Corporate Finance project

Alcoa Inc. – Cash flow analysis for the year 2012

Cash flow from operations

Cash flow from operations for the year 2012 was a net cash inflow of $1,243 million as compared to a net cash inflow of $1,651 million in 2011. In the following sections we will discuss the major events that resulted in this substantial change in operating cash flow.

Net Income

For the year 2012, Alcoa had a net income of $191 million, which is a significant decline over the $611 million in 2011. The economic downturn which started in the second half of 2008 had a significant impact on Alcoa’s sales and profitability in 2009 and 2010. By the end of 2009, the economic conditions started improving and this is reflected in the higher sales figures for 2010 and 2011. In 2011, Alcoa increased its sales to $24,951 million, which is an improvement of 18.74% over the 2010 figures. The projected growth in world-wide demand for aluminum for 2012 was estimated at 7%, but slowdown of Chinese and Indian economies reduced the demand for aluminum in the second half of 2012. This in turn caused the prices to go down, contributing to the overall decline in sales, which was down by 5% for the year 2012. Even though there was a decline in revenue, Alcoa was unable to reduce the cost of goods sold, which resulted in 22% decline in gross profit.

The cost control effort by Alcoa is reflected in the Selling, General and Administrative Expenses, which decreased only by 1.4% in 2012. Most of the cost savings came from shutting down unprofitable lines of business and retrenchment of employees. Alcoa managed to reduce most of their other indirect costs, but the lower gross profit eventually resulted in a net income of only $191 million, which came 69% below that of 2011.

Changes in current assets and current liabilities

Alcoa continued to control the Accounts Receivables, which decreased only by 10.5% during the year. The weakness in demand for its products allowed Alcoa to reduce its inventory, resulting in a net cash inflow of $74 million. There was no significant change in accounts payable. The changes in current assets and liabilities resulted in a net cash inflow of $266 million.

Cash flow from investing

The net cash outflow from investing for the year 2012 was $858million, which was 22% lower than that of 2011. Alcoa continued its investment in new hydroelectric power projects, bauxite mine development and refinery expansion, which contributed to the $317 million cash outflow against Plant, Property and Equipment. The increase investment in the equity of the Alcoa’s captive insurance company resulted in a net cash outflow of $258 million. A cash outflow of $593 million was associated with a reduction in other long-term assets.

Cash flow from financing

The net cash outflow from financing for the year 2012 was $274 million, which is worse than the $153 million outflow for the year 2011. In the year 2012, $329 million long-term debt became due and was paid off. Loosening of the credit markets allowed Alcoa to borrow additional $194 million against notes payable in 2011, which was mostly paid off in 2012, resulting in a cash outflow of $233 million. The $775 million cash outflow against the other shareholder’s equity reflects the write offs against foreign subsidiary currency fluctuations.

Summary

The net cash inflow for the year was $111 million, which allowed Alcoa to maintain its significant cash holding of $2,050 million.

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