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Alcoa Reports Third Quarter 2015 Profit

The following excerpt is from the company's SEC filing.

Strong productivity, solid value-add profitability, and Alumina strength

3Q 2015 Highlights

Net income of $44 million, or $0.02 per share; excluding special items, net income of $109 million, or $0.07 per share

$5.6 billion revenue down approximately 11 percent year-over-year, reflecting a 21 percent decline from divestitures, closures and market headwinds, partially offset by a 10 percent revenue increase from aerospace and automotive organic growth, acquisitions and Alumina sales

$3.4 billion revenue, after-tax operating income of $257 million, and adjusted EBITDA of $508 million for combined Value-Add businesses

Engineered Products and Solutions record revenue of $1.4 billion; aerospace revenue up 39 percent year-over-year

Global Rolled Products automotive revenue up 133 percent year-over-year

$2.2 billion revenue, after-tax operating income of $153 million, and adjusted EBITDA of $379 million for combined Upstream businesses

Best Alumina profitability year-to-date since 2007, offset by Primary Metals as Midwest transaction price declined $641 per metric ton, or 27.2 percent, year-to-date

$287 million year-over-year productivity gains; year-to-date productivity gains of $849 million, as compared to annual 2015 target of $900 million

$420 million cash from operations and free cash flow of $152 million; $1.7 billion cash on hand

3Q 2015 Portfolio Transformation Highlights

Announced that Alcoas Board of Directors unanimously approved plan to create two independent, public companiesa Value-Add Company and an Upstream Companyresulting from successful multi-year transformation

Completed RTI International Metals acquisition growing titanium offerings and advanced manufacturing technologies; signed approximately $1.1 billion Lockheed Martin contract that draws on new titanium capabilities gained through RTI

Signed an approximately $1 billion contract with Airbus for high-tech, multi-material fastening systems

Announced $60 million Alcoa Technical Center investment to deepen additive manufacturing capabilities for aerospace and other high growth markets

Reached joint development agreement with Ford Motor Company to collaborate on next-generation aluminum alloys using Alcoa Micromill

technology; Alcoa Micromill

material to debut on 2016 Ford F-150; signed letter of intent with Danieli Group to commercialize Micromill technology in worldwide licensing deal

Began shipments from newly expanded Alcoa, Tennessee automotive facility and announced plan to restart Texarkana, Texas casthouse to meet higher aluminum demand from automotive industry

Received approval from Government of Western Australia to export trial bauxite shipments from Willowdale and Huntly mines, targeting early 2016

Saudi Arabia Maaden-Alcoa joint venture mine completed; smelter on track to produce nameplate capacity of 740,000 metric tons of aluminum, and refinery projected to produce 1 million metric tons of alumina, both in 2015

Announced curtailment of remaining capacity at Suralco refinery in Suriname; permanently closed Anglesea coal mine and power station in Australia

New York

October 8, 2015

Lightweight metals leader Alcoa (NYSE:AA) today reported a third quarter profit as its value-add and upstream portfolios delivered solid results in the face of strong market and currency headwinds. Alcoa has been transforming by building its value-add portfolio for profitable growth and creating a globally competitive upstream business. The Companys successful multi-year transformation will culminate with the launch of two Fortune 500 companies, one value-add focused and the other upstream focused, expected in the second half of 2016.

Alcoa reported third quarter 2015 net income of $44 million, or $0.02 per share, including $65 million in net unfavorable special items. Special items included restructuring-related costs to optimize the upstream portfolio and transaction costs, partially offset by gains on asset sales. Third quarter 2015 results compare to net income of $149 million, or $0.12 per share, in third quarter 2014.

Excluding special items, third quarter 2015 net income was $109 million, or $0.07 per share, led by strong productivity gains and solid midstream and downstream profitability, offset by lower metal prices. The Midwest transaction price was down $641 per metric ton, or 27.2 percent, year-to-date through September 30, 2015. Third quarter 2015 results, excluding special items, compare to net income of $370 million, or $0.31 per share, in third quarter 2014.

Third quarter 2015 revenue totaled $5.6 billion, down approximately 11 percent year-over-year. Divesting and closing lower-margin businesses and market headwinds caused third quarter revenue to fall 21 percent. This decrease was partially offset by a 10 percent third quarter revenue increase from organic growth in aerospace, automotive and alumina, combined with acquisitions.

The third quarter brought economic headwinds and significant volatility in some of our markets, said Klaus Kleinfeld, Chairman and Chief Executive Officer. We continue to be laser

focused on the things we can control. We have successfully made our Upstream businesses less vulnerable to commodity downswings. We have intensified innovation and growth in the Value-Add businesses, and it shows through the solid underlying performance despite currency movements and market fluctuations. Our productivity performance was strong combined with good cash generation. While we cannot control external factors, we do remain focused on what we can controlmaking our businesses more resilient.

2015 End Market Forecasts

In its global end markets, Alcoa maintained 2015 estimates for global aerospace sales growth of 8 to 9 percent. In industrial gas turbines, Alcoa increased its 2015 forecast for global airfoil market growth of 3 to 4 percent, up from 1 to 3 percent.

In North America, Alcoa tightened 2015 estimates for automotive production to up 2 to 4 percent, from up 1 to 4 percent; maintained its 2015 estimate for heavy duty truck and trailer production growth of 9 to 11 percent; held steady its 2015 projection for commercial building and construction sales growth at 4 to 5 percent; and kept its 2015 packaging estimate unchanged at down 1 to 2 percent.

In Europe, the Company updated its projection for 2015 automotive production growth to up 1 to 3 percent, from down 1 to up 3 percent; raised its 2015 heavy duty truck and trailer production forecast to up 1 to 3 percent, from down 2 percent to flat; maintained its 2015 commercial building and construction sales growth estimate at down 2 to 3 percent; and kept its 2015 packaging estimate unchanged at up 1 to 2 percent.

In China, Alcoa lowered its estimate for 2015 automotive production growth to up 1 to 2 percent, from up 5 to 8 percent; reduced its projection for 2015 heavy duty truck and trailer production growth to down 22 to 24 percent, from down 14 to 16 percent; reduced its 2015 commercial building and construction sales growth to up 4 to 6 percent from up 6 to 8 percent; and kept its 2015 packaging estimate unchanged at up 8 to 12 percent.

In addition, Alcoa reaffirmed its projections that global aluminum demand is expected to increase 6.5 percent in 2015 and double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection. Alcoa is also projecting a global aluminum deficit for 2016.

Value-Add Portfolio Transformation

After the separation, the innovation and technology-driven Value-Add Company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. In the third quarter, these combined business segments reported revenue of $3.4 billion, after-tax operating income (ATOI) of $257 million, and adjusted EBITDA of $508 million.

In the third quarter, the Company acquired RTI International Metals. Earlier this month, Alcoa announced an approximately $1.1 billion contract with Lockheed Martin that draws on new titanium capabilities gained through RTI. Under the contract, Alcoa becomes the titanium supplier for airframe structures for all three variants of the F-35 Joint Strike Fighter over nine

years, from 2016 to 2024. RTI is expected to contribute $1.2 billion in revenue and its profitability is expected to reach 25 percent EBITDA margin, both in 2019. Separately, Alcoa announced an approximately $1 billion contract with Airbus for high-tech, multi-material fastening systems, Alcoas largest-ever fastener deal with the aircraft manufacturer. Under the contract, Alcoa will supply primarily titanium, steel and nickel-based superalloy fastening systems for every Airbus platform.

The Company announced a $60 million expansion at the Alcoa Technical Center to accelerate advanced 3D-printing materials and processes. Alcoa is building a multi-metals powder facility to make the critical input material for metallic 3D-printed parts. In addition, Alcoa has developed the patented Ampliforge process. With this process, the Company can design and 3D-print a near complete part, and then treat it using a traditional manufacturing process, such as forging, to enhance metallurgical properties, including toughness and strength.

In automotive, Alcoa continued to make significant headway with both its breakthrough Micromill technology and material, and rolling mill investments to meet growing demand for aluminum intensive vehicles. Alcoas automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018.

In the third quarter:

Ford and Alcoa announced a joint development agreement to collaborate on advanced automotive aluminum alloys using Micromill technology. Ford also said it will debut Micromill material on its 2016 Ford F-150 truck, making it the first automaker to use the advanced automotive aluminum commercially. To date, the Company has Micromill qualification agreements in place with nine major automotive customers on three continents, including Ford.

Alcoa signed a letter of intent with the Danieli Group to work toward an agreement to license the breakthrough Micromill technology to customers around the world.

A new midstream business unit, Micromill Products and Services, was established to drive revenue from licensing Alcoas intellectual property and technology associated with manufacturing advanced Micromill products. The business unit will provide services like training and technical support as well as generate product sales from San Antonio Works starting with automotive sheet in North America and expanding into other market sectors and regions.

In Tennessee, a $300 million automotive plant expansion backed by customer contracts opened and began shipments four months ahead of schedule. Alcoa also announced plans to restart its Texarkana, Texas casthouse. It is expected to ramp up production in the first half of 2016 and produce aluminum slab for the North American automotive market.

The Company also realigned its value-add portfolio to drive further profitable growth.

In the third quarter, Alcoa created a new downstream business segment, Transportation and Construction Solutions (TCS), comprising Alcoa Wheel and Transportation Products and Alcoa Building and Construction. The segment will expand into emerging regional markets, in addition to capturing continued growth in existing markets.

Global Rolled Products is also strengthening its ability to capture profitable growth opportunities in attractive market sectors and regions. The segment will now consist of four business units comprising Aerospace and Automotive Products; Brazing, Commercial Transportation and Industrial; Global Packaging; and Micromill Products and Services.

Upstream Portfolio Transformation

After the separation, the Upstream Company will comprise five strong business units that today make up Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. In the third quarter, the combined upstream businesses reported revenue of $2.2 billion, ATOI of $153 million, and adjusted EBITDA of $379 million.

Alcoa made progress in building its third-party bauxite business. In the third quarter, the Company received approval from the Government of Western Australia to export trial bauxite shipments from its Willowdale and Huntly mines, targeted for early 2016. Alcoa has the worlds largest bauxite mining portfolio with a low 19

percentile position on the global bauxite cost curve.

Since 2007, the Company has divested, closed or curtailed 1.4 million metric tons, or 33 percent, of total smelting operating capacity. In addition, Alcoas review of 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment or divestiture remains active.

In the third quarter, Alcoa:

Announced the curtailment of the remaining 887,000 metric-tons-per-year of Suralcos alumina refining capacity in Suriname. The refinery is scheduled to be idled by November 30, 2015.

Permanently closed the Anglesea coal mine and power station in Australia on August 31, 2015.

Completed the mine at the Maaden-Alcoa joint venture in Saudi Arabia, the lowest cost aluminum complex in the world. The joint ventures smelter is on track to produce nameplate capacity of 740,000 metric tons of aluminum and the refinery is projected to produce 1 million metric tons of alumina, both in 2015.

In addition, Alcoa has launched an improvement plan in its Primary Metals segment to increase productivity between $110 million to $130 million in 2016.

As a result of strategic actions, Alcoa has dropped eight points on the global aluminum cost curve since 2010 to the 43

percentile and is targeting the 38

percentile by 2016. On the global alumina cost curve, Alcoa has dropped five points since 2010 to the 25

percentile and is targeting the 21

The Company also continued growing its value-add casthouse products, which are projected to represent approximately 70 percent of 2015 smelter shipments. From 2010 to 2014, growth of total value-add product shipments from its smelters delivered $1.3 billion in total incremental margin. In Alumina, Alcoa estimates approximately 75 percent of its total third-party smelter-grade alumina shipments will be based on Alumina Price Index/spot market pricing this year.

Financial Performance

Alcoa continues to drive strong performance across all businesses, delivering $287 million in third quarter year-over-year productivity gains and $849 million year-to-date against a $900 million 2015 annual target. Productivity gains have been driven by process improvements and procurement savings across all segments. Alcoa invested return-seeking capital of $389 million, compared to a $750 million 2015 annual target. Approximately 80 percent of year-to-date return seeking capital was invested in the value-add businesses. Alcoa controlled sustaining capital expenditures of $408 million against a $725 million 2015 annual plan.

Cash provided from operations was $420 million in the quarter and free cash flow was $152 million. Alcoa ended the quarter with cash on hand of $1.7 billion.

The Company achieved an average of 40 days working capital for the quarter, 8 days higher than third quarter 2014 due to the impact of the Firth Rixson, TITAL and RTI acquisitions. Excluding the impact of the acquisitions, average days of working capital decreased 1 day from 32 to 31...


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