Alcoa Inc. (AA), the largest U.S. aluminum producer, posted a loss of $119 million or 11 cents per share in the second quarter of 2013 compared with a loss of $2 million or break-even per share in the year-ago quarter. The loss includes $195 million related to restructuring due to plant closures and legal expense.
Excluding one-time special items, Alcoa earned $76 million or 7 cents a share in the quarter, in line with the Zacks Consensus Estimate. However, it was ahead of the year-ago earnings of $61 million or 6 cents per share. Productivity gains and strong performance from Alcoa's Engineered Products business supported the results.
Revenues dropped roughly 2% to $5,849 million from $5,963 million in the year-ago quarter but exceeded the Zacks Consensus Estimate of $5,744 million. The decline in revenues 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 8% sequentially in the reported quarter.
Alcoa reiterated its global aluminum demand growth expectation of 7% for 2013. Its shares, which are down roughly 9% so far this year, rose to trade above $8 per share after the market closed yesterday, partly reflecting the top line beat.
Segment Review
Alumina - Shipments in the reported quarter were 2.33 million metric tons on production of 4.16 million metric tons. After Tax Operating Income (ATOI) was $64 million, up from $23 million in the year-ago quarter and $58 million in the sequentially preceding quarter. The second quarter 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 second quarter were 0.69 million metric tons versus 0.75 million metric tons a year ago. Production in the quarter was 0.90 million ! metric tons, a decrease of 4.7% from the year-ago quarter. After Tax Operating Loss was $32 million compared with a loss of $3 million in the year-ago quarter and an income of $39 million in the prior quarter. The sequential decline was driven by lower LME prices and higher costs, including the previously announced maintenance costs related to power plant outages in Australia and the U.S.
Global Rolled Products - Shipments in the quarter were 0.50 million metric tons, up 3.7% year over year. Third-party revenues were $1.88 billion, down 1.9% year over year. The segment posted ATOI of $79 million, up 1.3% year over year but down 2.5% sequentially. The sequential decline was due to lower metal prices, largely offset by strong demand from the aerospace, automotive, and packaging businesses.
Engineered Products and Solutions - Shipments in the quarter were 0.058 million metric tons, down 1.7% year over year The segment posted record ATOI of $193 million, up 22.9% year over year and 11.6% sequentially. The increase was due to higher productivity and volumes across all market segments.
Financial Position
Alcoa ended the quarter with cash and cash equivalents of $1.20 billion compared with $1.71 billion a year ago. Alcoa had a debt-to-capital ratio of 34.5% in the reported quarter versus 36.1% a year ago.
Alcoa Reducing Smelting Capacity
Alcoa announced its plans to curtail 460,000 metric tons of smelting due to low metal prices and maintain cost competitiveness. The company also intends to permanently close its Fusina smelter in Italy, representing 44,000 metric tons of smelting capacity. These two closures will reduce the company's global smelting capacity to roughly 4.1 million metric tons with 13%, or 523,000 metric tons, of smelting capacity idled.
Alcoa remains on track to move down the cost curve and curtailed capacities in its upstream business. The curtailments will improve the competitiveness of! the comp! any's Primary Products business.
Alcoa also announced that it will expand mills in Tennessee and Iowa that cater to the auto and aerospace industries. Alcoa completed the expansion of aluminum-lithium capacity at its Kitts Green facility in the UK and also expanded capacity by 30% at the Alcoa Technical Center outside Pittsburgh. Alcoa expects its aluminum-lithium revenues to quadruple over the next six years to nearly $200 million.
Outlook
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%), commercial transportation (3%-8%), packaging (1%-2%), building and construction (4%-5%), and industrial gas turbine (3%-5%).
Our Take
Alcoa, a prominent player in the mining industry along with Aluminum Corporation of China Limited (ACH), Atlatsa Resources Corporation (ATL) and BHP Billiton Limited (BHP), 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, weakness remains in the commercial building and construction market. In addition, the company continues to contend with pricing pressure.
Alcoa currently retains a short-term Zacks Rank #4 (Sell).
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