Alcoa Inc (NYSE:AA) shares jumped 1.68% in pre-market trading Wednesday after the company reported better than expected second quarter results on late Tuesday. The 125-year old aluminum company has finally returned to profitability as its cost-cutting efforts have begun to pay off, and restructuring charges have declined.

Alcoa Inc (AA)

Alcoa swings to profitability

The Pittsburgh-based aluminum producer reported a net profit of 12 cents per share or $138 million for the quarter ending June 30. The company had incurred a loss of 11 cents per share or $119 million in the corresponding quarter last year. However, revenues fell 0.2% from $5.85 billion to $5.84 billion. Excluding one-time charges, Alcoa earned $216 million or 18 cents per share, compared to just $76 million or 7 cents in the same quarter a year ago. Analysts polled by FactSet were looking for 12 cents in adjusted earnings and $5.63 billion in sales.

The company’s primary metals business, which smelts aluminum, has long been a drag on its earnings. But it showed after-tax operating profit of $97 million in the June quarter despite shrinking output. The unit had suffered a loss of $32 million last year. Alcoa CEO Klaus Kleinfeld has shut down several inefficient plants, and has announced the closure of many other plants worldwide. Once Alcoa executes all closures, its aluminum smelting capacity will decline by 28% since 2007.

Profits at its engineered products unit, which produces components for truck and jet wheels, inched up 5.7% to $204 million. Alcoa said earnings at its global rolled products were unchanged. However, the company took $78 million in restructuring and other charges related to capacity reduction. Morningstar analyst Andrew Lane said the smelting business has made a solid comeback. Alcoa has been very aggressive in cutting costs and capacity in the smelting business.

Alcoa expanding into finished parts business

For years, the Kleinfeld-led company has been a victim of falling aluminum prices, which have tanked from $3,070 in July 2008 to $1,930 on Tuesday. To reduce its exposure to swinging metal prices, Alcoa is slowly moving into production of high-margin finished parts for cars and jets. Last month, it acquired British jet-engine parts maker Firth Rixson Ltd for $2.85 billion. After closing the deal, aerospace-related sales will make up 20% of Alcoa’s total revenues.

Alcoa CEO finds aerospace quite attractive. Airplane-related order backlogs stretch out for years, which is a sure-shot growth. Kleinfeld reiterated his previous forecast for aluminum demand to jump 7% this year.

Tags: