Alcoa Reports Lower Revenues On Aluminum Prices, Net Loss On Impairments

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Alcoa ( AA ) released its fourth quarter and annual earnings on Thursday, January 9. The company's reported quarterly revenues of $5.6 billion were lower than the $5.9 billion reported in Q4 2012 due to 7% lower year-over-year aluminum prices. Seasonally weaker results in the value-add businesses, especially the packaging markets as well as weakness in industrial markets and weather related impact on building and construction were other factors that contributed to lower revenues.

Net loss for the fourth quarter stood at $2.3 billion compared to a net income of $24 million in the previous quarter and $242 million in the fourth quarter of 2012. Full year net loss was $2.3 billion compared to a profit of $191 million in 2012. The huge net loss was primarily due to special items worth $2.4 billion that included a $1.7 billion impairment of goodwill, a $361 million non-cash charge related to potential tax benefits whose realization is no longer assured and $243 million related to the $384 million Alcoa agreed to pay to settle criminal and civil charges brought by the U.S. Justice Department and the SEC. Without the impact of special items, Alcoa's Q4 earnings stood at $40 million.

Alcoa managed to reduce costs and the working capital cycle and increase productivity.

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Productivity Related Improvements Offset Lower Volumes

Alcoa managed to increase the productivity of its operations and reduce costs. The company estimated that the benefits due to these amounted to $1.1 billion for the whole year, which far exceeded its target of $750 million. Productivity related gains helped to offset the impact of lower volumes, particularly those related to seasonal declines in packaging. It also helped offset higher costs of energy in the upstream business. The additional value boosted the company's bottom line. Considering that Alcoa's net loss for the full year stood at $2.3 billion, the figure would have been much higher without this contribution. Since it is only to be expected that in a weak economic scenario neither demand nor volumes sold would increase much, productivity would always be an important factor in determining profitability.

Performance Of Individual Business Segments In Q4

In the engineered products and solutions ( EPS ) division, ATOI rose year-over-year from $140 million to $168 million due to productivity gains and higher sales volumes. The division reported an adjusted EBITDA margin of 20.3%.

In the global rolled products (GRP) division, ATOI declined on a year-over-year basis to $21 million from $77 million due to pricing pressure, a seasonal decline in demand and high inventory levels in the aerospace segment. In this segment, productivity gains were able to offset the negative impact of these factors only marginally.

In the upstream part of the business, Alcoa's alumina division gained handsomely year-over-year due to higher Alumina Price Index ( API ) prices even in the face of lower London Metal Exchange(LME) aluminum prices and productivity related improvements. ATOI increased from $41 million to $70 million sequentially. (( LME Aluminum Price Graph , LME))

The ATOI for the primary metals segment stood at a negative $35 million compared to a positive $8 million in Q3 2012. The sequential decline was due to lower LME prices and increased energy costs.

Outlook For 2014

Alcoa witnessed robust global growth in the aerospace segment to the tune of 9-10%. The bulk of this growth came due to demand for commercial planes rather than civilian aircraft. Going forward, Alcoa predicts a constant 7-8% growth rate in this segment in 2014.

There is a large backlog of orders with Boeing and Airbus to the tune of 10,000 planes which might take upto 8 years to clear. Boeing and Airbus received orders from Emirates worth $76 billion for their 777X and A380 models respectively at the Dubai Airshow in 2013. In addition,  demand from the cargo sector was up by 5.3% in 2013 and is expected to further increase by 6% in 2014. The opportunities will be partially offset by excess inventory of aerospace structural plates which would take two years to come down and will impact revenues negatively by 10% compared to 2013 levels. For the first time, Alcoa talked extensively about other parts of the aerospace market where it sees good opportunity. It said that in 2013 jets for regional airlines saw a demand growth of 19.5%, business jets saw a demand growth of 10% and on the defense side there was some positive news as major budget reductions for platforms like the Joint Strike Fighter and the F-35 were avoided by the government.

The automotive segment in the U.S. saw growth of 4-5% in 2013 and Alcoa expects further growth between 2-5% in 2014. The average age of passenger cars today is 11.4 years against a historic average of 9.4 years, which implies pent-up demand. In Europe, production is expected to stabilize in 2013 and Alcoa expects growth between -1% to 3%. The demand growth in China is expected to be between 6-10% despite expectations of increased restrictions to check air pollution.

In the truck and trailers segment in North America, production declined by 12% in 2013 but is expected to increase between 1-5% in 2014. Demand in the commercial building and construction segment is expected to grow by 3-4% in 2014 in North America. In the industrial gas turbine segment, however, demand may decrease by 8-12% because in Europe gas-fired power generation is facing competition from low priced coal, and in the U.S., gas prices have increased, which has allowed coal to claw back some share in power generation. (( Alcoa Q4 2013 Earnings Conference Call , Seeking Alpha))

We have a Trefis price estimate for Alcoa of $7, which will shortly be revised in view of the latest earnings results.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AA , API , EPS , MT , RIO

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