Alcoa third-quarter net down; cutting back spending

NEW YORK (Reuters) - Aluminum producer ALCOA (AA.NY)Inc said it was halting major capital projects in the face of uncertain markets, after it posted a lower-than-expected quarterly profit on softer demand in key sectors like the aerospace and auto industries.

Alcoa, among the first major U.S. companies to post third-quarter results as the credit crisis spreads, said the sharp decline in metal prices and falling demand are forcing it to stop "all non-critical capital projects" and make targeted reductions to match market conditions.

The company, which last week announced curtailment of production at its Rockdale, Texas aluminum smelter, reported a 31-percent drop in operating income in its primary metals business and a 36-percent decline in engineered products.

It also had a 47-percent slump in flat-rolled products, blaming "weaker than expected market conditions in North America and Europe" as well as the machinists' strike at Boeing , which uses aluminum to make airplanes.

"We are forecasting all our North American end-markets will decline from 2007," President and Chief Executive Officer Klaus Kleinfeld told Wall Street analysts on a conference call on Tuesday. He noted that North American automobile manufacture would be 14 percent lower than last year and flat in Europe.

"The short-term picture is not promising," he said. "Recently, aluminum prices have fallen steeply and demand has softened further, while input costs remain high.

"The resulting margin squeeze will have a greater impact going forward, but will be somewhat mitigated by the easing of energy prices and a stronger U.S. dollar."

Alcoa's stock, which had fallen 7.7 percent during the day to close at $16.71 on the New York Stock Exchange, dropped 4.2 percent to $16.01 in after-hours trading.

The company also said it would suspend share repurchases.

TIGHTER 2009 CAP EXPENSE BUDGET

"I think this is probably going to be the first of many companies that come out and say something along the lines of what Alcoa did, which is they're taking steps to preserve their cash and just trying to keep their balance sheet strong," said Jonathan Pavlik, portfolio manager at Stewart Capital.

Despite the dismal short-term outlook, Kleinfeld said the longer-term prospects for the industry were good, but that the company had "taken action to conserve cash and maximize profitability through very adverse economic conditions."

"Given the sharp decline in metal prices and increasingly soft demand in our key markets, we are stopping all non-critical capital projects, making targeted reductions to match market conditions, and are adjusting our manufacturing capacity to meet demand."

Chief Financial Officer Chuck McLane said Alcoa was looking at a 2009 capital expense budget of about $1.3 billion to $1.4 billion. It was previously $3 billion.

Alcoa's third-quarter net income fell to $268 million, or 33 cents per share, from $555 million, or 63 cents in the same quarter of 2007, the Pittsburgh-based company said.

Last year's third-quarter earnings included a gain of $218 million on the sale of Alcoa's stake in China's Chalco.

The latest results included costs of 10 cents per share for the curtailment of the Rockdale smelter and the negative impact of currency translations.

Revenue fell to $7.2 billion from $7.4 billion a year earlier, as the price of aluminum dropped 28 percent during the quarter, from $3,375 per ton on July 1 to $2,415 on Sept 30.

Analysts on average were expecting earnings of 50 cents per share and revenue of $7.139 billion, according to Reuters Estimates.

"It's quite disappointing, considering that the estimates were roughly 70 cents in August and have been coming down steadily to roughly 51 cents right before the report," said Brian Hicks, co-manager of the global resources fund at U.S. Global Investors.

"That's a pretty dramatic shortfall. I think it's reflective of how quickly economic conditions seem to be deteriorating. A lot driven by the credit freeze," he said.

(Reporting by Steve James; Editing by Edward Tobin, Carol Bishopric and Bernard Orr)