Alcoa Inc. (AA:US), the largest U.S. aluminum producer, reported second-quarter earnings and revenue that beat analysts’ estimates after an increase in orders from the auto and aerospace industries.
Profit was 6 cents a share, exceeding the 5-cent average of 19 estimates compiled by Bloomberg, Alcoa said yesterday in a statement. That excludes charges related to a proposed settlement of a lawsuit brought by Aluminium Bahrain BSC (ALBH) and other items. Sales fell 9.4 percent to $5.96 billion, beating the $5.81 billion average of 11 estimates.
Chief Executive Officer Klaus Kleinfeld reiterated Alcoa’s forecast for global aluminum demand to rise 7 percent this year and exceed supply. The company’s units that make the metal for customers such as Boeing Co. (BA:US) and Ford Motor Co. have seen higher profitability, helping to counter the weaker performance of its aluminum-smelting business. The primary metals unit posted an after-tax operating loss of $3 million after prices declined.
“Alcoa is still holding the line and keeping their head above water,” Jorge Beristain, a Greenwich, Connecticut-based analyst with Deutsche Bank AG who has a hold (AA:US) rating on the stock, said yesterday by telephone. “The pilot light has kind of gone out on aluminum prices.”
Alcoa had a second-quarter net loss of $2 million, or break even on a per share basis, compared with net income of $322 million, or 28 cents, a year earlier.
The shares slid 4.1 percent to $8.40 in New York, the biggest decline on the Dow Jones Industrial Average. The company, which is typically the first in the DJIA to report results, has fallen 49 percent in the past year, the worst performance on the index.
Car and truck manufacturers are building lighter vehicles and planemakers face record backlogs as airlines refurbish aging fleets. Global aluminum demand in the auto industry will increase 4 percent to 8 percent this year, with U.S. consumption rising as much as 14 percent, Kleinfeld said yesterday on a conference call with analysts and investors. That’s higher than growth of 3 percent to 7 percent projected three months earlier.
Alcoa also said it will gain from demand growth of 3 percent to 5 percent for blades used in gas turbines and jet engines this year. That compares with an estimate made in the first-quarter for expansion of as much as 2 percent.
Downstream operations are a focus for Alcoa. The company is spending $300 million to expand auto-parts output in Iowa. In May it reported the start of a $90 million expansion of a plant in Indiana to produce aluminum-lithium alloys used in aircraft.
“In their downstream business and midstream business, those two pieces we are seeing margin expansion,” Brian Yu, a San Francisco-based analyst at Citigroup Inc. who recommends holding Alcoa’s shares, said in a July 6 interview. “It’s a sign that, yes, the company is doing some things right.”
Aluminum prices have declined over the past year amid a supply surplus. Aluminum for delivery in three months on the London Metal Exchange averaged $2,019 a metric ton in the quarter, 23 percent less than a year earlier.
Global output rose 4.1 percent to 14.9 million tons in the first four months of 2012, beating usage by 623,703 tons, according to data compiled by Bloomberg.
Still, for the whole year, there will be a deficit of 515,000 tons, Kleinfeld said, wider than Alcoa’s April forecast for a 435,000-ton shortfall. Deutsche Bank’s Beristain and Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, estimate there will be a surplus this year.
Alcoa said in January that it would cut production capacity by 12 percent. Rio Tinto Group, the second-largest producer, said yesterday it reduced output by 15 percent at a plant in New Zealand after prices fell. Norway’s Norsk Hydro ASA (NHY), the fifth- biggest producer, said last month it would shut 120,000 tons of capacity in Australia because of weaker demand and oversupply.
“The market is working and we do see that the people are moving forward with curtailing or responding by slower build- out” of new smelting capacity, Kleinfeld said on the call.
Alcoa has faced claims from Aluminium Bahrain, the producer known as Alba, that it bribed officials in the kingdom and caused Alba to pay almost $500 million more than it should have for alumina, the main raw material in aluminum. Alcoa said it proposed to settle the suit, brought in the U.S., by offering a $45 million cash payment, and also offered Alba a contract for alumina supply.
Alcoa took a $45 million charge for the quarter in relation to the settlement and said it may take a further charge of $75 million. Potential settlements with the Securities and Exchange Commission and the U.S. Department of Justice may also result in future charges, the company said.
U.S. prosecutors -- who have been investigating the allegations since 2008 to determine whether Alcoa or anyone else violated the U.S. Foreign Corrupt Practices Act -- last month dropped objections to the pretrial gathering of evidence in the lawsuit by state-owned Alba.
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