Alcoa Reports Second Quarter Results

NEW YORK — Alcoa has reported second quarter 2016 results and the company is on track to complete its separation later this year into two separate businesses — Alcoa and Arconic.

Profit in the future combined Arconic (Value-Add) segments grew year-over-year and the future combined Alcoa Corporation (Upstream) segments strengthened sequentially.

“As markets ever more rapidly evolve, we have made Alcoa increasingly agile; results continue to improve,” said Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer. “In the face of a transforming aerospace market, we moved quickly to bring our costs down while capturing new opportunities. Contract wins continued as did our innovation leadership with the opening of a state-of-the-art metals powder plant geared toward rising demand for 3D-printed parts. Our automotive sheet revenue hit an all-time high. After substantially reshaping our Upstream segments they are now performing well even in a low pricing environment; we are building out our bauxite business and continue to win new supply contracts. Exceptional productivity and monetization of non-essential assets has put us in an excellent cash position. Our separation is on track for later this year.”

Alcoa reported second quarter 2016 net income of $135 million, or $0.09 per share, including $78 million in special items primarily related to separation costs, restructuring-related charges and associated tax impacts, discussed below. Year-over-year, second quarter 2016 results compare to net income of $140 million, or $0.10 per share.

Excluding the impact of special items, second quarter 2016 adjusted net income was $213 million, or $0.15 per share. All segments contributed to $375 million in productivity gains, partially offsetting the negative effects of lower year-over-year alumina and aluminum pricing and cost increases. In second quarter 2015, Alcoa reported adjusted net income, excluding special items, of $250 million, or $0.19 per share.

The second quarter effective tax rate of 46 percent was affected by special items during the quarter, including certain non-deductible expenses related to the separation and tax costs associated with the sale of company-owned life insurance policies. Excluding the impact of all special items, the quarterly tax rate on operating results was 31 percent.

Year-over-year, a 4 percent revenue increase from recent acquisitions and organic growth was more than offset by a 14 percent revenue decline due primarily to lower aluminum and alumina pricing and the impact of curtailed, divested and closed operations. As a result of these combined factors, Alcoa reported second quarter 2016 revenue of $5.3 billion, down 10 percent from $5.9 billion in the second quarter of 2015.

Asset Sales

Alcoa continues to strengthen its balance sheet and maximize cash flow through sales of non-essential assets. Announced sales are expected to generate total cash proceeds of $1.2 billion during 2016, of which $815 million has been received year-to-date. In the second quarter of 2016, Alcoa:

  • Liquidated additional company-owned life insurance policies for gross proceeds of $223 million;
  • Sold its Remmele Medical business, which was part of the RTI International Metals acquisition, to LISI MEDICAL, for $102 million; and
  • Sold for $111 million equity and fixed income securities held by its captive insurance company.

Additionally in the second quarter, Alcoa reached agreement to sell the following assets for a total of approximately $400 million:

  • Real estate in Ferndale, Washington to Petrogas and property associated with a former Alcoa smelter in Frederick, Maryland to a regional commercial real estate company; and
  • The Yadkin Hydroelectric Project in North Carolina to Cube Hydro Carolinas LLC, an affiliate of Cube Hydro Partners LLC, which will manage the assets.

The transactions above are expected to close in the second half of 2016.

Cash Flows

Alcoa ended second quarter 2016 with cash on hand of $1.9 billion. Cash from operations was $332 million. Free cash flow for the quarter was $55 million, which reflected an additional planned prepayment of $200 million related to a natural gas supply agreement in Australia and pension contributions of $77 million. Additionally, cash used for financing activities and cash provided from investing activities were $100 million and $311 million, respectively.

Market Update

In the global aerospace market, 2016 continues to be a transition year for original equipment manufacturers. Within jet engines, new launches are accelerating demand, outpacing near-term demand for structural airframe components, which is being partially absorbed through de-stocking.

The Company is forecasting improvement in the second half of 2016 as new platforms ramp up, and a strong 2017. Large commercial aircraft deliveries declined approximately 1 percent year-over-year in the first half of 2016, but are expected to rise 6 percent in the second half of 2016 compared to the first. As a result, Alcoa forecasts full-year 2016 deliveries to be flat to up 3 percent, followed by strong double-digit growth in 2017.

In automotive, Alcoa continues to forecast global automotive production growth of 1 to 4 percent. This includes 1 to 4 percent growth in North America, where the United States continues to record strong sales, particularly in the light truck segment. The global outlook is driven by a variety of factors, including low fuel prices, sustained demand, stable consumer confidence and recovery of global economies.

Alcoa also projects solid growth in other end markets. Low natural gas prices in North America and the adoption of new, high-efficiency industrial gas turbine models continue to drive orders for both heavy-duty gas turbines and spare parts. Alcoa projects global airfoil market growth to be 2 to 4 percent for 2016. The 2016 packaging market is projected to grow 1 to 3 percent and the global building and construction market, 4 to 6 percent.

Growth in the heavy duty truck, trailer and bus market in Europe and China is expected to be offset by continued production declines in North America, setting the global production outlook for the commercial transportation market at negative 4 to negative 1 percent for the year.

In 2016, Alcoa projects an approximately 775 thousand metric ton global aluminum deficit as 5 percent global aluminum demand growth outweighs 2.5 percent global aluminum supply growth. In addition, the Company projects a global alumina deficit of 1.5 million metric tons.

Arconic Overview

After the Company’s separation, the innovation and technology-driven Arconic will include Global Rolled Products (other than the rolling mill operations in Warrick, IN and Saudi Arabia, which will move to Alcoa Corporation), Engineered Products and Solutions and Transportation and Construction Solutions. In second quarter 2016, these Value-Add segments reported combined revenue of $3.5 billion, after-tax operating income (ATOI) of $294 million, and adjusted EBITDA of $567 million.

ATOI and adjusted EBITDA increased 3 and 6 percent, respectively, year-over-year. The combined segments also generated $176 million in productivity ($360 million year-to-date) as part of their business improvement programs announced in the first quarter. All Arconic segments are on track to deliver a combined $650 million in productivity savings in 2016.

In addition, in the second quarter, the future Arconic:

  • Signed a long-term contract valued at approximately $470 million with Embraer for aluminum sheet and plate for Embraer’s new E2 jet airliners; and
  • Opened a state-of-the-art, 3D printing metal powder production facility located at the Alcoa Technology Center to develop and produce proprietary titanium, nickel and aluminum powders optimized for 3D printed aerospace parts.

Alcoa Corporation Overview

Following the Company’s separation, Alcoa Corporation will comprise Bauxite, Alumina, Aluminum, Cast Products, and Energy – today’s Alumina and Primary Metals segments – as well as the rolling mill operations in Warrick, IN, and Saudi Arabia that are currently part of the Global Rolled Products segment. In second quarter 2016, the Alumina and Primary Metals segments reported revenue of $2.3 billion, ATOI of $150 million and adjusted EBITDA of $358 million. These segments generated $199 million in productivity in the second quarter ($379 million year-to-date) as part of its business improvement program, and are on track to deliver a combined $550 million in productivity savings for 2016.

In the second quarter, Alcoa Corporation continued to successfully build its third-party bauxite business. Alcoa World Alumina and Chemicals (AWAC) signed new third-party bauxite contracts valued at $60 million over the next two years for a total of $410 million in the first half of 2016. Under the contracts, AWAC will supply bauxite to external customers from four of its global mines. The new contracts, which will triple Alcoa Corporation’s third-party bauxite sales in 2016 from 2015, serve customers in China, the United States, Europe and Brazil. AWAC is an unincorporated joint venture that consists of a group of companies, which are owned 60 percent by Alcoa and 40 percent by Alumina Limited of Australia.

In addition, Alcoa Corporation continued to take aggressive action to improve its competitiveness and reached a new power agreement for its Intalco smelter in Washington State and completed the curtailment of the Pt. Comfort, Texas refinery.