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Alcoa Beats Earnings Despite Lower Prices

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Alcoa Inc. (AA - Free Report) , the largest U.S. aluminum producer, posted a profit of $24 million or 2 cents per share in the third quarter of 2013 compared with a loss of $143 million or 13 cents per share in the year-ago quarter. The results include restructuring and other one-time charges/gains of $96 million.

Excluding one-time special items, earning was $120 million or 11 cents a share in the quarter, ahead of the year-ago earnings of $76 million or 7 cents per share and Zacks Consensus Estimate of 6 cents. Productivity gains, strong demand from auto makers, healthy operating performance and cost cutting supported the results despite lower metal prices.

Higher productivity and strong results in its Engineered Products and Global Rolled Products units, which accounted for 57% of the company’s revenues in the first three quarter of 2013, were responsible for the increased earnings. Though Alcoa’s earnings in the downstream businesses improved in 2013, the Primary Metals unit, the company's largest by revenues, has come under pressure from a decline in metal prices.

Revenues dropped roughly 1.2% to $5,765 million from $5,833 million in the year-ago quarter but exceeded the Zacks Consensus Estimate of $5,713 million. The decline was due to weak aluminum prices, offset by strong demand in the aerospace and automotive end markets. Alcoa continues to see pricing pressure with London Metal Exchange (LME) cash price falling 7% year over year in the reported quarter.

Alcoa reiterated its global aluminum demand growth expectation of 7% for 2013.

Segment Review

Alumina - Shipments in the reported quarter were 2.6 million metric tons on production of 4.21 million metric tons. After Tax Operating Income (ATOI) was $67 million, up from loss of $9 million in the year-ago quarter and profit of $64 million in the sequentially preceding quarter. The results were driven by higher Alumina Price Index-based pricing, a favorable impact from foreign exchange rates, and strong productivity savings, partly offset by lower LME prices.

Primary Metals - Shipments in the quarter were 0.69 million metric tons, down 1% from the year ago quarter. Production in the quarter was 0.90 million metric tons, almost flat from the year-ago quarter. ATOI was $8 million compared with a loss of $14 million in the year-ago quarter and a loss of $32 million in the prior quarter. The sequential increase was driven by considerable productivity gains, non-recurring power plant outages, and the favorable impact of foreign exchange rates.

Global Rolled Products - Shipments in the quarter were 0.50 million metric tons, down 0.6% year over year. Third-party revenues were $1.81 billion, down 3.8% year over year. The segment posted ATOI of $71 million, down 20.2% year over year and 10.1% sequentially. The sequential decline was due to lower volumes in aerospace and industrial markets and price pressures in packaging despite strong automotive and seasonal packaging demand.

Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 3.4% year over year. The segment posted third quarter record ATOI of $192 million, up 22% year over year and flat sequentially. The sequential increase was driven by strong productivity gains across all market segments offset by lower volumes and increased costs. Innovation in the business continues to drive share gains.

Financial Position

Alcoa ended the quarter with cash and cash equivalents of $1.02 billion, down 29% from $1.43 billion a year ago. Alcoa had a debt-to-capital ratio of 34.5% in the reported quarter versus 36.1% a year ago.

Strategic Actions

Alcoa’s strategic re-positioning of its value and commodities businesses is working very well. The company is making capital investments and remains on track to move down the cost curve and curtail capacities in its upstream business. The curtailments will improve the competitiveness of the company’s Primary Products business.

Alcoa’s $300 million Davenport, Iowa, plant is expected to complete by the end of 2013 and it has also started construction of the $275 million automotive expansion scheduled for its Tennessee, rolling mill. Both the plants are expected to support the increasing demand for aluminum sheet for automotive production. The company expects aluminum sheet per vehicle to grow ten-fold by 2025 in North America alone.

The Ma’aden-Alcoa joint venture project in Saudi Arabia that will create the world’s lowest-cost integrated aluminum facility is 99% complete and full operating capacity of 740,000 metric tons per year is expected in 2014. The smelter will be in sync with the company’s goal of lowering its position on the world aluminum production cost curve by 10 percentage points overall by 2015. The smelter is expected to contribute about two percentage points to the goal.

Alcoa announced its plans to curtail 460,000 metric tons of smelting due to low metal prices and maintain cost competitiveness. In the first five months of the announcement, Alcoa closed or curtailed 274,000 metric tons, or 60%, of the capacity under review.


Alcoa remains optimistic for 2013 and expects global demand for aluminum to increase 7%. The company envisions 9%-10% global growth in the aerospace sector this year. Alcoa’s growth forecast for other markets are – automotive (1%-4%), packaging (1%-2%), commercial building and construction (4%-5%), and industrial gas turbine (3%-5%). In the heavy truck and trailer market, Alcoa raised its 2013 growth expectation (to 5%-9% from 3%-8%) on improvements in the European market and a stronger Chinese market.

Our Take

Alcoa, a prominent player in the mining industry along with Aluminum Corporation of China Limited , Atlatsa Resources Corporation and BHP Billiton Limited (BHP - Free Report) , is a world leader in production and management of primary aluminum, fabricated aluminum, and alumina. The company is also the world’s largest miner of bauxite and refiner of alumina.

Alcoa is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions. Healthy demand in the aerospace market is expected to drive results going forward. However, the company continues to contend with pricing pressure.

Alcoa currently retains a short-term Zacks Rank #3 (Hold).

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