Alcoa's Added-Value Units Fall Short in Earnings Miss

  • Profit slips in businesses that sell to car and plane makers
  • Overall revenue declines, also missing analysts' estimates

Alcoa Inc. exhibited third-quarter growing pains in its prized manufacturing units as they failed to provide enough added value to offset falling aluminum prices.

After-tax operating income across the downstream business that sells aluminum products to carmakers and jet producers fell 6.2 percent from a year earlier to $257 million, New York-based Alcoa said Thursday in a statement, missing the company’s forecast that profit will expand at the units.

The results show the challenges facing Chairman and Chief Executive Officer Klaus Kleinfeld in his quest to split the 127-year-old company in two under the weight of a global aluminum glut. Since taking charge in 2008, the former CEO of Siemens AG has emphasized value-added products while rationalizing a commodity-metals business that was once the world’s largest by volume.

While currency and costs related to acquisitions help explain the margin squeeze, “it still suggests 2016 expectations in downstream may prove to be too high,” David Gagliano, a New York-based analyst at BMO Capital Markets, wrote in a note Friday.

Income Declines

Net income in the quarter fell to 2 cents a share from 12 cents a year earlier, Alcoa said in the statement. Earnings excluding one-time items were 7 cents a share, trailing the 13-cent average of 12 estimates compiled by Bloomberg. Sales declined 11 percent to $5.57 billion, missing the $5.64 billion average estimate.

Alcoa’s breakup plan, announced last week, will separate manufacturing units from its legacy smelting and refining business. Analysts said the move, to be completed in the second half of next year, could help protect its manufacturing sector from the volatility of commodity prices. 

The lightweight metal, which is trading at less than half its July 2008 peak, averaged $1,623 a metric ton in the third quarter, down 19 percent from a year earlier. Average prices for alumina, the metal precursor refined from bauxite ore, lost 5.9 percent.

Primary Loss

In the third quarter, Alcoa’s aluminum-smelting, or primary, segment, had a loss of $59 million, compared with income of $245 million a year earlier. Profit in the alumina division increased more than threefold to $212 million.

Alcoa announced this week contracts worth a combined $2.1 billion with Airbus Group SE and Lockheed Martin Corp., bolstering the manufacturing side of the business. While the company has predicted demand for aluminum will grow this year by 6.5 percent globally, China has flooded the market with shipments in the first seven months of the year, according to customs data compiled by Bloomberg.

The company has divested, closed or curtailed 1.4 million tons, or 33 percent, of total smelting operating capacity since 2007, Alcoa said in Thursday’s statement.

The shares fell 4.6 percent to $10.50 at 12:53 p.m. Alcoa lost 30 percent in 2015 through Thursday’s close, compared with a decline of 2.2 percent in the Standard & Poor’s 500 index.

‘Harder to Integrate’

Kleinfeld has spent more than $3.5 billion in the past two years to buy aerospace-components makers including RTI International Metals Inc., Tital GmbH and Firth Rixson Ltd., while also expanding existing facilities in Indiana, Iowa and Tennessee that fabricate aluminum used in the aerospace, energy and automotive sectors.

“They experienced execution problems in the engineered products and solutions segment,” Justin Bergner, a Rye, New York-based analyst at Gabelli & Co. Inc., said Thursday about the third-quarter results. “Either one or both of the RTI or Firth Rixson are proving harder to integrate than management expected.”

Chief Financial Officer Bill Oplinger said costs associated with integrating acquisitions and a strong dollar each had a role in the downstream segments missing forecasts.

“A stronger U.S. dollar really significantly hurts the plants that are overseas,” Oplinger said on a conference call to discuss earnings. “That has had a negative impact” on the engineered products and solutions business in the third quarter, he said.

Alcoa reduced its estimate of the global aluminum supply surplus this year to 551,000 tons from a previous forecast of 762,000 tons. The company expects a deficit of the metal in 2016 as exports from China slow.

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