Alcoa Inc. (AA) recorded its fifth consecutive loss of $194 million, or 19 cents per share, in the first quarter of 2010. However, losses narrowed from a loss of $480 million or 59 cents in the first quarter of 2009 and a sequential loss of $295 million or 29 cents. Accounting for restructuring and special charges of $295 million or 29 cents per share, Alcoa earned 10 cents per share.

Restructuring charges included $135 million (prior guidance of $180 million), or 13 cents per share due to the closure of two smelters in Badin, North Carolina, and Frederick, Maryland. Alcoa also took charges for tax impacts totaling $112 million (prior guidance of $80 million), or 11 cents per share, primarily because of changes in federal health care laws.

Quarterly revenues jumped 20% to $4.9 billion on higher realized prices, offset partially by lower shipments in alumina and primary metals and higher energy costs. Realized prices for alumina were up 13%, while that of aluminum improved 8%.

Cash from operations in the quarter was $199 million and cash and cash equivalent reached $1.3 billion as of March 31, 2010. Debt-to-capital ratio of 38.1% at the end of the quarter reflected an improvement of 60 basis points from fourth quarter 2009 and a 250 basis point improvement from first quarter 2009.

Alcoa generated $86 million in productivity through its cash sustainability program sequentially, helping the quarterly EBITDA of $596 million. Cash sustainability efforts helped reduce operating cost by 8.2% year over year.

Segment Results



Alumina: The segment reported a 1% decline in alumina production to 3.9 million tons while realized prices increased 13%. Operating profit in the segment improved to $72 million from $35 million in the same quarter of 2009.

Primary Metals: In the Primary Metals segment, higher energy bills affected Alcoa’s Italian smelters. However, realized aluminum prices increased 8% over the previous quarter leading to an operating income of $123 million, compared to operating losses of $212 million in the year-ago quarter. Primary metal production for the quarter declined 1% to 8.9 million tons.

Flat-Rolled Products: During the first quarter, Alcoa lost one of its major North American customers in the beverage can sheet business under the segment. This resulted in lower sales volumes in the quarter affecting operating income.

Operating income in the quarter was $30 million compared with operating losses of $61 million in the year-ago quarter. However, the segment has witnessed improved pricing across end-markets, including can sheet.

The principal business of Alcoa’s Flat-Rolled Products segment is the production of aluminum plate, sheet, foil and hard alloy extrusions, which serve the packaging and consumer, transportation, building and construction, distribution, aerospace and automotive markets.


Engineered Products and Solutions: The segment is engaged in the production of titanium, aluminum and super alloy investment castings, forgings and fasteners, aluminum wheels, integrated aluminum structural systems and architectural extrusions for the aerospace, automotive, building and construction, commercial transportation and power generation markets.

Operating income in the segment was down 15% to $81 million from last year’s $95 million. A modest improvement in commercial transportation markets was offset by continued weakness in the building and construction and industrial gas turbines markets.

Earnings Estimate Revisions

Alcoa’s net earnings of 10 cents in the first quarter of 2009 were slightly lower than the Zacks Consensus Estimate of 12 cents. For the second quarter and full year 2010, the Zacks Consensus estimate is pegged at 24 cents and 81 cents with a downside potential of 54.17% and 1.23% respectively.

In the last month, 2 out of the 13 analysts covering the stock have revised the estimates upward while 6 analysts have revised the estimates downward. Over the last 7 days, 2 analysts have revised the estimates downward. With respect to earnings surprises, Alcoa has missed the Zacks Consensus Estimate twice in the last four trailing quarters, reflected in the average earnings surprise of 19.84%.

Alcoa has not provided any financial guidance for the next quarter. However, the company expects aluminum demand to pick up in 2010 and expects results to be better than 2009. We maintain our long-term Neutral recommendation on the stock.
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