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Alcoa reports improved profit; beats estimates

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By John D. Oravecz
Tuesday, July 8, 2014, 4:27 p.m.
 

Alcoa Inc.'s emphasis on higher-margin businesses such as aerospace and heavy-duty truck wheels contributed to improved second-quarter net income.

And its traditional aluminum production segment, which had been a drag on results, turned a profit because of cost cuts, higher regional price premiums and strong demand.

Engineered products, which includes the aerospace segment where Alcoa announced the $3 billion acquisition of a jet-engine components maker two weeks ago, had record operating profit.

“Management's tone has been they are transforming the company, now we are seeing some performance that backs that up,” said Andrew Lane, analyst with Morningstar Inc. in Chicago.

Lane said the key for the quarter was improved performance of Alcoa's primary metals segment, the result of smelting capacity closings this year and in 2013.

“Smelting had been a detractor from the company's performance, and now it is a significant contributor to net income,” Lane said.

To cut costs in the commodity aluminum segment, Alcoa idled 147,000 metric tons of smelting capacity in Brazil. It also signed letter of intent to sell its stake in a bauxite mine and alumina refinery in Jamaica.

Since 2007, Alcoa said it reduced smelting capacity by 1.2 million metric tons, or 28 percent. In the first quarter, reductions also were announced in Australia and Massena, N.Y.

CEO Klaus Kleinfeld said the second-quarter results posted Tuesday “prove Alcoa's transformation is in high gear. Our strategy of building a lightweight multi-material innovation powerhouse and a highly competitive commodities business is driving compelling and sustainable shareholder value.”

The aluminum maker said it earned $138 million, or 12 cents a share, on revenue of $5.8 billion, up 7 percent from the first quarter but down slightly from a year ago.

The results included $78 million in expenses to reduce costs of its commodity aluminum business, mainly from closing high-cost smelting capacity. Excluding those expenses, Alcoa earned 18 cents a share, compared to an estimate of 12 cents by analysts surveyed by First Call. Analysts expected revenue of $5.6 billion

A year ago, Alcoa reported a net loss of $119 million, or 11 cents a share.

Shares closed at $14.85, up 11 cents, before the company reported. The stock has gained 39.7 percent so far this year.

The company said operating profit in the engineered products segments hit $204 million, as profit margin rose to 23.1 percent. Alcoa moved further into the aerospace portion of that segment with the acquisition of U.K.-based Firth Rixson Ltd., a leading jet-engine component company.

Alcoa said the deal will boost annual aerospace revenue by 20 percent to about $4.8 billion, as the company continues to diversify its business beyond its mining and aluminum smelting roots. Firth Rixson will double Alcoa's average engine content in key programs, and Kleinfeld called the deal a “major milestone” in Alcoa's transformation.

Alcoa will pay $2.35 billion in cash and $500 million in stock to Firth Rixson's owner, private equity firm Oak Hill Capital. Firth Rixson has operations in the United States, Asia and Europe.

The company said it completed an expansion at its Davenport, Iowa, plant, which will produced aluminum sheet for the automotive market, and an expansion in Alcoa, Tenn., is also on track.

Automakers are turning to aluminum as they gear up to meet the government's 54.5 mpg target by 2025 with lighter-weight materials and will switch to full-scale production using aluminum in their best-selling vehicles.

The New York-based company employs about 2,000 in the Pittsburgh area — at its corporate operations center on the North Shore, the Alcoa Technical Center in Upper Burrell, and Traco Co., a window manufacturer in Cranberry.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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