After the close on October 11, Alcoa Inc. released 3Q11 earnings that disappointed investors. AA reported net income of $172M, or $.15/share, missing consensus estimates of $.22/share and representing a significant sequential decline. Revenue of $6.42B topped street estimates of $6.24B, but was again a sequential decline as compared to 2Q11. CEO Klaus Kleinfeld attributed the significant miss to lower aluminum prices, seasonal factors and weakness in Europe. Shares of AA are currently trading down more than 5% in after-hours trading.
Within the Alumina segment, ATOI of $154M represents an increase of 120% Y/Y but a 17% decrease sequentially. Lower prices of Alumina on the LME significantly impacted this segments top-line, over powering the Company’s efforts to offset increased energy and raw material costs with greater productivity, higher volume, and positive currency impact. The Primary Metals segment reported ATOI of $110M, a sequential decline of 45%, mainly attributed to a decline in LME cash prices. AA’s Flat-Rolled products saw both a Y/Y and sequential decline in ATOI, reporting just $60M. The significant driver behind this decline was deterioration in European markets, risings costs and seasonal plant closings. AA’s Engineered Products and Solutions segment continues to be on the cutting edge and proved so with both Y/Y and sequential increases in revenues, although they saw a sequential decline in ATOI due to unfavorable price mix and flooding at a PA. factory.
AA continued to work towards their financial targets in the quarter expanding their FCF to $250M YTD on $1.1B in cash from operations. They also improved their liquidity by raising cash on hand 6%. Continued capital spending and investment in the Company’s joint venture in Saudi Arabia, as well as a 200 basis point decline in their debt-to-capital ratio are some other highlights from the earnings call.
Alcoa had a tough quarter that was driven by a rapid decline in aluminum prices as well as a slowdown in the demand from many of their target end markets. Although global recovery and demand has slowed, CEO Klaus Kleinfeld maintains his forecast of 12% growth in demand for 2012 and is quoted as saying: “Alcoa is a confident company in a very nervous world. We are well prepared for whatever lies ahead, with more cash on hand, lower debt, and continued focus on profitable growth.” Although much of this may be true, we currently believe that AA is going to continue to have a tough time finding earnings growth as the prices of aluminum continue to drop, demand remains depressed, and input costs continue to apply pressure to margins. Over the quarter, spot prices of aluminum declined roughly 20%, leading to nearly a 40% loss in the share price of AA. A continued drop could continue to be detrimental to AA’s earnings and share price.