Alcoa 2015 Annual Report Download - page 75

Alcoa is also the world leader in the production and management of primary aluminum, fabricated aluminum, and
alumina combined, through its active participation in all major aspects of the industry: technology, mining, refining,
smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME)
and priced daily. Sales of primary aluminum and alumina represent approximately 40% of Alcoa’s revenues. The price
of aluminum influences the operating results of Alcoa.
Alcoa is a global company operating in 30 countries. Based upon the country where the point of sale occurred, the
United States and Europe generated 55% and 26%, respectively, of Alcoa’s sales in 2015. In addition, Alcoa has
investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi
Arabia. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations
in foreign currency exchange rates and interest rates, affect the results of operations in these countries.
Management Review of 2015 and Outlook for the Future
In 2015, growth in global aluminum demand reached 6%, which was slightly less than management’s projection
(7%) at the end of 2014. However, significant market headwinds negatively impacted the smelting portion of Alcoa’s
upstream operations as the average LME price (on 15-day lag) of aluminum declined 10% and regional premiums
decreased substantially (39% in the United States and Canada and 44% in Europe) compared to 2014. The refining
portion of the upstream operations continued to make progress in shifting customer pricing away from the LME
aluminum price to a mixture of alumina index/spot pricing; however, this was overshadowed by a decrease in the
average alumina index/spot price. Conversely, Alcoa’s upstream operations realized the benefit of a stronger U.S.
dollar in 2015 compared to 2014. In the midstream operations, after-tax operating income was stable in 2015 from
2014 despite generating $1,052 less revenue due to the closure and divestiture of six rolling mills, while the
downstream operations received the benefit of $1,310 in combined revenue combined from three acquisitions. Across
all operations, cost headwinds continued to be a challenge; however, management was able to more than offset these
with net productivity improvements.
Separate from the 2015 operational results, management initiated a number of portfolio actions during the year. In the
upstream operations, following similar actions taken in both 2014 and 2013, smelting capacity of 217 kmt was
curtailed (another 230 kmt will be curtailed by the end of June 2016) and 96 kmt (all of which was previously
curtailed) was permanently closed (another 269 kmt will be closed by the end of March 2016). Additionally, refining
capacity of 1,705 kmt was curtailed (another 1,635 kmt will be curtailed by the end of June 2016). Management also
completed the divestiture of another rolling mill (three rolling mills were previously divested in December 2014) in the
midstream operations that was no longer part of the strategic direction of Alcoa. From a growth perspective, Alcoa
completed the acquisition of two businesses, mostly aerospace-related, both of which will enhance the portfolio of
Alcoa’s downstream operations.
As a result of the previously mentioned capacity reductions, Alcoa’s 2015 results were negatively impacted by
significant restructuring charges related to these actions. Additionally, developments in legal matters in Italy, an
assessment of the realizability of certain deferred tax assets, and an impairment of goodwill caused unfavorable
impacts in Alcoa’s 2015 results.
Management continued its focus on liquidity and cash flows, generating incremental improvements in procurement
efficiencies, overhead rationalization, and disciplined capital spending. This focus and the related results enabled Alcoa
to end 2015 with a solid financial position, consistent with the end of 2014.
The following financial information reflects certain key measures of Alcoa’s 2015 results:
• Sales of $22,534 and Net loss of $322, or $0.31 per diluted share;
• Total segment after-tax operating income of $1,906, a decrease of 3% from 2014;
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