(dollars in millions, except per-share amounts and ingot prices; production and shipments in thousands of metric tons [kmt])

Overview

Our Business

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: technology, mining, refining, smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. Aluminum and alumina represent more than 80% of Alcoa's revenues, and the price of aluminum influences the operating results of Alcoa. Nonaluminum products include precision castings and aerospace and industrial fasteners. Alcoa's products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.

Alcoa is a global company operating in 30 countries. Based upon the country where the point of sale occurred, the U.S. and Europe generated 52% and 25%, respectively, of Alcoa's sales in 2012. In addition, Alcoa has investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi Arabia, all of which present opportunities for substantial growth. 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 2012 and Outlook for the Future

At the end of 2011, management had projected growth in global aluminum demand of 7% for 2012. In the first half of the year, demand was on course; however, a slowdown in growth in China in the second half resulted in an actual growth rate of 6%. Additionally, LME pricing levels declined on average 16% year-over-year, mainly due to macroeconomic events, including significant uncertainty of the sovereign debt of many European countries and the U.S. fiscal cliff. The Company also faced significant headwinds for certain costs, including maintenance supplies and services; labor, especially in emerging markets; transportation costs, mostly fuel oil; and higher pension costs. Consequently, the 2012 operating results of the Company's upstream businesses declined compared with 2011. Partially offsetting this decrease was the Company's midstream and downstream businesses achieving their highest profitability ever driven by net productivity improvements and higher volumes. Management continued its relentless focus on liquidity and cash flows generating incremental improvements in procurement efficiencies, overhead rationalization, working capital, and disciplined capital spending. These actions enabled Alcoa to decrease debt while maintaining a stable level of cash on hand.

The following financial information reflects some key measures of Alcoa's 2012 results:

• Sales of $23,700 and Income from continuing operations of $191, or $0.18 per diluted share;

• Total segment after-tax operating income of $1,369;

• Cash from operations of $1,497, reduced by pension contributions of $561;

• Capital expenditures of $1,261, under $1,500 for the third consecutive year;

• Cash on hand at the end of the year of $1,861, in excess of $1,400 for the fourth consecutive year;

• Decrease in total debt of $542, and a decline of $1,749 since 2008; and

• Debt-to-capital ratio of 34.8%, a decrease of 50 basis points from 2011 and within the targeted range of 30% to 35%.

In 2013, management is projecting continued growth (increase of 7%) in the global consumption of primary aluminum, consistent with that of 2012. All regions, except North America, are expected to have one-to-three percentage point increases in aluminum demand over 2012 with China (11%) and India (9%) expected to have the highest growth rates in 2013. However, added production, along with few industry-wide capacity curtailments, will result in supply slightly exceeding demand for primary aluminum. For alumina, growth in global consumption is estimated to be 9%, and overall demand is expected to slightly exceed supply. Management also anticipates improved market conditions for aluminum products in all major global end markets, particularly aerospace, despite declines in certain regions. Relative to input costs, labor and maintenance expenses will continue to be a challenge; however, management has established and is committed to achieving the following specific goals in 2013:

• generating incremental savings over those realized in 2009 through 2012 from procurement, overhead, and working capital programs;

• generating positive cash flow from operations that will exceed capital spending; and

• maintaining a debt-to-capital ratio between 30% and 35%.

Looking ahead over the next one to three years, management will continue to focus on its aggressive strategic targets established two years ago. These targets include lowering Alcoa's refining and smelting operations on the cost curve to the 23rd (from 30th) and 41st (from 51st) percentiles, respectively, by 2015 and driving revenue growth in the

midstream (increase of $2,500) and downstream (increase of $1,600) operations by 2013. In conjunction with the revenue targets, management is committed to improving margins that will exceed historical levels in the midstream and downstream operations. Management has made significant progress on these targets as described below.

In 2012, actions taken to improve Alcoa's position on the cost curve for both refining and smelting operations included production curtailments of 390 kmt of the Atlantic refinery system; the creep of low-cost capacity at the refineries in Australia; full or partial curtailment of 240 kmt of smelting capacity in Europe and the permanent closure of 291 kmt of smelting capacity in the U.S.; the near full-startup of the Estreito hydroelectric power project in Brazil; and new energy contracts for two U.S. smelters. Additionally, the aluminum complex in Saudi Arabia continues to be on target as first production from the smelter occurred in December 2012 and the mine and refinery are expected to commence in 2014. At December 31, 2012, Alcoa's refining operations were in the 30th percentile and smelting operations were in the 47th percentile, a four-percentage point improvement, on the respective cost curves.

The midstream and downstream operations both achieved margins that exceeded historical levels for the second year in a row and are making progress against the respective revenue growth targets. The midstream operations will continue to build on this success in 2013 through expansion of the rolling facilities in Davenport, IA to meet rising U.S. automotive demand, due to changing emissions regulations, and volume growth in Russia and China, including emerging markets like consumer electronics. The downstream operations will extend their profitable growth in 2013 through continued innovative solutions to meet a wide-range of customer needs, as well as expansion of aluminum lithium capabilities in Lafayette, IN to meet the growing demand in the aerospace market and the opening of a forged wheels facility in Suzhou, China that will serve the commercial transportation market.

Results of Operations

Earnings Summary

Income from continuing operations attributable to Alcoa for 2012 was $191, or $0.18 per diluted share, compared with $614, or $0.55 per share, in 2011. The decline of $423 in continuing operations was primarily due to the following:
lower realized prices for aluminum and alumina, higher input costs, and charges for litigation and environmental remediation matters. These items were partially offset by net productivity improvements, a gain on the sale of U.S. hydroelectric power assets, a decline in the results attributable to noncontrolling interests, lower restructuring charges, net favorable foreign currency movements, lower income taxes due to a decline in operating results, a favorable LIFO (last in, first out) impact, and higher volumes in the midstream and downstream segments.

Income from continuing operations attributable to Alcoa for 2011 was $614, or $0.55 per share, compared with $262, or $0.25 per share, in 2010. The improvement of $352 in continuing operations was primarily due to the following:
higher realized prices for alumina and aluminum, stronger volumes in the midstream and downstream segments, net productivity improvements, and a net favorable change in mark-to-market derivative contracts. These items were partially offset by higher input costs, net unfavorable foreign currency movements, higher income taxes due to better operating results, and additional restructuring charges.

Net income attributable to Alcoa for 2012 was $191, or $0.18 per share, compared with $611, or $0.55 per share, in 2011, and $254, or $0.24 per share, in 2010. In 2011, net income of $611 included a loss from discontinued operations of $3, and, in 2010, net income of $254 included a loss from discontinued operations of $8.

In 2011, Alcoa restarted the following previously curtailed production capacity in the U.S.: Massena East, NY (125 kmt-per-year); Wenatchee, WA (43 kmt-per-year); and Ferndale, WA (Intalco: 47 kmt-per-year (11 kmt more than previously planned)). These restarts occurred to help meet anticipated growth in aluminum demand and to meet obligations outlined in power agreements with energy providers. As a result of these restarts, aluminum production increased by approximately 150 kmt during 2011 and by 215 kmt in 2012.

In late 2011, management approved the permanent shutdown and demolition of the smelter located in Tennessee (215 kmt-per-year) and two potlines (capacity of 76 kmt-per-year) at the smelter located in Rockdale, TX (remaining capacity of 191 kmt-per-year composed of four potlines). This decision was made after a comprehensive strategic analysis was performed to determine the best course of action for each facility. Factors leading to this decision were in general focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term power solution; changed market fundamentals; cost competitiveness; required future capital investment; and restart costs.

Also, at the end of 2011, management approved a partial or full curtailment of three European smelters as follows: Portovesme, Italy (150 kmt-per-year); Avilés, Spain (46 kmt out of 93 kmt-per-year); and La Coruña, Spain (44 kmt out of 87 kmt-per-year). These curtailments were completed by the end of 2012. The curtailment of the Portovesme smelter may lead to the permanent closure of the facility, while the curtailments at the two smelters in Spain are planned to be temporary. These actions were the result of uncompetitive energy positions, combined with rising material costs and falling aluminum prices (mid-2011 to late 2011).

In December 2012, the Spanish Government issued a Ministerial Order that modified the interruptibility regime previously in place in the Spanish power market. The interruptibility regime allows certain industrial customers who are willing to be subject to temporary interruptions in the supply of power to sell interruption rights to the high voltage transmission system operator. In January 2013, Alcoa applied for and was granted rights to sell interruption services under the modified regime from its San Ciprian, Avilés, and La Coruña smelters in Spain. The commitment is taken for a one-year period. Alcoa understands that the Spanish Government intends to notify the European Commission of the modification in the interruptibility regime for review under European state aid rules. As a result of the modification to the interruptibility regime, Alcoa has commenced the restart of a portion (25 kmt combined for Avilés and La Coruña) of the capacity previously curtailed in the first half of 2012 in order to meet the requirements of the modified interruptibility regime.

Sales-Sales for 2012 were $23,700 compared with sales of $24,951 in 2011, a decrease of $1,251, or 5%. The decline was mainly the result of a drop in realized prices for aluminum and alumina, driven by lower London Metal Exchange (LME) prices, unfavorable pricing in the midstream segment due to a decrease in metal prices, and unfavorable foreign currency movements, mostly due to a weaker euro, somewhat offset by higher volumes in the midstream and downstream segments and favorable product mix in the midstream segment.

Sales for 2011 were $24,951 compared with sales of $21,013 in 2010, an improvement of $3,938, or 19%. The increase was primarily due to a rise in realized prices for alumina and aluminum, better pricing in the midstream segment, and higher volumes in the Primary Metals segment and virtually all businesses in the midstream and downstream segments.

Cost of Goods Sold-COGS as a percentage of Sales was 86.4% in 2012 compared with 82.1% in 2011. The percentage was negatively impacted by the previously mentioned lower realized prices in the upstream and midstream segments, higher input costs, a net charge for adjustments to certain environmental reserves ($194), and a charge for a civil litigation reserve ($85). These items were somewhat offset by net productivity improvements, net favorable foreign currency movements due to a stronger U.S. dollar, and a change in LIFO adjustments from unfavorable to favorable, primarily due to lower prices for alumina and metal and lower costs for calcined coke.

COGS as a percentage of Sales was 82.1% in 2011 compared with 81.7% in 2010. The percentage was negatively impacted by higher energy and raw materials costs and net unfavorable foreign currency movements due to a weaker U.S. dollar, mostly offset by the previously mentioned higher realized prices and net productivity improvements.

Selling, General Administrative, and Other Expenses-SG&A expenses were $997, or 4.2% of Sales, in 2012 compared with $1,027, or 4.1% of Sales, in 2011. The decline of $30 was mostly due to lower stock-based compensation expense, a decrease in bad debt expense (see below), a decline in travel expense, and less spending across various other expenses. These items were partially offset by higher pension costs, due to the recognition of higher net actuarial losses, and increased professional expenses, due to consulting fees associated with productivity initiatives and higher legal expenses.

SG&A expenses were $1,027, or 4.1% of Sales, in 2011 compared with $961, or 4.6% of Sales, in 2010. The increase of $66 was principally the result of higher labor costs and an increase in bad debt expense. The increase in labor costs was the result of a higher average employee base and a higher cost of employee benefits. The higher bad debt expense was caused by charges for anticipated customer credit losses, primarily related to those in Europe.

Research and Development Expenses-R&D expenses were $197 in 2012 compared with $184 in 2011 and $174 in 2010. The increase in 2012 as compared to 2011 was primarily caused by additional spending related to inert anode technology for the Primary Metals segment. The increase in 2011 as compared to 2010 was mainly driven by incremental increases across various expenses necessary to support R&D activities.

Provision for Depreciation, Depletion, and Amortization-The provision for DD&A was $1,460 in 2012 compared with $1,479 in 2011. The decrease of $19, or 1%, was principally the result of the cessation of DD&A due to the decision at the end of 2011 to permanently shut down and demolish the smelter in Tennessee (see Restructuring and Other Charges below) and the absence of DD&A on various in-use assets that reached the end of their estimated useful life in 2011, partially offset by an increase related to assets placed into service associated with a new hydroelectric power facility in Brazil and higher DD&A due to the capitalization of new haul roads and the write-off of old haul roads no longer in use for mining sites in Australia.

The provision for DD&A was $1,479 in 2011 compared with $1,450 in 2010. The increase of $29, or 2%, was mostly due to a portion of the assets placed into service in mid-2011 related to a new hydroelectric power facility in Brazil, along with a number of small increases at various locations.

Restructuring and Other Charges-Restructuring and other charges for each year in the three-year period ended December 31, 2012 were comprised of the following:

                                                                2012        2011        2010
Asset impairments                                               $  40       $ 150       $ 139
Layoff costs                                                       47          93          43
Other exit costs                                                   21          61          58
Reversals of previously recorded layoff and other exit costs      (21 )       (23 )       (33 )
Restructuring and other charges                                 $  87       $ 281       $ 207

Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.

2012 Actions-In 2012, Alcoa recorded Restructuring and other charges of $87 ($73 after-tax and noncontrolling interests), which were comprised of the following components: $47 ($29 after-tax and noncontrolling interests) for the layoff of approximately 800 employees (390 in the Engineered Products and Solutions segment, 250 in the Primary Metals segment, 85 in the Alumina segment, and 75 in Corporate), including $10 ($7 after-tax) for the layoff of an additional 170 employees related to the previously reported smelter curtailments in Spain (see 2011 Actions below); $30 ($30 after-tax) in asset impairments and $6 ($6 after-tax) for lease and contract termination costs due to a decision to exit the lithographic sheet business in Bohai, China; $11 ($11 after-tax) in costs to idle the Portovesme smelter (see 2011 Actions below); $10 ($8 after-tax) in other asset impairments; a net charge of $4 ($4 after-tax and noncontrolling interests) for other miscellaneous items; and $21 ($15 after-tax and noncontrolling interests) for the reversal of a number of layoff reserves related to prior periods, including $10 ($7 after-tax) related to the smelters in Spain. The reversal related to the smelters in Spain is due to lower than expected costs based on agreements with employee representatives and the government, as well as a reduction of 55 in the number of layoffs due to the anticipation of the restart of a portion of the previously curtailed capacity based on an agreement with the Spanish government that will provide interruptibility rights (i.e. compensation for power interruptions when grids are overloaded) to the smelters during 2013. A portion of this reversal relates to layoff costs recorded at the end of 2011 (see 2011 Actions below) and a portion of this reversal relates to layoff costs recorded during 2012 (see above).

As of December 31, 2012, approximately 270 of the 800 employees were separated. The remaining separations for the 2012 restructuring programs are expected to be completed by the end of 2013. In 2012, cash payments of $16 were made against layoff reserves related to the 2012 restructuring programs.

2011 Actions-In 2011, Alcoa recorded Restructuring and other charges of $281 ($181 after-tax and noncontrolling interests), which were comprised of the following components: $127 ($82 after-tax) in asset impairments and $36 ($23 after-tax) in other exit costs related to the permanent shutdown and planned demolition of certain idled structures at two U.S. locations (see below); $93 ($68 after-tax and noncontrolling interests) for the layoff of approximately 1,600 employees (820 in the Primary Metals segment, 470 in the Global Rolled Products segment, 160 in the Alumina segment, 20 in the Engineered Products and Solutions segment, and 130 in Corporate), including the effects of planned smelter curtailments (see below); $23 ($12 after-tax and noncontrolling interests) for other asset impairments, including the write-off of the carrying value of an idled structure in Australia that processed spent pot lining and adjustments to the fair value of the one remaining foil location while it was classified as held for sale due to foreign currency movements; $20 ($8 after-tax and noncontrolling interests) for a litigation matter related to the former St. Croix location; a net charge of $5 ($4 after-tax) for other small items; and $23 ($16 after-tax) for the reversal of previously recorded layoff reserves due to normal attrition and changes in facts and circumstances, including a change in plans for Alcoa's aluminum powder facility in Rockdale, TX.

In late 2011, management approved the permanent shutdown and demolition of certain facilities at two U.S. locations, each of which was previously temporarily idled for various reasons. The identified facilities are the smelter located in Alcoa, TN (capacity of 215 kmt-per-year) and two potlines (capacity of 76 kmt-per-year) at the smelter located in Rockdale, TX (remaining capacity of 191 kmt-per-year composed of four potlines). Demolition and remediation activities related to these actions began in 2012 and are expected to be completed in 2015 for the Tennessee smelter and in 2013 for the two potlines at the Rockdale smelter. This decision was made after a comprehensive strategic analysis was performed to determine the best course of action for each facility. Factors leading to this decision were in general focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term power solution; changed market fundamentals; cost competitiveness; required future capital investment; and restart costs. The asset impairments of $127 represent the write off of the remaining book value of properties, plants, and equipment related to these facilities. Additionally, remaining inventories, mostly operating supplies, were written down to their net realizable value resulting in a charge of $6 ($4 after-tax), which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The other exit costs of $36 represent $18 ($11 after-tax) in environmental remediation and $17 ($11 after-tax) in asset retirement obligations, both triggered by the decision to permanently shut down and demolish these structures, and $1 ($1 after-tax) in other related costs.

Also, at the end of 2011, management approved a partial or full curtailment of three European smelters as follows: Portovesme, Italy (150 kmt-per-year); Avilés, Spain (46 kmt out of 93 kmt-per-year); and La Coruña, Spain (44 kmt out of 87 kmt-per-year). These curtailments were completed by the end of 2012. The curtailment of the Portovesme smelter may lead to the permanent closure of the facility, which would result in future charges, while the curtailments at the two smelters in Spain are planned to be temporary. These actions were the result of uncompetitive energy positions, combined with rising material costs and falling aluminum prices (mid-2011 to late 2011). As a result of these decisions, Alcoa recorded costs of $33 ($31 after-tax) for the layoff of approximately 650 employees. As Alcoa engaged in discussions with the respective employee representatives and governments, additional charges were recognized in 2012 (see 2012 Actions above).

As of December 31, 2012, approximately 895 of the 1,475 employees were separated. The total number of employees associated with the 2011 restructuring programs was updated to reflect changes in plans (agreement related to the smelters in Spain - see 2012 Actions above), better than expected operating performance at certain locations, and natural attrition. The remaining separations for the 2011 restructuring programs are expected to be completed by the end of 2013. In 2012 and 2011, cash payments of $23 and $24, respectively, were made against layoff reserves related to the 2011 restructuring programs.

2010 Actions-In 2010, Alcoa recorded Restructuring and other charges of $207 ($130 after-tax and noncontrolling interests), which were comprised of the following components: $127 ($80 after-tax and noncontrolling interests) in

asset impairments and $46 ($29 after-tax and noncontrolling interests) in other exit costs related to the permanent shutdown and planned demolition of certain idled structures at five U.S. locations (see below); $43 ($29 after-tax and noncontrolling interests) for the layoff of approximately 875 employees (625 in the Engineered Products and Solutions segment; 75 in the Primary Metals segment; 60 in the Alumina segment; 25 in the Global Rolled Products segment; and 90 in Corporate); $22 ($14 after-tax) in net charges (including $12 ($8 after-tax) for asset impairments) related to divested and to be divested businesses (Automotive Castings, Global Foil, Transportation Products Europe, and Packaging and Consumer) for, among other items, the settlement of a contract with a former customer, foreign currency movements, working capital adjustments, and a tax indemnification; $2 ($2 after-tax and noncontrolling interests) for various other exit costs; and $33 ($24 after-tax and noncontrolling interests) for the reversal of prior periods' layoff reserves, including a portion of those related to the Portovesme smelter in Italy due to the execution of a new power agreement.

In early 2010, management approved the permanent shutdown and demolition of the following structures, each of which was previously temporarily idled for different reasons: the Eastalco smelter located in Frederick, MD (capacity of 195 kmt-per-year); the smelter located in Badin, NC (capacity of 60 kmt-per-year); an aluminum fluoride plant in Point Comfort, TX; a paste plant and cast house in Massena, NY; and one potline at the smelter in Warrick, IN (capacity of 40 kmt-per-year). This decision was made after a comprehensive strategic analysis was performed to determine the best course of action for each facility. Factors leading to this decision included current market fundamentals, cost competitiveness, other existing idle capacity, required future capital investment, and restart costs, as well as the elimination of ongoing holding costs. The asset impairments of $127 represent the write off of the remaining book value of properties, plants, and equipment related to these facilities. Additionally, remaining inventories, mostly operating supplies, were written down to their net realizable value resulting in a charge of $8 ($5 after-tax and noncontrolling interests), which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The other exit costs of $46 represent $30 ($19 after-tax and noncontrolling interests) in asset retirement obligations and $14 ($9 after-tax) in environmental remediation, both triggered by the decision to permanently shut down and demolish these structures, and $2 ($1 after-tax and noncontrolling interests) in other related costs.

As of December 31, 2012, the separations associated with 2010 restructuring programs were essentially complete. In 2012 and 2011, cash payments of $3 and $7, respectively, were made against layoff reserves related to 2010 restructuring programs.

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