up $3 million, or 23 percent, from the prior quarter. Market and operating conditions were comparable to the prior quarter with margin improvements accounting for the increase.

Engineered Solutions –ATOI was $58 million or essentially flat to the prior quarter ATOI of $60 million. Improvements from the wire harness business restructuring offset the weaker market conditions in forgings and investment castings. On a year over year basis, the Fastening Systems and Power & Propulsion (Howmet) businesses had outstanding years with ATOI up 36 percent and 47 percent, respectively.

Packaging & Consumer --ATOI was $56 million, up $20 million, or 56 percent, from the prior quarter. The normal seasonal decrease in the closures business was offset by seasonal improvements in the consumer products business. With the pending sale, depreciation was ceased in the segment leading to a positive impact of approximately $20 million.

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Recent Earnings Forecasts:

Qtr.4 2007 Qtr.3 2007 Qtr.2 2007 Qtr.1 2007

Estimate 0.33 0.65 0.81 0.76

Actual 0.36 0.64 0.81 0.79

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Alcoa and subsidiaries
Statement of Consolidated Income (unaudited), continued
(in millions, except per-share, share, and metric ton amounts)
	Year ended
	December 31,
	2006		2007
Sales	$	30,379			$	30,748
Cost of goods sold (exclusive of expenses below)		23,318				24,248
Selling, general administrative, and other expenses		1,402				1,472
Research and development expenses		213				249
Provision for depreciation, depletion, and amortization		1,280				1,268
Goodwill impairment charge		–				133
Restructuring and other charges		543				399
Interest expense		384				401
Other income, net		(193)				(1,913)
Total costs and expenses		26,947				26,257
Income from continuing operations before taxes on income		3,432				4,491
Provision for taxes on income		835				1,555
Income from continuing operations before minority interests’ share		2,597				2,936
Less: Minority interests’ share		436				365
Income from continuing operations		2,161				2,571
Income (loss) from discontinued operations		87				(7)
NET INCOME	$	2,248			$	2,564
Earnings (loss) per common share:
Basic:
Income from continuing operations	$	2.49			$	2.98
Income (loss) from discontinued operations		.10				–
Net income	$	2.59			$	2.98
	2006		2007
Average number of shares used to compute:
Basic earnings per common share		868,819,955				860,771,021
Common stock outstanding at the end of the period		867,739,544				827,401,800
Shipments of aluminum products (metric tons)		5,545,000				5,393,000

Alcoa and subsidiaries Consolidated Balance Sheet (a = unaudited) - in millions
		December 31, 2006 (a)		December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	506			$	483
Receivables from customers, less allowances of $68 in 2006 and $72 in 2007			2,788				2,602
Other receivables			301				451
Inventories			3,380				3,326
Prepaid expenses and other current assets			1,378				1,224
Total current assets			8,353				8,086
Properties, plants, and equipment			27,689				31,601
Less: accumulated depreciation, depletion, and amortization			13,682				14,722
Properties, plants, and equipment, net			14,007				16,879
Goodwill			4,885				4,806
Investments			1,718				2,038
Other assets			3,939				4,046
Assets held for sale			4,281				2,948
Total assets		$	37,183			$	38,803
LIABILITIES
Current liabilities:
Short-term borrowings		$	462			$	569
Commercial paper			340				856
Accounts payable, trade			2,407				2,787
Accrued compensation and retirement costs			949				943
Taxes, including taxes on income			851				644
Other current liabilities			1,360				1,165
Long-term debt due within one year			510				202
Total current liabilities			6,879				7,166
Commercial paper			1,132				–
Long-term debt, less amount due within one year			4,777				6,371
Accrued pension benefits			1,540				1,098
Accrued postretirement benefits			2,956				2,753
Other noncurrent liabilities and deferred credits			2,002				1,943
Deferred income taxes			762				545
Liabilities of operations held for sale			704				451
Total liabilities			20,752				20,327
MINORITY INTERESTS			1,800				2,460
SHAREHOLDERS' EQUITY
Preferred stock			55				55
Common stock			925				925
Additional capital			5,817				5,774
Retained earnings			11,066				13,039
Treasury stock, at cost			(1,999)				(3,440)
Accumulated other comprehensive loss			(1,233)				(337)
Total shareholders' equity			14,631				16,016
Total liabilities and equity		$	37,183			$	38,803

(a) The Consolidated Balance Sheet as of December 31, 2006 has been reclassified to reflect the movement of the automotive castings and packaging and consumer businesses to held for sale in the third quarter of 2007.

QUESTIONS:

1.) Decompose Alcoa’s ROE for 2006 and 2007. In what direction do you see the company’s performance moving? What other information would you like to see (be specific)?

2.) Alcoa's net income for the 3rd quarter of 2007 increased 86% over 3rd quarter results from 2006. Why then did the stock price drop 6% after the company announced those earnings? 

3.) Based on the data presented, what operating segments comprise 

Alcoa's business? Based on the reconciliation of ATOI to Net Income, what can you say about the quality of Alcoa’s income? Be specific in your answer.

4.) How would you classify (from an economic perspective) the products sold by Alcoa? What external factors limit Alcoa’s flexibility in pricing those products? Which segments of Alcoa's operations do you think are most directly impacted by this pricing limitation?

5.) Given the pricing limitations on their products, on what basis does Alcoa 

compete? Why might that make it difficult to compete with rising entities in 

diverse global locations, such as United Company Rusal, that that has access to low-cost hydropower in Russia?

REQUIRED: 

Compose your answers in Standard English.

Answer all parts of each question separately.

Label each of your responses accordingly.

Provide and label the elements of any supporting calculations.