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Alcoa Beats, Cuts Demand View

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The largest U.S. aluminum producer Alcoa Inc. (AA - Free Report) reported a loss in the third quarter of 2012, hurt by a hefty charge associated with environmental remediation and legal settlement and lower aluminum pricing. The company posted a loss of $143 million or 13 cents per share in the quarter compared with a profit of $172 million or 15 cents a share reported in the year-ago quarter.

Excluding one-time special items (including a $175 million charge mainly related to environmental remediation of the Grasse River and the settlement of a civil lawsuit against Aluminum Bahrain), Alcoa earned $32 million or 3 cents a share in the quarter. Analysts polled by Zacks were expecting the company to break even on a per share basis. The company recorded a $40 million charge associated with the legal settlement in the quarter.

Revenues decreased 9.1% year over year and 2.2% sequentially to $5,833 million, but were ahead of the Zacks Consensus Estimate of $5,565 million. Alcoa said that aluminum prices dropped 17% year over year and 5% sequentially in the third quarter.

Alcoa witnessed strong productivity growth in its upstream and downstream businesses in the third quarter on the back of higher utilization rates, process innovations, lower scrap rates and usage reductions. The company saw healthy demand across the aerospace and automotive markets in the quarter.

Segment Details

Alumina - Shipments in the reported quarter were 2.37 million metric tons on production of 4.08 million metric tons. The After Tax Operating Income (ATOI) was negative $9 million, down from $154 million in the year-ago quarter and from $23 million reported in the sequentially preceding quarter. The third quarter results were impacted by lower London Metal Exchange (LME) based pricing and unfavorable currency, partly offset by improved productivity, stable Alumina Price Index-pricing and higher volumes.

Primary Metals - Shipments in the third quarter were 0.77 million metric tons versus 0.75 million metric tons in the previous-year quarter. Production in the quarter was 0.94 million metric tons, a slight decrease of 2.7% from the year-ago quarter.  ATOI was negative $14 million compared with $110 million in the year-ago quarter and negative $3 million in the prior quarter.  Higher alumina costs and negative impact of LME based pricing were offset by productivity gains, cost decreases, and improved regional premiums.

Global Rolled Products - Shipments in the quarter were 0.48 million metric tons compared with 0.45 million in the prior-year quarter. Third-party revenues were $1.85 million, down 6.3% year over year. The segment posted ATOI of $98 million, up 63.3% year over year and 3.2% sequentially. The segment reported increased productivity, higher volumes and better price and mix compared with the previous year.

Engineered Products and Solutions - Shipments in the quarter were 0.05 million metric tons versus 0.06 million metric tons in the prior-year quarter. ATOI was $160 million, up 15.9% year over year and flat sequentially, mainly driven by productivity improvements and favorable Massena impacts, partly offset by increased costs and lower volumes. Sales for the segment declined 0.4% year over year and 3.7% sequentially to $1.37 million.

Financial Position

The company ended the third quarter with strong liquidity with cash and cash equivalents of $1.43 billion, up 7.5% year over year. Debt-to-capital ratio for the quarter was 36.1%, up from 33.7% a year ago. Capital expenditure was $302 million in the quarter compared with $291 million in second-quarter 2012.

Alcoa Reducing Smelting Capacity

Alcoa remained on track to move down the cost curve and curtailed capacities in its upstream business. The company completed partial curtailments at La Coruna and Aviles, Spain, while the Portovesme, Italy curtailment is underway and is expected to be completed by November 30, 2012. Further, the company permanently closed its smelter at Alcoa, Tennessee, and two lines at Rockdale, Texas. With the full curtailment of the Portovesme smelter, Alcoa will have 14% of its highest-cost system smelting capacity offline. The curtailments will improve the competitiveness of the company’s Primary Products business.


Alcoa has lowered its global aluminum demand forecast for 2012 to 6% from its earlier expectation of 7%, owing to the slowdown in China. The company, however, expects the aluminum market to double in 2020 from the 2010 levels as the market is already ahead of the required 6.5% compound annual growth rate.

With respect to its end markets, Alcoa anticipates aerospace market to grow by 13% to 14% annually. The company has raised its outlook for the automotive market for 2012 by 1%. Alcoa has reaffirmed its growth expectations for packaging (2% to 3%), commercial building and construction (2.5% to 3.5%), and industrial gas turbine (3% to 5%). However, the company has lowered its 2012 growth expectations for the heavy truck and trailer market (a 7% to 9% percent decline) anticipating a slowdown across all major regions.

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 - Free 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.

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

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