Alcoa tops estimates as parts business shines ahead of split

Alcoa Inc., the 128-year-old aluminum producer that's splitting into two companies, reported earnings that exceeded analysts' estimates after profit from its car and jet parts businesses offset declines in prices for the metal.

Net income fell to 9 cents a share from 10 cents a year earlier, New York-based Alcoa said Monday in a statement. Profit excluding one-time items was 15 cents a share, beating the 9- cent average of 12 estimates compiled by Bloomberg. Sales dropped to $5.3 billion from $5.9 billion.

Investors are scrutinizing the profitability of the so- called downstream units that will be renamed Arconic when the company splits in two by the end of the year. After separating legacy smelting and mining assets, Arconic may have about $7.8 billion of debt, imperiling the goal Chief Executive Officer Klaus Kleinfeld set when the split was announced: to achieve an investment-grade credit rating. On June 29, Kleinfeld said the target is for Arconic to retain Alcoa's ratings, which are split between one investment-grade and two junk levels.

Alcoa's engineered products and solutions segment, which will comprise Arconic's largest unit after the company splits, saw after-tax operating income in the second quarter rise 9.1 percent to $180 million as the company benefited from acquisitions in that segment.

The earnings statement was released after the close of regular trading in New York, where Alcoa rose 4.4 percent to $10.59 at 4:22 p.m. The shares advanced 2.7 percent this year through the close.

Kleinfeld is targeting an earnings before interest, taxes, depreciation and amortization margin of 21-22 percent this year for the engineered products and services segment. The company spent more than $4 billion in 2014 and 2015 to bolster the business, which will be Arconic's largest unit, including the purchase of U.K. jet-parts maker Firth Rixson Ltd. and Pittsburgh-based RTI International Metals Inc. Alcoa has targeted 1,000 job cuts and is evaluating a further 1,000 in the division as it works to integrate the acquisitions and boost profitability.

Alcoa increased its forecast for global supply of the metal in 2016 and decreased its market-deficit projection. Supply of the metal used in everything from beer cans to aircraft is set to climb 2.5 percent in 2016, higher than a 2 percent projection in its previous earnings report, the company said in the statement. In April, Alcoa estimated a market deficit of about 1.1 million metric tons in 2016, which it lowered to a 775,000- ton deficit in the latest earnings report.

The price of aluminum for delivery in three months on the London Metal Exchange dropped by 11 percent from a year earlier in the second quarter to average $1,583 a metric ton.

In the past decade, a protracted downturn in aluminum prices left Alcoa's smelters struggling to compete as Chinese companies relentlessly boosted output. The price of aluminum has tumbled about 50 percent from a 2008 peak.

Kleinfeld said in September that the largest U.S. aluminum company would split off its smelters, mines and power assets into a stand-alone entity that will keep Alcoa's name. Alumina Ltd., Alcoa's joint-venture partner in Australia, took action in U.S. courts to prevent Alcoa from proceeding with the split without Alumina's consent.

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