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How RTI Metals Fits into Alcoa’s Aerospace Portfolio

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Alcoa’s aerospace portfolio

On July 23, 2015, Alcoa (AA) completed the acquisition of RTI Metals (RTI). In this part, we’ll explore how RTI Metals fits into Alcoa’s aerospace portfolio. Currently, Alcoa forms 2.26% of the Materials Select Sector SPDR ETF (XLB) and 4.4% of the SPDR S&P Metals and Mining ETF (XME).

RTI Metals

RTI Metals is a supplier of titanium and specialty metals products to the aerospace, defense, and energy sectors. RTI Metals fits into Alcoa’s strategy of growing its value-added portfolio and should enhance Alcoa’s portfolio of titanium offerings.

Last year, Alcoa acquired TITAL, which is a privately held German company. TITAL is a leader in titanium and aluminum structural castings for aircraft engines. These acquisitions enhance Alcoa’s presence in advanced jet engine components.

Allegheny Technologies (ATI), and General Electric (GE) are other leading suppliers to the aerospace sector.

Financial impact of RTI Metals

The previous chart shows the financial impact of the RTI Metals acquisition. Alcoa expects RTI to contribute $1.2 million to its 2019 revenues. Currently, RTI’s earnings before interest, taxes, depreciation, and amortization (or EBITDA) margin is 14.5%. Alcoa expects RTI Metals’ EBITDA margin to increase to 25% by 2019.

Alcoa’s Engineered Products division, which produces value-added products, had an EBITDA margin of 21.5% in 2Q15. Alcoa’s EBITDA margins have come down after the Firth Rixson acquisition. Its EBITDA margin in 2Q15 without the inclusion of Firth Rixson was 22.6%. However, Alcoa was able to increase Firth Rixson’s EBITDA margins over the last two quarters.

Alcoa expects RTI Metals to positively contribute to its earnings per share (or EPS) from the third year onward. It also expects to realize synergies of $100 million from this transaction. However, the deal might lead to EPS dilution for the first couple of years.

Alcoa has announced a new organizational structure, which we’ll discuss in detail in the next part.

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