Alcoa's (AA) Q2 Earnings Top, Profit Drops on Lower Prices

AlcoaAA posted forecast-topping earnings in the second quarter of 2016, but lower aluminum prices dragged down its sales and profits in the quarter.

The New York-based aluminum giant's profits slipped on a reported basis in the quarter, hurt by lower metals prices and charges related to restructuring actions and business separation. Alcoa logged profit, as reported, of $135 million (or 9 cents per share) for the reported quarter, a roughly 4% decline from $140 million or 10 cents per share in the year-ago quarter.

Barring one-time items, earnings came in at 15 cents per share (down from 19 cents per share a year ago), comfortably beating the Zacks Consensus Estimate of 9 cents. Gains from productivity actions continued to offset headwinds from lower metal prices. The company recorded productivity gains of $375 million across all segments in the quarter.

Revenues went down roughly 10% year over year to $5,295 million in the second quarter as organic growth and gains from acquisitions was more than offset by lower prices of aluminum and alumina and divestment & closure of businesses. Revenues, however, beat the Zacks Consensus Estimate of $5,251 million.

Alcoa's realized aluminum prices skid around 15% year over year in the reported quarter. Aluminum prices remain under pressure given the oversupply of the metal in the market. Nevertheless, prices ticked up 3% from first-quarter 2016.

Alcoa backed its global aluminum demand growth forecast for 2016. The company remains on track to complete its business separation in second-half 2016.

The company's shares went up roughly 3.8% in extended trading yesterday on better-than-expected results.

Alcoa Inc. (AA) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Segment Review

Engineered Products and Solutions (EPS) - Revenues from the division climbed 15% year over year to roughly $1.5 billion in the second quarter on the back of the RTI acquisition. After-tax operating income (ATOI) rose 9% year over year to $180 million as contributions from RTI acquisition and productivity gains were partly offset by unfavorable pricing and mix and higher costs.

Transportation and Construction Solutions (TCS) - The segment's sales fell 5% year over year to $467 million. ATOI rose around 5% year over year to $46 million on productivity gains.

Global Rolled Products (GRP) - Sales fell around 7% year over year to $1.6 billion. ATOI slipped around 11% year over year to $68 million, impacted by transformation of the Warrick rolling mill, higher costs, lower volume in aerospace and pricing pressure in global can sheet packaging, partly offset by productivity gains.

Alumina - Revenues tumbled around 25% year over year to $694 million in the quarter. Production fell around 17% year over year to 3.3 million metric tons. Shipments also went down roughly 16% to 2.3 million metric tons. ATOI slid roughly 49% year over year to $109 million.

Primary Metals - Sales skid around 27% year over year to $1.1 billion. Shipments fell around 10% to 0.6 million metric tons. Production was roughly 0.6 million metric tons, an around 15% decline from the prior-year quarter. ATOI tumbled around 39% year over year to $41 million, hit by lower aluminum prices.

Financial Position

Alcoa ended the quarter with cash and cash equivalents of $1,929 million, up around 47% year over year. Total long-term debt was $9,052 million, up roughly 4% year over year. Cash from operations was $332 million in the reported quarter while free cash flow was $55 million.

Portfolio Transformation & Strategic Actions

Alcoa is splitting into two independent, publicly traded companies. The separation will result in the creation of two standalone entities - The Upstream Company in and The Value-Add Company. The future Value-Add Company will be named 'Arconic Inc.' while the Upstream Company will be renamed 'Alcoa Corporation' prior to the separation. The separation is expected to close in second-half 2016.

Alcoa recently filed an initial registration statement on Form 10 with the U.S. Securities and Exchange Commission ("SEC)" for the planned separation. The filing - an key milestone for the business split - includes preliminary detailed information about Alcoa Corporation as a standalone company. The separation will mark the completion of Alcoa's multi-year transformation.

Alcoa is actively pursuing its aerospace expansion strategy. The company recently landed a multi-year supply contract with Brazil-based leading commercial jets maker, Embraer, worth $470 million. The deal makes Alcoa the sole supplier for proprietary wing skins and fuselage sheet to Embraer.

The company, earlier this year, also cut a long-term agreement with Boeing BA to supply multi-material aerospace parts. Alcoa, last October, also secured big aerospace deals with Airbus and Lockheed Martin LMT .

In addition, Alcoa is making a notable progress with its breakthrough Micromill technology and rolling mill investments to meet rising demand for aluminum intensive vehicles. Alcoa has inked a joint development agreement with Ford F to make next-generation aluminum alloys for automotive parts using the Micromill technology.

The company is also divesting non-core businesses to optimize portfolio and strengthen its balance sheet. Announced sales are expected to generate total cash proceeds of $1.2 billion in 2016, of which $815 million has been achieved so far this year.

Alcoa also remains on track to move down the cost curve through capacity curtailments. As part of this move, the company shuttered its Warrick Operations smelter in Indiana in March and also curtailed 1.2 million metric tons of refining capacity at its Point Comfort operations in Texas in first-quarter 2016. It has also reached a power deal to boost competitiveness of the Intalco smelter in Washington State.


Moving ahead, Alcoa sees an improvement in the aerospace market in the back half of 2016 and a strong 2017 based on ramp-up of new platforms. While large commercial aircraft deliveries fell around 1% year over year in the first half, they are expected to increase 6% in the second half from the first. Based on this, the company expects deliveries to be flat to up 3% for full-year 2016.

The company continues to see global automotive production growth of 1% to 4% for 2016 including 1% to 4% growth in North America.

For the commercial transportation market, the company expects global production of -4% to -1% for 2016 as production growth in the heavy duty truck, trailer and bus market in Europe and China is expected to be offset by continued declines in North America.

Alcoa expects 4% to 6% global sales growth in the building and construction market. For the packaging market, Alcoa continues to expect global sales growth of 1% to 3% this year. For the global airfoil market, Alcoa sees a 2% to 4% growth in 2016.

Moreover, Alcoa now expects a global aluminum deficit of around 775,000 metric tons (down from prior view of 1.1 million metric tons) and a global alumina deficit of 1.5 million metric tons (up from 1.4 million metric tons) this year. The company reaffirmed its global aluminum demand growth forecast of 5% for 2016. Global demand for aluminum is expected to grow faster than supply in 2016.

ALCOA INC Price, Consensus and EPS Surprise

ALCOA INC Price, Consensus and EPS Surprise | ALCOA INC Quote

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

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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.

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