Alcoa's Q2 Earnings Top, Turn to Profit - Analyst Blog


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Alcoa Inc. ( AA ) swung to a profit in the second quarter of 2014 on strong results from its downstream and primary metals businesses, aided by higher aluminum pricing. The results in the legacy primary metals business were driven by solid aluminum demand.

The U.S. aluminum giant raked in a profit of $138 million or 12 cents per share in the second quarter compared with a loss of $119 million or 11 cents per share in the year-ago quarter and a loss of $178 million or 16 cents per share in first-quarter 2014.

Alcoa recorded $78 million in restructuring charges and other special items in the quarter. Restructuring actions were mostly related to reduction of costs in the commodity business.

Excluding one-time special items, earnings came in at $216 million or 18 cents per share in the reported quarter, ahead of the year-ago earnings of $76 million or 7 cents per share. Earnings per share also surpassed the Zacks Consensus Estimate of 13 cents.

Revenues edged down 0.2% to $5,836 million in the second quarter from $5,849 million in the year-ago quarter but rose 7% from the previous quarter. It exceeded the Zacks Consensus Estimate of $5,626 million. The sequential increase was due to strong volumes in the mid and downstream businesses, improved metal pricing, and higher energy sales.

Alcoa reaffirmed its global aluminum demand growth expectations of 7% for 2014. Its shares were up as much as .3.4% in after-hours trading yesterday.

Alcoa Inc - Earnings Surprise | FindTheBest

Segment Review

Alumina - Shipments in the reported quarter were 2.4 million metric tons on production of 4.1 million metric tons. After Tax Operating Income (ATOI) was $38 million, down from $64 million in the year-ago quarter and $92 million in the sequentially preceding quarter.  The sequential decline in ATOI was mainly due to the first quarter benefit from the sale of Alcoa's Suriname gold mine interest, unfavorable foreign exchange translation, lower Alumina Price Index (API) pricing, and additional costs due to outages and maintenance.

Primary Metals - Shipments in the quarter were 0.6 million metric tons, down 7.9% from the year-ago quarter. Production in the quarter was 0.8 million metric tons, down 11.3% from the year-ago quarter. ATOI was $97 million compared with negative $32 million in the year-ago quarter and negative $15 million in the prior quarter.

The sequential improvement in ATOI was led by higher London Metal Exchange (LME) pricing and regional premiums, increased power sales, and the absence of special charges recorded in the first quarter, which were partly offset by unfavorable currency swings.

Global Rolled Products - Shipments in the quarter were roughly 0.5 million metric tons, almost at par year over year. Third-party revenues were $1.9 billion, down 0.9% year over year. The segment posted ATOI of $79 million, which was flat year over year and up 33.8% sequentially. The sequential jump was due to for can sheet and strengthening orders for brazing sheet, industrial and commercial transportation products due to economic recoveries in Europe and the U.S., as well as the absence of a first quarter charge related to the planned permanent shutdown of the Australia rolling operations.

Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 6.9% year over year. The segment posted second-quarter ATOI of $204 million, up 5.7% year over year and 7.4% sequentially. The sequential results were driven by higher volumes across all businesses and favorable productivity.

Financial Position

Alcoa's cash and cash equivalents stood at roughly $1,183 million as of Jun 30, 2014, down 1.6% from $1,202 million as of Jun 30, 2013. Alcoa had a debt-to-capital ratio of 35.4%, compared with 34.5% in the year ago quarter.

Portfolio Transformation

Alcoa made several investments during the reported quarter. The company recently entered into an agreement to buy jet engine parts maker Firth Rixson for $2.85 million. The acquisition is expected to contribute $1.6 billion in incremental revenues and $350 million earnings before interest, tax, depreciation and amortization (EBITDA) in 2016.  

The company also announced two organic investments in its Power and Propulsion (APP) business in the Engineered Products and Solutions segment totaling $125 million to meet increasing demand for next-generation jet engine components. APP revenues are expected to reach $2.2 billion in 2016.

In the company's Global Rolled Products segment, expansion in Davenport, IA is ramping up production to serve automotive demand. Alcoa's second automotive expansion in Tennessee remains on schedule for completion in mid-2015.

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.

During the quarter, Alcoa announced various capacity curtailments. Alcoa completed the curtailment of 147,000 metric tons of smelting capacity in Brazil at Sao Luis (Alumar) and Pocos de Caldas. The company will permanently close Point Henry aluminum smelter in Australia by Aug 2014, thereby curtailing 190,000 metric tons. Also, it completed the start up of the Saudi Arabia smelter, the lowest cost aluminum production facility in the world, during the quarter.

To further optimize the Alumina business, Alcoa signed a non-binding letter of intent to pursue a sale of its ownership interest in Alcoa Minerals of Jamaica, L.L.C. (AMJ) that operates a bauxite mine and an alumina refinery.

Alcoa has realized $302 million year-over-year productivity savings in the second quarter and $556 million for the first half versus its annual target of $850 million. The company's capital expenditures amounted to $206 million against an annual plan of $500 million and controlled sustaining capital expenditures of $261 million against a $750 million annual target. The company is also progressing on the Saudi Arabia joint venture project with $64 million already invested against a $125 million annual plan.


Alcoa reaffirmed its expectations of 8%-9% global growth in the aerospace sector in 2014 on the back of strong demand for both large commercial aircraft and regional jets. Alcoa's growth forecast for other markets are - automotive (1%-4%), packaging (2%-3%), commercial building and construction (4%-6%). For the industrial gas turbine market, Alcoa continues to expect a decline of 8% to 12% on lower orders for new gas turbines and spare parts.

Alcoa raised its 2014 expectations for the North America commercial transportation market to a range of 10% to 14%, from a previous range of 5% to 9% partly due to rising truck orders and backlogs.

Alcoa expects the transportation market to remain steady (-1% to 3%) in 2014 due to weakness in the European market.

Alcoa 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.

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

Other mining companies worth considering are Kazakhmys PLC ( KZMYY ), Paramount Gold and Silver Corp. ( PZG ) and Thompson Creek Metals Company Inc. ( TC ). All three carry a Zacks Rank #2 (Buy).

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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 Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
More Headlines for: API , APP , AMJ , AA , PZG

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