Alcoa Inc (AA) Earnings Analysis: More Capacity Cuts Possible

Alcoa Inc (AA) Earnings Analysis: More Capacity Cuts Possible
By Alcoa ( [Public domain], via Wikimedia Commons

Alcoa Inc (NYSE:AA) reported disappointing fourth quarter results yesterday. Shares slipped 1.29% to close Thursday at $10.69, and sank another 6.92% in pre-market trading Friday to $9.95. Of course, the decline was also fueled by Alcoa Inc (NYSE:AA)’s $384 million deal to settle bribery charges in Bahrain. The leading aluminum producer posted a loss of $2.19 per share or $2.3 billion on $5.59 billion revenue. The loss was largely driven by $1.7 billion in impairment charges on smelters acquired in 1998 and 2000.

Alcoa still coping with low price, excess supply

The Pittsburgh-based company had reported a loss of 21 cents on $5.9 billion revenue in the same period a year ago. Excluding impairment charges, one-time restructuring and tax items, earnings came at 4 cents per share or $40 million, compared to 6 cents or $64 million in Q4, 2012. Analysts polled by FactSet expected the company to report 6 cents share in profit with $5.36 billion in revenue.

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Alcoa Inc (NYSE:AA) was hit hard by weak aluminum prices in global markets. That hurt the company’s upstream segments, where it mines bauxite, and then refines and smelts it to produce aluminum. During the fourth quarter, Alcoa Inc (NYSE:AA) received 7% less than the average price last year. Aluminum prices are still far below their pre-financial crisis levels, especially due to excess supply as production in China and the Middle East continues to rise. Excess aluminum supply and low prices forced the company to keep about 17% of its smelting capacity idle, with a possibility to make more cuts.

Alcoa sees strong demand for manufactured products

The Q4 operating income from its engineered products segment inched up from $612 million to $726 million YoY. The engineered products unit produces cast metal goods such as aluminum wheels. In contrast, earnings from its Global Rolled Products division plunged from $77 million in Q4, 2012 to $21 million. Global Rolled Products unit produces aluminum plates and sheets for autos, commercial manufacturers and airplanes.

Alcoa Inc (NYSE:AA) sees strong demand in Global Rolled Products segment, which made up 57% of its total revenue. And much of that growth should come from China. The company expects overall aluminum demand to jump 7% in 2014. Despite missing analysts’ estimates, Alcoa Inc (NYSE:AA)’s financials remain in good shape. Its cash from operations increased $706 million sequentially to $920 million. The aluminum maker has $1.4 billion in cash and $498 million in positive free cash flow at the end of Q4. Alcoa Inc (NYSE:AA)’s year-end debt burden has declined to the lowest level since 2006.

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