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Weak Price Hits Alcoa in 2Q

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The largest U.S. aluminum producer Alcoa Inc. (AA - Analyst Report) turned to a loss in the second quarter of 2012, hurt by lower aluminum prices. The company posted a loss of $2 million (break-even on a per-share basis) in the quarter compared with a profit of $322 million (or 28 cents a share) reported in the year-ago quarter.

Excluding one-time special items (including restructuring and other charges, litigation expenses and tax-related items), Alcoa earned 6 cents a share, in line with the Zacks Consensus Estimate and below the year-ago earnings of 32 cents.

Revenues decreased 9.4% year over year and 0.7% sequentially to $5,963 million, surpassing the Zacks Consensus Estimate of $5,828 million. While weak aluminum prices dragged down revenues, the company saw increased demand across aerospace and automotive markets in the quarter. Alcoa said that aluminum prices dropped 18% year-over-year and 4% sequentially in the second quarter.

Alcoa witnessed strong performances across all its businesses driven by higher utilization rates, process innovations, lower scrap rates and usage reductions. The company expects improved aluminum demand from automobile, aerospace, packaging and commercial transportation end markets.

Segment Details

Alumina - Shipments in the reported quarter were 2.19 million metric tons on production of 4.03 million metric tons. The After Tax Operating Income (ATOI) decreased 87.6% year over year to $23 million. Adjusted EBITDA dropped $20 million to $147 million, representing a sequential decrease of 13.6%. The second-quarter results were impacted by lower volumes and higher raw material costs, partly offset by improved productivity and favorable currency.

Primary Metals - Shipments in the second quarter were 0.75 million metric tons versus 0.72 million metric tons in the previous-year quarter. Production in the quarter was 0.94 million metric tons, a slight decrease of 0.4% from the year-ago quarter.  ATOI was a negative $3 million compared with $201 million in the year-ago quarter and $10 million in the prior quarter. Adjusted EBITDA plunged 11.2% sequentially to $119 million in the quarter. The segment reported increased productivity and lower raw material costs compared with the previous quarter.

Global Rolled Products - Shipments in the quarter were 0.48 million metric tons, compared with $0.47 million in the prior-year quarter. Third-party revenues in the second quarter were $1.91 million, up 8.2% year over year. The segment posted ATOI of $95 million, down 4% year over year. Increased raw material costs and lower price mix were offset by higher volumes and productivity gains.

Engineered Products and Solutions - Shipments in the quarter were 0.59 million metric tons versus 0.57 million metric tons in the prior-year quarter. ATOI was $160 million, up 7.4% year over year, and 3.2% sequentially, mainly driven by productivity improvements and higher volumes, partially offset by increased costs and unfavorable impact due to fire at Massena. Sales for the segment jumped 3.6% year over year to $1.42 million and increased 2.2% from the last quarter. Adjusted EBITDA of $276 million increased by $15 million over the year-ago quarter.

Financial Position

The company ended the second quarter with strong liquidity position with cash and cash equivalents of $1.7 billion as of June 30, 2012, compared with $1.94 billion as of December 31, 2011. Debt-to-capital ratio for the quarter was 36.1%. Capital expenditure was $291 million in the quarter compared with $270 million in first-quarter 2012.

Alcoa Reducing Smelting Capacity

Alcoa curtailed 390,000 metric tons of its system refining capacity in the reported quarter. The company also remains on track for further capacity curtailments of its system refining capacity to improve its competitive position. The curtailments will improve the competitiveness of the company’s Primary Products business.

Outlook

For 2012, Alcoa reiterated its forecast that aluminum demand will grow by 7% globally. The company also continues to expect that there will be a deficit in global aluminum supply in 2012.

Our Take

Pennsylvania-based Alcoa Inc. is among the world’s leading producers of primary and fabricated aluminum and alumina. The company competes with Aluminum Corporation Of China Limited and RioTinto plc. (RIO - Analyst Report).

We believe that the company’s cost reduction efforts are, to some extent, offsetting the impact of higher energy and raw material costs on its bottom line. Alcoa is divesting underperforming assets through its restructuring program. The company is making efforts to reduce costs of its upstream business and achieve record profit in its mid stream and downstream businesses.

We currently have a long-term Neutral recommendation on Alcoa. The stock maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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