Alcoa Returns to Profitability

Aluminum giant, Alcoa Inc. (AA - Analyst Report) posted a profit of 8 cents in the third quarter of 2009 (after three consecutive quarterly losses), in contrast to the Zacks Consensus Estimate of a loss of 9 cents, helped by lower costs. Year-over-year earnings declined 34% from 33 cents.

Alcoa’s cost-cutting efforts have resulted in overhead cost savings of $375 million and raw material procurement savings of $1.61 billion in the first nine months of 2009. The company externally sources raw materials including coke, an ingredient used in the smelting process, and caustic soda, which is used to refine bauxite into alumina. Reductions in working capital have generated $780 million in cash, or 98% of the 2009 target of $800 million.

However, Alcoa’s topline slipped 34% to $4.6 billion in the third quarter from $6.7 billion in the year ago period on lower aluminum prices and demand. The average price of aluminum was 83 cents a pound in the third quarter, down 35% from $1.27 per pound in the same period of the previous year.

In the Alumina segment, production declined 5% year over year to 3.6 million tons. Production of primary aluminum decreased 13% to 881,000 tons on a 7% year-over-year decline in aluminum shipments. However, aluminum demand and prices have increased in the last three months. Alumina production increased 9% sequentially. Aluminum prices improved 13% sequentially on rising LME prices. Alcoa commissioned its Juruti mine in Brazil in the quarter and combined it with the Sao Luis refining expansion, which makes it the lowest-cost producer of alumina, globally.

In the Flat Rolled Products segment, shipments decreased 18% year over year, but increased 6% sequentially. Alcoa saw a 21% increase in aluminum demand from the automotive market. During the quarter, the company commissioned its Bohai flat-rolled products facility in China, which serves the printing, transportation, electronics and packaging industries. However, low demand from the aerospace industry resulted in lower production in the Engineered Products and Solution segment. Production of flat rolled products was down 46% year over year.

Cash from operations in the quarter was $184 million, compared with $328 million in the second quarter of 2009. Cash from operations in the third quarter 2008 was a negative $93 million. Alcoa’s debt-to-capital ratio stood at 38.3% at the end of the quarter, a 140 basis point reduction from the second quarter of 2009.

Alcoa sees end-markets stabilizing and demand improving 11% in the second half of 2009. Most of the demand is expected to come from global truck and trailer and automotive segments for the second half. We believe the cost cuts will make the company more competitive when markets recover.

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