Alcoa AA delivered yet another disappointing quarterly earnings as its legacy aluminum smelting business continued to be hammered by lower aluminum prices. The New York-based company’s profits for third-quarter 2015 sank year over year, hurt by lower metal prices. Both revenues and earnings for the quarter trailed expectations.

The aluminum giant recorded a profit, as reported, of $44 million or 2 cents per share for the third quarter, a roughly 70% plunge from $149 million or 12 cents per share logged in the year-ago quarter.

Barring one-time items including restructuring charges, earnings were 7 cents per share, down from 31 cents per share recorded a year ago. Earnings fell well short of the Zacks Consensus Estimate of 14 cents, marking the second straight quarterly miss.

Revenues slipped roughly 11% to $5,573 million in the third quarter from $6,239 million in the year-ago quarter as organic growth across aerospace, automotive and alumina businesses was more than offset by macroeconomic headwinds (including a slowdown in China's economy) and divestment & closure of businesses. Revenues missed the Zacks Consensus Estimate of $5,670 million.

Alcoa again backed its expectation of 6.5% global aluminum demand growth for 2015 while projecting a global aluminum deficit for the next year. The company’s shares skid roughly 5% in extended trading yesterday, reflecting the dismal third-quarter results. Weak aluminum prices have taken their toll on Alcoa's shares which are down roughly 30% this year.
 

Segment Review

Engineered Products and Solutions – Revenues from the division climbed 35% year over year to $1.4 billion on the back of acquisitions and market share gains. After-tax operating income (ATOI) fell nearly 3% year over year to $151 million, partly affected by costs related to the acquisition of RTI International.   

Transportation and Construction Solutions – The newly created segment’s sales fell 9% year over year to $475 million. ATOI declined 12% year over year to $44 million, hurt by unfavorable currency impact and cost headwinds.

Global Rolled Products – Sales tumbled around 21% year over year to $1.5 billion. ATOI fell 10% to $62 million as higher costs, unfavorable currency/price impact, portfolio actions and investment on growth initiatives more than offset gains from productivity and higher automotive sales.   

Alumina – Revenues rose around 3% year over year to $912 million in the quarter. Production fell around 6% year over year to 3.9 million metric tons while shipments rose 3% to 2.8 million metric tons. ATOI surged more than three-fold year over year to $212 million, aided by cost management and productivity improvement actions.

Primary Metals – Sales slid around 33% year over year to $1.2 billion. Shipments in the quarter were 0.6 million metric tons, down 4% from the year-ago quarter. Production was 0.7 million metric tons, an 8% decline from the prior-year quarter. ATOI was at a loss of $59 million versus an income of $245 million a year ago and $67 million in the previous quarter. The sequential decline was partly due to lower London Metal Exchange (LME) aluminum price and decrease in regional premiums.  

Financial Position

Alcoa ended the quarter with cash and cash equivalents of $1,739 million, down 47% year over year. Long-term debt was $9,091 million, up 3% year over year. Cash flow from operations was $420 million in the quarter while free cash flow was $152 million.

Outlook

Alcoa continues to expect global aerospace sales to increase 8% to 9% year over year in 2015. The company has raised its global airfoil market growth expectations in the industrial gas turbine market and now sees a growth of 3%-4%, up from 1%-3%.

The company revised its North American automotive production growth expectations for 2015 to 2%-4% from 1%-4%.  Alcoa reaffirmed its 9%-11% production growth forecast for the North American heavy duty truck and trailer market. The company expects 4%-5% sales growth in the North American commercial building and construction market and also kept its estimate for the packaging market unchanged at down 1%-2%.

Moreover, Alcoa has revised its projection for 2015 European automotive production growth to up 1%-3%, from down 1%-3%. The company has increased its European heavy duty truck and trailer production estimate to up 1%-3% from down 2% to flat. Alcoa has retained its commercial building and construction sales growth estimate for Europe at down 2%-3% while keeping packaging forecast unaltered at up 1%-2%.

Alcoa has cut its automotive production growth forecast for China for 2015 and now sees a growth of 1%-2%, versus 5%-8% expected earlier. It has also lowered its forecast for Chinese heavy duty truck and trailer production, which is now expected to fall 22%-24% versus a 14%-16% decline expected earlier. Commercial building and construction sales growth estimate has also been cut to 4%-6% from 6%-8% while forecast for the Chinese packaging market has been kept unchanged at up 8%-12%.

Portfolio Transformation

Alcoa, last month, said that it is splitting into two independent, publicly-traded companies. The separation will result in the creation of two standalone entities – The Upstream Company (consisting of bauxite, alumina, aluminum, casting and energy business units) and The Value-Add Company (includes global rolled products, engineered products and solutions, and transportation and construction solutions businesses).

The transaction, which is subject to specific conditions including final approval by Alcoa’s board, is expected to close in second-half 2016. Upon transaction closure, shareholders of Alcoa will own all of the outstanding shares of both the companies. The separation marks the completion of Alcoa’s multi-year transformation.

Alcoa continues to look for expansion opportunities beyond its struggling legacy primary aluminum business. The company is actively pursuing its aerospace expansion strategy. The purchase of RTI International has expanded Alcoa’s titanium offerings and added advanced technologies and materials to its portfolio. Alcoa sees RTI to contribute $1.2 billion in revenues in 2019.

Moreover, Alcoa recently won a contract worth roughly $1.1 billion to supply titanium for Lockheed Martin’s LMT F-35 Joint Strike Fighter (“JSF”) program. Under the contract, Alcoa will supply titanium plate and billet from a number of operations it gained through its buyout of RTI International Metals. The contract makes Alcoa the titanium supplier for airframe structures for all three variants of the F-35 for nine years.

Alcoa has also landed a $1 billion deal with Airbus to supply the latter titanium, steel and nickel-based superalloy aerospace fastening systems. The deal marks Alcoa’s biggest fastener contract ever with the aircraft maker.

In addition, Alcoa is making a notable progress with its breakthrough Micromill technology and rolling mill investments to meet rising emand for aluminum intensive vehicles. Alcoa recently cut a joint development agreement with Ford F to make next-generation aluminum alloys for automotive parts using the Micromill technology. The expected use of Micromill material on Ford vehicles is anticipated to more than double from 2016 to 2017. Alcoa has also signed a letter of intent with the Danieli Group to commercialize the Micromill technology.

Alcoa also remains on track to move down the cost curve through capacity curtailments. The company has cut 33% (or 1.4 million metric tons) of its smelting capacity since 2007. The company is reviewing 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for potential curtailment or divestiture.

During the third quarter, Alcoa curtailed the remaining 887,000 metric tons per year of alumina refining capacity at Suralco in Suriname and also permanently shuttered the Anglesea coal mine and power station in Australia.

Moreover, the alumina refinery at Ma’aden-Alcoa joint venture remains on schedule to produce 1.1 million metric tons of alumina in 2015. The smelter is also producing at full capacity and is on target to reach nameplate production of 740,000 metric tons of primary aluminum in 2015.

Alcoa currently carries a Zacks Rank #5 (Strong Sell).

A better-ranked company in the mining space is Rio Tinto plc RIO, sporting a Zacks Rank #2 (Buy).

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