Let’s look at the 4Q14 earnings of Alcoa’s downstream operations, which are reported under engineered products and services (or EPS). EPS is the most profitable segment for Alcoa and produces value-added aluminum products. Constellium (CSTM) also produces primarily value-added aluminum products. However, mining giants like Rio Tinto (RIO) and BHP Billiton (BHP) don’t have value-added operations.
The focus on value-added products has been a key pillar of Alcoa’s transformation. Alcoa’s share of revenues from value-added products has risen steadily over the past few years. Alcoa (AA) comprises more than 3.5% of the SPDR S&P Metals and Mining ETF (XME).
The above chart illustrates the 4Q14 financial performance of Alcoa’s EPS segment, showing its profits are almost flat on a year-over-year basis. Alcoa’s downward remeasurement of Firth Rixson inventory in accordance with purchase accounting standards created a negative impact of $12 million.
Results below guidance
After-tax operating income (or ATOI) of EPS segment is up by ~5% year-over-year (or Y-o-Y) after excluding the negative impact from Firth Rixson. Alcoa provided guidance of 8–12% growth in ATOI on a Y-o-Y basis. The final results of the EPS segment, which could be due to cost pressures, are below the guidance given by Alcoa. Cost increases contributed to a negative impact of $47 million.
Alcoa delivered a strong overall performance in 4Q14, reflected by its record cash flow. In the next article, we will analyze Alcoa’s 4Q14 cash flow.