Alcoa: Downstream Business Gives Star Performance in 1Q 2015



Alcoa’s downstream business

Alcoa’s (AA) downstream business generated after-tax operating income of $191 million in 1Q 2015. This is the downstream business’s highest-ever after-tax operating income. The segment is Alcoa’s most profitable. It produces value-added aluminum products.

Constellium (CSTM) and Kaiser Aluminum (KALU) also produce value-added aluminum products. KALU currently forms 4.2% of the SPDR S&P Metals and Mining ETF (XME). Century Aluminum (CENX) forms 2.5% of XME’s portfolio.

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Firth Rixson

This was the first quarter in which Alcoa consolidated the earnings of Firth Rixson for the entire quarter. Alcoa acquired Firth Rixson, a leading jet engine component manufacturer, for a consideration of $2.85 billion.

Alcoa’s downstream business reported an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 20.1% this quarter, down from 22.2% in 1Q 2014. One of the reasons for the smaller margin was lower profit margins at Firth Rixson.

The segment was also negatively impacted by the strong US dollar (UUP). Currency movement took a $10 million toll on this segment’s profitability, as you can see in the previous chart.

Productivity gains

The segment was negatively impacted by a weaker pricing mix in its fasteners and wheels business. Alcoa also witnessed short-term pricing pressures in the European building construction market. Demand from the aerospace sector, though, continues to be strong.

Alcoa realized $53 million in productivity gains from its downstream operations, which more than offset the negative impact of cost increases.

Alcoa’s earnings have been driven largely by demand from the automobile sector. In the next part of this series, we’ll learn how Alcoa’s automotive shipments shaped up in 1Q 2015.


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