June 26--Alcoa Inc. moved further into the aerospace industry, spending nearly $3 billion for a leading jet-engine component company and advancing its focus on higher profit-margin products.
The aluminum manufacturer said Thursday that the deal for U.K.-based Firth Rixson Ltd. will boost annual aerospace revenue by $800 million, or 20 percent, to about $4.8 billion, as the company continues to turn its focus away from its mining and aluminum smelting roots.
Alcoa shares jumped 2.7 percent, up 39 cents to $14.94, within reach of a three-year high. The New York-based company employs about 2,000 in the Pittsburgh area -- at its corporate operations center on the North Shore, the Alcoa Technical Center in Upper Burrell, and Traco Co., a window manufacturer in Cranberry.
"It really nicely adds into our core jet engine suite," said CEO Klaus Kleinfeld, on a conference call. Fifth Rixson's strength in jet engine rings and forgings, added to Alcoa's position in fasteners, structures and castings, "creates a very compelling full offering ... that's the beauty of this transaction."
"Firth Rixson doubles the Alcoa average engine content in the key programs," Kleinfeld said, calling the deal a "major milestone" in Alcoa's transformation. It will "bring together some of the greatest innovators in jet engine component technology (and) will significantly expand our market leadership and growth potential."
Firth Rixson's revenue is growing twice as fast as the global aerospace market, at about 12 percent a year between 2013 and 2019, Alcoa said. It's revenue is expected to grow 60 percent over the next three years, from $1 billion in 2013 to $1.6 billion.
"It captures growth in the commercial jet and commercial engine market; very, very cool market, 7 percent growth," Kleinfeld said. "I mean, show me other markets where you see that with a nine-year order backlog. That is fantastic."
Alcoa will pay $2.35 billion in cash and $500 million in stock to Firth Rixson's current owner, private equity firm Oak Hill Capital. It also may spend an additional $150 million based on pre-set performance targets.
Firth Rixson has operations in the United States, Asia and Europe.
Josh Sullivan, an analyst with Sterne Agee, said the move is good for Alcoa because it strengthens its position in a growing aerospace sector. The industry already accounted for about $4 billion of the company's $23 billion in overall sales last year, he noted. Alcoa has said it expects the aerospace industry to grow by 8 percent to 9 percent this year.
The acquisition gives the company access to isothermal forging technology that is going into the next generation of aircraft engines, which should prove profitable for Alcoa, Sullivan said.
Isothermally forged parts are increasingly required in jet engines that use higher temperatures to maximize power output, drive fuel efficiency and reduce emissions. Firth Rixson's plant in Savannah, Ga., has a 19,500 ton isothermal press. Alcoa has not invested in the process, Kleinfeld said.
"This isn't just about buying a different portfolio," Sullivan said. "This is an attractive portfolio that brings a broader set of capabilities with high-margin business."
Sullivan said the aluminum side of Alcoa's business also is looking good as automakers look to use the metal.
About 30 percent of new vehicles are rolling off the production line with aluminum hoods. Ford unveiled an aluminum-body 2015 F-150 pickup that has all the power of the original, but weighs up to 700 pounds less. The truck goes on sale this year.
"The whole company is going through a Renaissance. These trends will continue over the next few years," Sullivan said.
In April, the company reported a quarterly loss of $178 million. Aluminum prices haven't recovered since the recession and Alcoa has been idling smelters to reduce capacity and cut costs.
The boards of directors for both companies approved the Firth Rixson deal, which is expected to close by the end of this year.
The Associated Press and Trib Total Media staff writers David Conti and Alex Nixon contributed. John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or [email protected].
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