UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2009
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number
001-32312
Novelis Inc.
(Exact name of registrant as
specified in its charter)
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Canada
(State or other jurisdiction
of
incorporation or organization)
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98-0442987
(I.R.S. Employer
Identification Number)
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3399 Peachtree Road NE, Suite 1500,
Atlanta, GA
(Address of principal
executive offices)
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30326
(Zip
Code)
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(404) 814-4200
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 (the Exchange
Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 31, 2009, the registrant had 77,459,658 common
shares outstanding. All of the Registrants outstanding
shares were held indirectly by Hindalco Industries Ltd., the
Registrants parent company.
DOCUMENTS
INCORPORATED BY REFERENCE
None
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET
DATA
This document contains forward-looking statements that are based
on current expectations, estimates, forecasts and projections
about the industry in which we operate, and beliefs and
assumptions made by our management. Such statements include, in
particular, statements about our plans, strategies and prospects
under the headings Item 1. Business,
Item 1A. Risk Factors and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Words such as
expect, anticipate, intend,
plan, believe, seek,
estimate and variations of such words and similar
expressions are intended to identify such forward-looking
statements. Examples of forward-looking statements in this
Annual Report on
Form 10-K
include, but are not limited to, our expectations with respect
to the impact of metal price movements on our financial
performance; our metal price ceiling exposure; the effectiveness
of our hedging programs and controls; and our future borrowing
availability. These statements are based on beliefs and
assumptions of Novelis management, which in turn are based
on currently available information. These statements are not
guarantees of future performance and involve assumptions and
risks and uncertainties that are difficult to predict.
Therefore, actual outcomes and results may differ materially
from what is expressed, implied or forecasted in such
forward-looking statements. We do not intend, and we disclaim
any obligation, to update any forward-looking statements,
whether as a result of new information, future events or
otherwise.
This document also contains information concerning our markets
and products generally, which is forward-looking in nature and
is based on a variety of assumptions regarding the ways in which
these markets and product categories will develop. These
assumptions have been derived from information currently
available to us and to the third party industry analysts quoted
herein. This information includes, but is not limited to,
product shipments and share of production. Actual market results
may differ from those predicted. We do not know what impact any
of these differences may have on our business, our results of
operations, financial condition, and cash flow. Factors that
could cause actual results or outcomes to differ from the
results expressed or implied by forward-looking statements
include, among other things:
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the level of our indebtedness and our ability to generate cash;
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changes in the prices and availability of aluminum (or premiums
associated with such prices) or other materials and raw
materials we use;
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the effect of metal price ceilings in certain of our sales
contracts;
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the capacity and effectiveness of our metal hedging activities,
including our internal used beverage can (UBC) and smelter
hedges;
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relationships with, and financial and operating conditions of,
our customers, suppliers and other stakeholders;
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fluctuations in the supply of, and prices for, energy in the
areas in which we maintain production facilities;
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our ability to access financing to fund current operations and
for future capital requirements;
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changes in interest rates under our Asset Backed Loan (ABL)
Credit Agreement
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continuing obligations and other relationships resulting from
our spin-off from Alcan, Inc.;
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changes in the relative values of various currencies and the
effectiveness of our currency hedging activities;
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factors affecting our operations, such as litigation,
environmental remediation and
clean-up
costs, labor relations and negotiations, breakdown of equipment
and other events;
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economic, regulatory and political factors within the countries
in which we operate or sell our products, including changes in
duties or tariffs;
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competition from other aluminum rolled products producers as
well as from substitute materials such as steel, glass, plastic
and composite materials;
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changes in general economic conditions, including further
deterioration in the global economy;
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our ability to maintain effective internal control over
financial reporting and disclosure controls and procedures in
the future;
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changes in the fair value of derivative instruments;
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cyclical demand and pricing within the principal markets for our
products as well as seasonality in certain of our
customers industries;
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changes in government regulations, particularly those affecting
taxes, climate change, environmental, health or safety
compliance;
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changes in interest rates that have the effect of increasing the
amounts we pay under our principal credit agreement and other
financing agreements; and
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the effect of taxes and changes in tax rates.
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The above list of factors is not exhaustive. These and other
factors are discussed in more detail under Item 1A.
Risk Factors and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
In this Annual Report on
Form 10-K,
unless otherwise specified, the terms we,
our, us, Company,
Novelis and Novelis Group refer to
Novelis Inc., a company incorporated in Canada under the
Canadian Business Corporations Act (CBCA) and its subsidiaries.
References herein to Hindalco refer to Hindalco
Industries Limited. In October 2007, Rio Tinto Group purchased
all of the outstanding shares of Alcan, Inc. References herein
to Alcan refer to Rio Tinto Alcan Inc.
Exchange
Rate Data
We prepare our financial statements in United States (U.S.)
dollars. As of December 31, 2008, the Federal Reserve Bank
of New York ceased the practice of maintaining and publishing
historical exchange rates. From December 31, 2008 onward,
we used the CitiFX Benchmark, published by Citibank, for
exchange rate information published as of 16:00 Greenwich Mean
Time (GMT) (11:00 A.M. Eastern Standard Time).
The following table sets forth exchange rate information
expressed in terms of Canadian dollars per U.S. dollar at
the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York. As noted above, the year ended
March 31, 2009 includes exchange data from Citibank as of
16:00 GMT. The rates set forth below may differ from the actual
rates used in our accounting processes and in the preparation of
our consolidated financial statements.
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Period
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At Period End
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Average Rate(A)
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High
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Low
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Year Ended December 31, 2004
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1.2034
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1.2984
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1.3970
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1.1775
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Year Ended December 31, 2005
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1.1656
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1.2083
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1.2703
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1.1507
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Year Ended December 31, 2006
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1.1652
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1.1310
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1.1726
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1.0955
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Three Months Ended March 31, 2007(B)
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1.1530
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1.1674
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1.1852
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1.1530
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April 1, 2007 Through May 15, 2007(B)
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1.0976
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1.1022
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1.1583
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1.0976
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May 16, 2007 Through March 31, 2008(B)
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1.0275
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1.0180
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1.1028
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0.9168
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Year Ended March 31, 2009
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1.2579
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1.1247
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1.2694
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0.9938
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(A) |
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The average of the 16:00 GMT buying rates on the last day of
each month during the period. |
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See Note 1 Business and Summary of Significant
Accounting Policies (Acquisition of Novelis Common
Stock and Predecessor and Successor Reporting) to our
accompanying consolidated financial statements. |
All dollar figures herein are in U.S. dollars unless
otherwise indicated.
Commonly
Referenced Data
As used in this Annual Report, total shipments
refers to shipments to third parties of aluminum rolled products
as well as ingot shipments, and references to aluminum
rolled products shipments or shipments do not
include ingot shipments. All tonnages are stated in metric
tonnes. One metric tonne is equivalent to 2,204.6 pounds. One
kilotonne (kt) is 1,000 metric tonnes. The term aluminum
rolled products is synonymous with the terms flat
rolled products and FRP commonly used by
manufacturers and third party analysts in our industry.
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PART I
Overview
We are the worlds leading aluminum rolled products
producer based on shipment volume in fiscal 2009, with total
shipments of approximately 2,943 kt in fiscal 2009. We are the
only company of our size and scope focused solely on aluminum
rolled products markets and capable of local supply of
technologically sophisticated aluminum products in all of these
geographic regions. We are also the global leader in the
recycling of used aluminum beverage cans. We had net sales of
approximately $10.2 billion for the year ended
March 31, 2009.
Organization
and Description of Business
Novelis Inc., formed in Canada on September 21, 2004, and
its subsidiaries, is the worlds leading aluminum rolled
products producer based on shipment volume. We produce aluminum
sheet and light gauge products for end-use markets including
construction and industrial, beverage and food cans, foil
products and transportation markets. As of March 31, 2009,
we had operations in 11 countries on four continents: North
America; South America; Asia; and Europe, through 32 operating
plants, one research facility and several market-focused
innovation centers. In addition to aluminum rolling and
recycling, our South American businesses include bauxite mining,
alumina refining, primary aluminum smelting and power generation
facilities that are integrated with our rolling plants in Brazil.
On May 18, 2004, Alcan announced its intention to transfer
its rolled products businesses into a separate company and to
pursue a spin-off of that company to its shareholders. The
spin-off occurred on January 6, 2005, following approval by
Alcans board of directors and shareholders, and legal and
regulatory approvals. Alcan shareholders received one Novelis
common share for every five Alcan common shares held.
Acquisition
of Novelis Common Stock and Predecessor and Successor
Reporting
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary pursuant to a plan
of arrangement (the Arrangement) at a price of $44.93 per share.
The aggregate purchase price for all of the Companys
common shares was $3.4 billion and Hindalco also assumed
$2.8 billion of Novelis debt for a total transaction
value of $6.2 billion. Subsequent to completion of the
Arrangement on May 15, 2007, all of our common shares were
indirectly held by Hindalco.
Our acquisition by Hindalco was recorded in accordance with
Staff Accounting Bulletin No. 103, Push Down Basis
of Accounting Required in Certain Limited Circumstances
(SAB 103). In the accompanying consolidated balance
sheets, the consideration and related costs paid by Hindalco in
connection with the acquisition have been pushed
down to us and have been allocated to the assets acquired
and liabilities assumed in accordance with Financial Accounting
Standards Board (FASB) Statement No. 141, Business
Combinations (FASB 141). Due to the impact of push down
accounting, the Companys consolidated financial statements
and certain note presentations separate the Companys
presentation into two distinct periods to indicate the
application of two different bases of accounting between the
periods presented: (1) the period up to, and including, the
May 15, 2007 acquisition date (labeled
Predecessor) and (2) the period after that date
(labeled Successor). The accompanying consolidated
financial statements include a black line division which
indicates that the Predecessor and Successor reporting entities
shown are not comparable.
Change
in Fiscal Year End
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. Accordingly, these consolidated financial statements
present our financial position as of March 31, 2009 and
2008, and the results of our
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operations, cash flows and changes in shareholders equity
for the year ended March 31, 2009, the periods from
May 16, 2007 through March 31, 2008 and from
April 1, 2007 through May 15, 2007, the three months
ended March 31, 2007 and the year ended December 31,
2006.
Our
Industry
The aluminum rolled products market represents the global supply
of and demand for aluminum sheet, plate and foil produced either
from sheet ingot or continuously cast roll-stock in rolling
mills operated by independent aluminum rolled products producers
and integrated aluminum companies alike.
Aluminum rolled products are semi-finished aluminum products
that constitute the raw material for the manufacture of finished
goods ranging from automotive body panels to household foil.
There are two major types of manufacturing processes for
aluminum rolled products differing mainly in the process used to
achieve the initial stage of processing:
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hot mills that require sheet ingot, a
rectangular slab of aluminum, as starter material; and
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continuous casting mills that can convert
molten metal directly into semi-finished sheet.
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Both processes require subsequent rolling, which we call cold
rolling, and finishing steps such as annealing, coating,
leveling or slitting to achieve the desired thicknesses and
metal properties. Most customers receive shipments in the form
of aluminum coil, a large roll of metal, which can be fed into
their fabrication processes.
There are two sources of input material: (1) primary
aluminum, such as molten metal, re-melt ingot and sheet ingot;
and (2) recycled aluminum, such as recyclable material from
fabrication processes, which we refer to as recycled process
material, used beverage cans (UBCs) and other post-consumer
aluminum.
Primary aluminum can generally be purchased at prices set on the
London Metal Exchange (LME), plus a premium that varies by
geographic region of delivery, form (ingot or molten metal) and
purity.
Recycled aluminum is also an important source of input material.
Aluminum is infinitely recyclable and recycling it requires only
approximately 5% of the energy needed to produce primary
aluminum. As a result, in regions where aluminum is widely used,
manufacturers and customers are active in setting up collection
processes in which UBCs and other recyclable aluminum are
collected for re-melting at purpose-built plants. Manufacturers
may also enter into agreements with customers who return
recycled process material and pay to have it re-melted and
rolled into the same product again.
There has been a long-term industry trend towards lighter gauge
(thinner) rolled products, which we refer to as
downgauging, where customers request products with
similar properties using less metal in order to reduce costs and
weight. For example, aluminum rolled products producers and can
fabricators have continuously developed thinner walled cans with
similar strength as previous generation containers, resulting in
a lower cost per unit. As a result of this trend, aluminum
tonnage across the spectrum of aluminum rolled products, and
particularly for the beverage and food cans end-use market, has
declined on a per unit basis, but actual rolling machine hours
per unit have increased. Because the industry has historically
tracked growth based on aluminum tonnage shipped, we believe the
downgauging trend may contribute to an understatement of the
actual growth of revenue attributable to rolling in some end-use
markets.
End-use
Markets
Aluminum rolled products companies produce and sell a wide range
of aluminum rolled products, which can be grouped into four
end-use markets based upon similarities in end-use applications:
(1) beverage and food cans; (2) construction and
industrial; (3) foil products and (4) transportation.
Within each end-use market, aluminum rolled products are
manufactured with a variety of alloy mixtures; a range of
tempers (hardness), gauges (thickness) and widths; and various
coatings and finishes. Large customers typically have customized
needs resulting in the development of close relationships with
their supplying mills and close technical development
relationships.
Beverage and Food Cans. Beverage cans are the
single largest aluminum rolled products application, accounting
for approximately 23% of total worldwide shipments in the
calendar year ended December 31,
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2008, according to market data from Commodity Research Unit
International Limited (CRU), an independent business analysis
and consultancy group focused on the mining, metals, power,
cables, fertilizer and chemical sectors. Beverage and food cans
is also our largest end-use market, making up 56% and 51% of
total shipments for the years ended March 31, 2009 and
2008, respectively. The recyclability of aluminum cans enables
them to be used, collected, melted and returned to the original
product form many times, unlike steel, paper or polyethylene
terephthalate plastic (PET plastic), which deteriorate with
every iteration of recycling. Aluminum beverage cans also offer
advantages in fabricating efficiency and product shelf life.
Fabricators are able to produce and fill beverage cans at very
high speeds, and non-porous aluminum cans provide longer shelf
life than PET plastic containers. Aluminum cans are light,
stackable and use space efficiently, making them convenient and
cost efficient to ship.
Downgauging and changes in can design help to reduce total costs
on a per can basis and contribute to making aluminum more
competitive with substitute materials.
Beverage can sheet is sold in coil form for the production of
can bodies, ends and tabs. The material can be ordered as
rolled, degreased, pre-lubricated, pre-treated
and/or
lacquered. Typically, can makers define their own specifications
for material to be delivered in terms of alloy, gauge, width and
surface finish.
Other applications in this end-use market include food cans and
screw caps for the beverage industry.
Construction and Industrial. Construction is
the largest application within this end-use market. Aluminum
rolled products developed for the construction industry are
often decorative and non-flammable, offer insulating properties,
are durable and corrosion resistant, and have a high
strength-to-weight
ratio. Aluminum siding, gutters, and downspouts comprise a
significant amount of construction volume. Other applications
include doors, windows, awnings, canopies, facades, roofing and
ceilings.
Aluminums ability to conduct electricity and heat and to
offer corrosion resistance makes it useful in a wide variety of
electronic and industrial applications. Industrial applications
include electronics and communications equipment, process and
electrical machinery and lighting fixtures. Uses of aluminum
rolled products in consumer durables include microwaves, coffee
makers, flat screen televisions, air conditioners, pleasure
boats and cooking utensils.
Another industrial application is lithographic sheet. Print
shops, printing houses and publishing groups use lithographic
sheet to print books, magazines, newspapers and promotional
literature. In order to meet the strict quality requirements of
the end-users, lithographic sheet must meet demanding
metallurgical, surface and flatness specifications.
Foil Products. Aluminum, because of its
relatively light weight, recyclability and formability, has a
wide variety of uses in packaging. Converter foil is very thin
aluminum foil, plain or printed, that is typically laminated to
plastic or paper to form an internal seal for a variety of
packaging applications, including juice boxes, pharmaceuticals,
food pouches, cigarette packaging and lid stock. Customers order
coils of converter foil in a range of thicknesses from 6 microns
to 60 microns.
Household foil includes home and institutional aluminum foil
wrap sold as a branded or generic product. Known in the industry
as packaging foil, it is manufactured in thicknesses ranging
from 11 microns to 23 microns. Container foil is used to produce
semi-rigid containers such as pie plates and take-out food trays
and is usually ordered in a range of thicknesses ranging from 60
microns to 200 microns.
Transportation. Heat exchangers, such as
radiators and air conditioners, are an important application for
aluminum rolled products in the truck and automobile categories
of the transportation end-use market. Original equipment
manufacturers (OEM) also use aluminum sheet with specially
treated surfaces and other specific properties for interior and
exterior applications. Newly developed alloys are being used in
transportation tanks and rigid containers that allow for safer
and more economical transportation of hazardous and corrosive
materials.
There has been recent growth in certain geographic markets in
the use of aluminum rolled products in automotive body panel
applications, including hoods, deck lids, fenders and lift
gates. These uses typically result from co-operative efforts
between aluminum rolled products manufacturers and their
customers that yield tailor-made solutions for specific
requirements in alloy selection, fabrication procedure, surface
quality
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and joining. We believe the recent growth in automotive body
panel applications is due in part to the lighter weight, better
fuel economy and improved emissions performance associated with
these applications.
Aluminum rolled products are also used in aerospace
applications, a segment of the transportation market in which we
are not allowed to compete until January 6, 2010, pursuant
to a non-competition agreement we entered into with Alcan in
connection with the spin-off, as described under the heading
Business Arrangements Between Novelis and
Alcan Non-competition. However,
aerospace-related consumption of aluminum rolled products has
historically represented a relatively small portion of total
aluminum rolled products market shipments.
Aluminum is also used in the construction of ships hulls
and superstructures and passenger rail cars because of its
strength, light weight, formability and corrosion resistance.
Market
Structure
The aluminum rolled products industry is characterized by
economies of scale, significant capital investments required to
achieve and maintain technological capabilities and demanding
customer qualification standards. The service and efficiency
demands of large customers have encouraged consolidation among
suppliers of aluminum rolled products.
While our customers tend to be increasingly global, many
aluminum rolled products tend to be produced and sold on a
regional basis. The regional nature of the markets is influenced
in part by the fact that not all mills are equipped to produce
all types of aluminum rolled products. For instance, only a few
mills in North America, Europe, Asia, and only one mill in South
America produce beverage can body and end stock. In addition,
individual aluminum rolling mills generally supply a limited
range of products for end-use applications, and seek to maximize
profits by producing high volumes of the highest margin mix per
mill hour given available capacity and equipment capabilities.
Certain multi-purpose, common alloy and plate rolled products
are imported into Europe and North America from producers in
emerging markets, such as Brazil, South Africa, Russia and
China. However, at this time we believe that most of these
producers are generally unable to produce flat rolled products
that meet the quality requirements, lead times and
specifications of customers with more demanding applications. In
addition, high freight costs, import duties, inability to take
back recycled aluminum, lack of technical service capabilities
and long lead-times mean that many developing market exporters
are viewed as second-tier suppliers. Therefore, many of our
customers in the Americas, Europe and Asia do not look to
suppliers in these emerging markets for a significant portion of
their requirements.
Competition
The aluminum rolled products market is highly competitive. We
face competition from a number of companies in all of the
geographic regions and end-use markets in which we operate. Our
primary competitors are as follows:
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North America
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Asia
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Alcoa, Inc. (Alcoa)
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Furukawa-Sky Aluminum Corp.
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Aleris International, Inc. (Aleris)
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Sumitomo Light Metal Company, Ltd.
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Arco Aluminium, (a subsidiary of BP plc)
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Southwest Aluminum Co. Ltd.
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Norandal Aluminum
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Kobe Steel Ltd.
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Wise Metal Group LLC
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Alcoa
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Rio Tinto Alcan Inc.
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Europe
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South America
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Hydro A.S.A.
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Companhia Brasileira de Alumínio
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Rio Tinto Alcan Inc.
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Alcoa
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Alcoa
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Aleris
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The factors influencing competition vary by region and end-use
market, but generally we compete on the basis of our value
proposition, including price, product quality, the ability to
meet customers specifications, range of products offered,
lead times, technical support and customer service. In some
end-use markets, competition is also affected by
fabricators requirements that suppliers complete a
qualification process to supply their plants. This process can
be rigorous and may take many months to complete. As a result,
obtaining business from these customers can be a lengthy and
expensive process. However, the ability to obtain and maintain
these qualifications can represent a competitive advantage.
In addition to competition from others within the aluminum
rolled products industry, we, as well as the other aluminum
rolled products manufacturers, face competition from
non-aluminum material producers, as fabricators and end-users
have, in the past, demonstrated a willingness to substitute
other materials for aluminum. In the beverage and food cans
end-use market, aluminum rolled products primary
competitors are glass, PET plastic, and in some regions, steel.
In the transportation end-use market, aluminum rolled products
compete mainly with steel and composites. Aluminum competes with
wood, plastic, cement and steel in building products
applications. Factors affecting competition with substitute
materials include price, ease of manufacture, consumer
preference and performance characteristics.
Key
Factors Affecting Supply and Demand
The following factors have historically affected the supply of
aluminum rolled products:
Production Capacity. As in most manufacturing
industries with high fixed costs, production capacity has the
largest impact on supply in the aluminum rolled products
industry. In the aluminum rolled products industry, the addition
of production capacity requires large capital investments and
significant plant construction or expansion, and typically
requires long lead-time equipment orders.
Alternative Technology. Advances in
technological capabilities allow aluminum rolled products
producers to better align product portfolio and supply with
industry demand. As an example, continuous casting offers the
ability to increase capacity in smaller increments than is
possible with hot mill additions. This enables production
capacity to better adjust to small
year-over-year
increases in demand. However, the continuous casting process
results in the production of a more limited range of products.
Trade. Some trade flows do occur between
regions despite shipping costs, import duties and the need for
localized customer support. Higher value-added, specialty
products such as lithographic sheet and some foils are more
likely to be traded internationally, especially if demand in
certain markets exceeds local supply. With respect to less
technically demanding applications, emerging markets with low
cost inputs may export commodity aluminum rolled products to
larger, more mature markets. Accordingly, regional changes in
supply, such as plant expansions, may have some effect on the
worldwide supply of commodity aluminum rolled products.
The following factors have historically affected the demand for
aluminum rolled products:
Economic Growth. We believe that economic
growth is currently the single largest driver of aluminum rolled
products demand. In mature markets, growth in demand has
typically correlated closely with growth in industrial
production. In emerging markets such as China, growth in demand
typically exceeds industrial production growth largely because
of expanding infrastructures, capital investments and rising
incomes that often accompany economic growth in these markets.
Substitution Trends. Manufacturers
willingness to substitute other materials for aluminum in their
products and competition from substitution materials suppliers
also affect demand. For example, in North America, competition
from PET plastic containers and glass bottles, and changes in
marketing channels and consumer preferences in beverage
containers, have, in recent years, reduced the growth rate of
aluminum can sheet in North America from the high rates
experienced in the 1970s and 1980s. Historically, despite
changes in consumer preferences, North American aluminum
beverage can shipments have remained at approximately
100 billion cans per year since 1994 according to the Can
Manufacturers Institute. For the calendar year ended
December 31, 2008, North American aluminum beverage can
8
shipments have declined by approximately 2.8% to
97.4 billion cans mainly due to a decline in carbonated
soft drinks.
Downgauging. Increasing technological and
asset sophistication has enabled aluminum rolling companies to
offer consistent or even improved product strength using less
material, providing customers with a more cost-effective
product. This continuing trend reduces raw material
requirements, but also effectively increases rolled
products plant utilization rates and reduces available
capacity, because to produce the same number of units requires
more rolling hours to achieve thinner gauges. As utilization
rates increase, revenues rise as pricing tends to be based on
machine hours used rather than on the volume of material rolled.
On balance, we believe that downgauging has maintained or
enhanced overall market economics for both users and producers
of aluminum rolled products.
Seasonality. While demand for certain aluminum
rolled products is affected by seasonal factors, such as
increases in consumption of beer and soft drinks packaged in
aluminum cans and the use of aluminum sheet used in the
construction and industrial end-use market during summer months,
our presence in both the northern and southern hemispheres tends
to dampen the impact of seasonality on our business.
Our
Business Strategy
Our primary objective is to deliver value by being the most
innovative and profitable aluminum rolled products company in
the world. We intend to achieve this objective through the
following areas of focus:
Expand
our global leadership position in can sheet, automotive sheet
and recycling
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Build upon our leadership in these three growth markets where
our global manufacturing footprint is a distinct advantage. In
can stock we are the number one producer in all of our regions,
with continued growth in developing markets such as Asia, South
America and Eastern Europe. The automotive market has great
future potential and Novelis is the only company capable of
producing exterior body sheet in both Europe and North America.
In the recycling business, we are the largest processor of used
beverage cans, recycling approximately 39 billion cans in
fiscal 2009. We are striving to increase the availability of
recycled metal to meet the growing demand for sustainable
packaging.
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Grow
our premium product portfolio
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Improve our product mix and margins by leveraging our assets and
technical capabilities into products and markets that have
higher margins, stability, barriers to entry and growth.
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Grow through the development of innovative products and
processes.
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Drive
constant improvement in our operations as a globally integrated
company
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Drive improvement towards global standards of excellence,
specifically in areas of finance, risk management, procurement,
and manufacturing. Through our business systems, we will achieve
seamless alignment of goals, methods and metrics across the
organization.
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Our
Operating Segments
Due in part to the regional nature of supply and demand of
aluminum rolled products and in order to best serve our
customers, we manage our activities on the basis of geographical
areas and are organized under four operating segments: North
America; Europe; Asia and South America. The following is a
description of our operating segments:
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North America. Headquartered in Cleveland,
Ohio, this segment manufactures aluminum sheet and light gauge
products and operates 11 plants, including two fully dedicated
recycling facilities, in two countries.
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9
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Europe. Headquartered in Zurich, Switzerland,
this segment manufactures aluminum sheet and foil products and
operates 14 plants, including one recycling facility, in six
countries.
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Asia. Headquartered in Seoul, South Korea,
this segment manufactures aluminum sheet and light gauge
products and operates three plants in two countries.
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South America. Headquartered in Sao Paulo,
Brazil, this segment comprises bauxite mining, aluminum smelting
operations, power generation, aluminum sheet and light gauge
products and operates four plants in Brazil.
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The table below shows Net sales and total shipments by segments
as a percentage of our consolidated Net sales and consolidated
total shipments (all amounts in millions, except shipments,
which are in kt). For additional financial information related
to our operating segments, see Note 21 Segment,
Geographical Area and Major Customer Information in the
accompanying consolidated financial statements.
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May 16,
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April 1,
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2007
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2007
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Three Months
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Year Ended
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Through
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Through
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Ended
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Year Ended
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March 31,
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March 31,
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May 15,
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March 31,
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December 31,
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2009
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2008
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2007
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2007
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2006
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Successor
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Successor
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Predecessor
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Predecessor
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Predecessor
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Consolidated
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Net sales(A)
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$
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10,177
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$
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9,965
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$
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1,281
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$
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2,630
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$
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9,849
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Total shipments
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2,943
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2,787
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363
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772
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3,123
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North America
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Net sales
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38.6
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%
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36.6
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%
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34.8
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%
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35.2
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%
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37.5
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%
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Total shipments
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37.6
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%
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37.0
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%
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36.9
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%
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37.0
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%
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39.4
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%
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Europe
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Net sales
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36.4
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%
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38.4
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%
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39.8
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%
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40.2
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%
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36.8
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%
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Total shipments
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34.3
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%
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34.9
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%
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36.4
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%
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37.2
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%
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34.4
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%
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Asia
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Net sales
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15.1
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%
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16.1
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%
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16.9
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%
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15.7
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%
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17.2
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%
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Total shipments
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15.6
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%
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16.9
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%
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16.3
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%
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15.2
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%
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16.5
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%
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South America
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Net sales
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9.9
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%
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8.9
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%
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8.5
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%
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8.9
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%
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8.8
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%
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Total shipments
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12.4
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%
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11.2
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%
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10.4
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%
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10.6
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%
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9.8
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%
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(A) |
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Consolidated Net sales include the results of our
non-consolidated affiliates on a proportionately consolidated
basis, which is consistent with the way we manage our business
segments. These Net sales were $14 million,
$5 million, and $17 million, for the year ended
March 31, 2009, the period from May 16, 2007 through
March 31, 2008 and for the year ended December 31,
2006, respectively. There were less than $1 million of Net
sales from our non-consolidated affiliates in each of the
periods from April 1, 2007 through May 15, 2007, and
the three months ended March 31, 2007. |
We have highly automated, flexible and advanced manufacturing
capabilities in operating facilities around the globe. In
addition to the aluminum rolled products plants, our South
America segment operates bauxite mining, alumina refining,
hydro-electric power plants and smelting facilities. We believe
our facilities have the assets required for efficient production
and are well managed and maintained. For a further discussion of
financial information by geographic area, refer to
Note 21 Segment, Geographical Area and Major
Customer Information to our consolidated financial statements.
North
America
Through 11 aluminum rolled products facilities, including two
fully dedicated recycling facilities as of March 31, 2009,
North America manufactures aluminum sheet and light gauge
products. Important end-use
10
applications for this segment include beverage cans, containers
and packaging, automotive and other transportation applications,
building products and other industrial applications.
The majority of North Americas efforts are directed
towards the beverage can sheet market. The beverage can end-use
application is technically demanding to supply and pricing is
competitive. We believe we have a competitive advantage in this
market due to our low-cost and technologically advanced
manufacturing facilities and technical support capability.
Recycling is important in the manufacturing process and we have
five facilities in North America that re-melt post-consumer
aluminum and recycled process material. Most of the recycled
material is from used beverage cans and the material is cast
into sheet ingot for North Americas two can sheet
production plants (at Logan, Kentucky and Oswego, New York).
In June 2008, we closed our Louisville, Kentucky plant where we
produced light gauge converter foil products.
Europe
Europe produces value-added sheet and foil products through 14
operating plants as of March 31, 2009, including one
recycling facility.
Europe serves a broad range of aluminum rolled product end-use
applications including: construction and industrial; beverage
and food can; foil and technical products; lithographic;
automotive and other. Beverage and food represent the largest
end-use market in terms of shipment volume by Europe.
Europe also has foil packaging facilities at six locations, and
in addition to rolled product plants, has distribution centers
in Italy and France together with sales offices in several
European countries. In April 2009, we closed the distribution
center in France.
In March 2009, we announced the closure of our aluminum sheet
mill in Rogerstone, South Wales, U.K. The facility ceased
operations in April 2009.
Asia
Asia operates three manufacturing facilities as of
March 31, 2009 and manufactures a broad range of sheet and
light gauge products. End-use applications include beverage and
food cans, foil, electronics and construction and industrial
products. The beverage can market represents the largest end-use
application in terms of volume. Recycling is an important part
of our Korean operations with recycling facilities at both the
Ulsan and Yeongju facilities.
We believe that Asia is well-positioned to benefit from further
economic development in China as well as other parts of Asia.
South
America
South America operates two rolling plants, two primary aluminum
smelters, and hydro-electric power plants as of March 31,
2009, all of which are located in Brazil. South America
manufactures various aluminum rolled products, including can
stock, automotive and industrial sheet and light gauge for the
beverage and food can, construction and industrial and
transportation and packaging end-use markets. More than 80% of
our shipments for the past two years were in the beverage and
food can market.
The primary aluminum operations in South America include a mine,
refinery and smelters used by our Brazilian aluminum rolled
products operations, with any excess production being sold on
the market in the form of aluminum billets. South America
generates a portion of its own power requirements.
In May 2009, we ceased the production of alumina at our Ouro
Preto facility in Brazil.
Raw
Materials and Suppliers
The raw materials that we use in manufacturing include primary
aluminum, recycled aluminum, sheet ingot, alloying elements and
grain refiners. Our smelters also use alumina, caustic soda and
calcined petroleum
11
coke and resin. These raw materials are generally available from
several sources and are not generally subject to supply
constraints under normal market conditions. We also consume
considerable amounts of energy in the operation of our
facilities.
Aluminum
We obtain aluminum from a number of sources, including the
following:
Primary Aluminum Sourcing. We purchased or
tolled approximately 1,820 kt of primary aluminum in fiscal 2009
in the form of sheet ingot, standard ingot and molten metal, as
quoted on the London Metal Exchange (LME), approximately 41% of
which we purchased from Rio Tinto Alcan. Following our spin-off
from Alcan, we have continued to purchase aluminum from Alcan
pursuant to the metal supply agreements described under
Item 1. Arrangements Between Novelis and Alcan.
Our primary aluminum contracts with Alcan were renegotiated and
the amended agreements took effect on January 1, 2008.
Primary Aluminum Production. We produced
approximately 103 kt of our own primary aluminum requirements in
fiscal 2009 through our smelter and related facilities in Brazil.
Recycled Aluminum Products. We operate
facilities in several plants to recycle post-consumer aluminum,
such as UBCs collected through recycling programs. In addition,
we have agreements with several of our large customers where we
take recycled processed material from their fabricating activity
and re-melt, cast and roll it to re-supply them with aluminum
sheet. Other sources of recycled material include lithographic
plates, where over 90% of aluminum used is recycled, and
products with longer lifespans, like cars and buildings, which
are just starting to become high volume sources of recycled
material. We purchased or tolled approximately 1,025 kt of
recycled material inputs in fiscal 2009.
The majority of recycled material we re-melt is directed back
through can-stock plants. The net effect of these activities in
terms of total shipments of rolled products is that
approximately 32% of our aluminum rolled products production for
fiscal 2009 was made with recycled material.
Energy
We use several sources of energy in the manufacture and delivery
of our aluminum rolled products. In fiscal 2009, natural gas and
electricity represented approximately 89% of our energy
consumption by cost. We also use fuel oil and transport fuel.
The majority of energy usage occurs at our casting centers, at
our smelters in South America and during the hot rolling of
aluminum. Our cold rolling facilities require relatively less
energy. We purchase our natural gas on the open market, which
subjects us to market pricing fluctuations. We have in the past
and may continue to seek to stabilize our future exposure to
natural gas prices through the purchase of derivative
instruments. Natural gas prices in Europe, Asia and South
America have historically been more stable than in the United
States.
A portion of our electricity requirements are purchased pursuant
to long-term contracts in the local regions in which we operate.
A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs.
Our South America segment has its own hydroelectric facilities
that meet approximately 25% of its total electricity
requirements for smelting operations. As a result of supply
constraints, electricity prices in South America have been
volatile, with spot prices increasing dramatically. We have a
mixture of self-generated electricity, long term fixed contracts
and shorter term semi-variable contracts. Although spot prices
have returned to normal levels, we may continue to face
challenges renewing our South American energy supply contracts
at effective rates to enable profitable operation of our full
smelter capacity.
Others
We also have bauxite and alumina requirements. We will satisfy
some of our alumina requirements for the near term pursuant to
the alumina supply agreement we have entered into with Alcan as
discussed below under Item 1. Arrangements Between
Novelis and Alcan.
12
Our
Customers
Although we provide products to a wide variety of customers in
each of the markets that we serve, we have experienced
consolidation trends among our customers in many of our key
end-use markets. In fiscal 2009, approximately 45% of our total
net sales were to our ten largest customers, most of whom we
have been supplying for more than 20 years. To address
consolidation trends, we focus significant efforts at developing
and maintaining close working relationships with our customers
and end-users. Our major customers include:
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Agfa-Gevaert N.V.
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Daching Holdings Limited
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Alcans packaging business group
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Lotte Aluminum Co. Ltd.
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Anheuser-Busch Companies, Inc.
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Kodak Polychrome Graphics GmbH
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Affiliates of Ball Corporation
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Impress
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BMW Group
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Pactiv Corporation
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Can-Pack S.A.
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Rexam Plc
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Various bottlers of the Coca-Cola system
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Ryerson Inc.
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Crown Cork & Seal Company, Inc.
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Tetra Pak Ltd.
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In our single largest end-use market, beverage can sheet, we
sell directly to beverage makers and bottlers as well as to can
fabricators that sell the cans they produce to bottlers. In
certain cases, we also operate under umbrella agreements with
beverage makers and bottlers under which they direct their can
fabricators to source their requirements for beverage can body,
end and tab stock from us. Among these umbrella agreements is an
agreement, referred to as the CC agreement, with several North
American bottlers of
Coca-Cola
branded products, including
Coca-Cola
Bottlers Sales and Services. Under the CC agreement, we
shipped approximately 352 kt of beverage can sheet (including
tolled metal) during fiscal 2009. These shipments were made to,
and we received payment from, our direct customers, being the
beverage can fabricators that sell beverage cans to the
Coca-Cola
associated bottlers. Under the CC agreement, bottlers in the
Coca-Cola
system may join the CC agreement by committing a specified
percentage of the can sheet required by their can fabricators to
us.
Purchases by Rexam Plc and its affiliates represented
approximately 17%, 15%, 14%, 16%, and 14% of our total net sales
for the year ended March 31, 2009, the period from
May 16, 2007 through March 31, 2008; the period from
April 1, 2007 through May 15, 2007; the three months
ended March 31, 2007; and the year ended December 31,
2006, respectively.
Distribution
and Backlog
We have two principal distribution channels for the end-use
markets in which we operate: direct sales and distributors.
Approximately 93%, 90%, 91%, 89%, and 87% of our total net sales
were derived from direct sales to our customers and
approximately 7%, 10%, 9%, 11%, and 13% of our total net sales
were derived from distributors for the year ended March 31,
2009, the period from May 16, 2007 through March 31,
2008; the period from April 1, 2007 through May 15,
2007; the three months ended March 31, 2007; and the year
ended December 31, 2006, respectively.
Direct
Sales
We supply various end-use markets all over the world through a
direct sales force that operates from individual plants or sales
offices, as well as from regional sales offices in 21 countries.
The direct sales channel typically involves very large,
sophisticated fabricators and original equipment manufacturers.
Longstanding relationships are maintained with leading companies
in industries that use aluminum rolled products. Supply
contracts for large global customers generally range from one to
five years in length and historically there has been a high
degree of renewal business with these customers. Given the
customized nature of products and in some cases, large order
sizes, switching costs are significant, thus adding to the
overall consistency of the customer base.
13
We also use third party agents or traders in some regions to
complement our own sales force. They provide service to our
customers in countries where we do not have local expertise. We
tend to use third party agents in Asia more frequently than in
other regions.
Distributors
We also sell our products through aluminum distributors,
particularly in North America and Europe. Customers of
distributors are widely dispersed, and sales through this
channel are highly fragmented. Distributors sell mostly
commodity or less specialized products into many end-use markets
in small quantities, including the construction and industrial
and transportation markets. We collaborate with our distributors
to develop new end-use applications and improve the supply chain
and order efficiencies.
Backlog
We believe that order backlog is not a material aspect of our
business.
Research
and Development
The table below summarizes our research and development expense
in our plants and modern research facilities, which included
mini-scale production lines equipped with hot mills, can lines
and continuous casters (in millions).
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May 16,
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April 1,
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Three
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2007
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2007
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Months
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Year Ended
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Through
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Through
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Ended
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Year Ended
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March 31,
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March 31,
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May 15,
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March 31,
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December 31,
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2009
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2008
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2007
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2007
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2006
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Successor
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Successor
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Predecessor
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Predecessor
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Predecessor
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Research and development expenses
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$
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41
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$
|
46
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$
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6
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$
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8
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$
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40
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We conduct research and development activities at our plants in
order to satisfy current and future customer requirements,
improve our products and reduce our conversion costs. Our
customers work closely with our research and development
professionals to improve their production processes and market
options. We have approximately 200 employees dedicated to
research and development, located in many of our plants and
research center.
Our
Employees
As of March 31, 2009, we had approximately
12,300 employees. Approximately 5,800 are employed in
Europe, approximately 3,000 are employed in North America,
approximately 1,500 are employed in Asia and approximately 2,000
are employed in South America and other areas. Approximately 70%
of our employees are represented by labor unions and their
employment conditions are governed by collective bargaining
agreements. Collective bargaining agreements are negotiated on a
site, regional or national level, and are of different
durations. We believe that we have good labor relations in all
our operations and have not experienced a significant labor
stoppage in any of our principal operations during the last
decade.
Intellectual
Property
In connection with our spin-off, Alcan has assigned or licensed
to us a number of important patents, trademarks and other
intellectual property rights owned or previously owned by Alcan
and required for our business. Ownership of certain intellectual
property that is used by both us and Alcan is owned by one of
us, and licensed to the other. Certain specific intellectual
property rights, which have been determined to be exclusively
useful to us or which were required to be transferred to us for
regulatory reasons, have been assigned to us with no license
back to Alcan.
We actively review intellectual property arising from our
operations and our research and development activities and, when
appropriate, we apply for patents in the appropriate
jurisdictions, including the United States and Canada. We
currently hold patents and patent applications on approximately
190 different items of
14
intellectual property. While these patents and patent
applications are important to our business on an aggregate
basis, no single patent or patent application is deemed to be
material to our business.
We have applied for or received registrations for the
Novelis word trademark and the Novelis logo
trademark in approximately 50 countries where we have
significant sales or operations. Novelis uses the Aditya Birla
Rising Sun logo under license from Aditya Birla Management
Corporation Private Limited.
We have also registered the word Novelis and several
derivations thereof as domain names in numerous top level
domains around the world to protect our presence on the World
Wide Web.
Environment,
Health and Safety
We own and operate numerous manufacturing and other facilities
in various countries around the world. Our operations are
subject to environmental laws and regulations from various
jurisdictions, which govern, among other things, air emissions,
wastewater discharges, the handling, storage and disposal of
hazardous substances and wastes, the remediation of contaminated
sites, post-mining reclamation and restoration of natural
resources, and employee health and safety. Future environmental
regulations may be expected to impose stricter compliance
requirements on the industries in which we operate. Additional
equipment or process changes at some of our facilities may be
needed to meet future requirements. The cost of meeting these
requirements may be significant. Failure to comply with such
laws and regulations could subject us to administrative, civil
or criminal penalties, obligations to pay damages or other
costs, and injunctions and other orders, including orders to
cease operations.
We are involved in proceedings under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, also
known as CERCLA or Superfund, or analogous state provisions
regarding our liability arising from the usage, storage,
treatment or disposal of hazardous substances and wastes at a
number of sites in the United States, as well as similar
proceedings under the laws and regulations of the other
jurisdictions in which we have operations, including Brazil and
certain countries in the European Union. Many of these
jurisdictions have laws that impose joint and several liability,
without regard to fault or the legality of the original conduct,
for the costs of environmental remediation, natural resource
damages, third party claims, and other expenses. In addition, we
are, from time to time, subject to environmental reviews and
investigations by relevant governmental authorities.
We have established procedures for regularly evaluating
environmental loss contingencies, including those arising from
environmental reviews and investigations and any other
environmental remediation or compliance matters. We believe we
have a reasonable basis for evaluating these environmental loss
contingencies, and we also believe we have made reasonable
estimates for the costs that are likely to be ultimately borne
by us for these environmental loss contingencies. Accordingly,
we have established reserves based on our reasonable estimates
for the currently anticipated costs associated with these
environmental matters. Management has determined that the
currently anticipated costs associated with these environmental
matters will not, individually or in the aggregate, materially
impair our operations or materially adversely affect our
financial condition.
We expect that our total expenditures for capital improvements
regarding environmental control facilities for the year ending
March 31, 2010 will be approximately $12 million.
Arrangements
Between Novelis and Alcan
In connection with our spin-off from Alcan, we entered into a
number of ancillary agreements with Alcan governing certain
terms of our spin-off as well as various aspects of our
relationship with Alcan following the spin-off. These ancillary
agreements include:
Transitional Services and Similar
Agreements. Pursuant to a collection of
approximately 130 individual transitional services agreements,
Alcan has provided to us and we have provided to Alcan, as
applicable, on an interim, transitional basis, various services,
including, but not limited to, treasury administration, selected
benefits administration functions, employee compensation and
information technology services. The agreed upon charges for
these services generally allow us or Alcan, as
15
applicable, to recover fully the allocated costs of providing
the services, plus all
out-of-pocket
costs and expenses plus a margin of five percent. No margin is
added to the cost of services supplied by external suppliers.
The majority of the individual service agreements, which began
on the spin-off date, terminated on or prior to
December 31, 2005. However, we had a continuing agreement
with Alcan through 2008 to use certain information technology
hosting services to support our financial accounting systems for
the Nachterstedt and Goettingen plants.
Metal Supply Agreements. We and Alcan have
entered into four multi-year metal supply agreements pursuant to
which Alcan supplies us with specified quantities of re-melt
ingot, molten metal and sheet ingot in North America and Europe
on terms and conditions determined primarily by Alcan. We
believe these agreements provide us with the ability to cover
some metal requirements through a pricing formula pursuant to
our spin-off agreement with Alcan. In addition, an ingot supply
agreement in effect between Alcan and Novelis Korea Ltd. prior
to the spin-off remains in effect following the spin-off.
On February 26, 2008, we and Alcan agreed to amend and
restate four existing multi-year metal supply agreements, which
took effect as of January 1, 2008.
The amended and restated metal supply agreement for the supply
of re-melt aluminum ingot amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of remelt ingot to be supplied and purchased subject to
adjustment, establishes certain delivery requirements, changes
certain pricing provisions, and revises certain payment terms,
among other standard terms and conditions.
The amended and restated molten metal supply agreement for the
supply of molten metal to the Companys Saguenay Works
Facility amends and restates the supply agreement dated
January 5, 2005 between the parties. This amended agreement
changes certain pricing provisions, and revises certain payment
terms, among other standard terms and conditions.
The amended and restated metal supply agreement for the supply
of sheet ingot in North America amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of sheet ingot to be supplied and purchased subject to
adjustment, changes certain pricing provisions, and revises
certain payment terms, among other standard terms and conditions.
The amended and restated metal supply agreement for the supply
of sheet ingot in Europe amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of sheet ingot to be supplied and purchased subject to
adjustment, and changes certain pricing provisions, among other
standard terms and conditions.
Foil Supply Agreements. In 2005, we entered
into foil supply agreements with Alcan for the supply of foil
from our facilities located in Norf, Ludenscheid and Ohle,
Germany to Alcans packaging facility located in Rorschach,
Switzerland as well as from our facilities located in Utinga,
Brazil to Alcans packaging facility located in Maua,
Brazil. These agreements are for five-year terms during the
course of which we will supply specified percentages of
Alcans requirements for its facilities described above (in
the case of Alcans Rorschach facility, 94% in 2006, 93% in
2007, 92% in 2008 and 90% in 2009, and in the case of
Alcans Maua facility, 70%). In addition, we will continue
to supply certain of Alcans European operations with foil
under the terms of two agreements that were in effect prior to
the spin-off.
Alumina Supply Agreements. We have entered
into a ten-year alumina supply agreement with Alcan pursuant to
which we purchase from Alcan, and Alcan supplies to us, alumina
for our primary aluminum smelter located in Aratu, Brazil. The
annual quantity of alumina to be supplied under this agreement
is between 85 kt and 126 kt. In addition, an alumina supply
agreement between Alcan and Novelis Deutschland GmbH that was in
effect prior to the spin-off remains in effect following the
spin-off.
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Available
Information
We are subject to the reporting and information requirements of
the Securities Exchange Act of 1934, as amended (Exchange Act)
and, as a result, we file periodic reports and other information
with the SEC. We make these filings available on our website
free of charge, the URL of which is
http://www.novelis.com,
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. The SEC maintains
a website
(http://www.sec.gov)
that contains our annual, quarterly and current reports and
other information we file electronically with the SEC. You can
read and copy any materials we file with the SEC at the
SECs Public Reference Room at 100 F Street,
N.E., Room 1850, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
Information on our website does not constitute part of this
Annual Report on
Form 10-K.
Risks
Related to our Business and the Market Environment
Economic
conditions could continue to materially adversely affect our
financial condition, results of operations, and
liquidity.
Our financial condition and results of operations depend
significantly on worldwide economic conditions. These economic
conditions have recently deteriorated significantly in many
countries and regions in which we do business, and may remain
depressed for the foreseeable future. Uncertainty about current
global economic conditions poses a risk as our customers may
postpone purchases in response to tighter credit and negative
financial news, which could adversely impact demand for our
products. These and other economic factors have, and may
continue to have, a significant impact on our financial
condition and results of operations.
The current financial turmoil affecting the banking system and
financial markets and the possibility that additional financial
institutions may consolidate or go out of business has resulted
in a tightening in the credit markets, a low level of liquidity
in many financial markets, and extreme volatility in fixed
income, credit, currency and equity markets. There could be a
number of follow-on effects from the credit crisis on our
business, including the insolvency of key suppliers or their
inability to obtain credit to finance development
and/or
manufacture products resulting in product delays and the
inability of customers to purchase our products or pay for
products they have already received. If conditions become more
severe or continue longer than we anticipate, or if we are
unable to adequately respond to unforeseeable changes in demand
resulting from economic conditions, our financial condition and
results of operations may be materially adversely affected.
The deterioration of global economic conditions combined with
rapidly declining aluminum prices from a peak of $3,292 per
tonne in July 2008 to $1,365 per tonne on March 31, 2009
have placed pressure on our short-term liquidity. In the near
term, our forecast indicates our liquidity position will be
tight, but adequate as we settle outstanding derivative
positions. However, our liquidity needs could increase due to
the unpredictability of current market conditions and their
potential effect on customer credit, future derivative
settlements, future sales volume, our credit, or other matters.
As a result, management has undertaken a number of activities to
generate cash in the near term as well as implement changes in
our cost structure that will benefit our liquidity in the
long-term.
In addition, we use various derivative instruments to manage the
risks arising from fluctuations in exchange rates, interest
rates, aluminum prices and energy prices. The current financial
turmoil affecting the banking system and financial markets could
affect whether the counterparties to our derivative instruments
are able to honor their agreements. We may be exposed to losses
in the future if the counterparties to our derivative
instruments fail to honor their agreements. Our maximum
potential loss may exceed the amount recognized in the
accompanying March 31, 2009 consolidated balance sheet.
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Certain
of our customers are significant to our revenues, and we could
be adversely affected by changes in the business or financial
condition of these significant customers or by the loss of their
business.
Our ten largest customers accounted for approximately 45%, 45%,
47%, 43% and 43% of our total net sales for the year ended
March 31, 2009; the period from May 16, 2007 through
March 31, 2008; the period from April 1, 2007 to
May 15, 2007; the three months ended March 31, 2007;
and the year ended December 31, 2006, respectively, with
Rexam Plc and its affiliates representing approximately 17%,
15%, 14%, 16% and 14% of our total net sales in the respective
periods. A significant downturn in the business or financial
condition of our significant customers could materially
adversely affect our results of operations or cash flows. In
addition, if our existing relationships with significant
customers materially deteriorate or are terminated in the
future, and we are not successful in replacing business lost
from such customers, our results of operations or cash flows
could be adversely affected. Some of the longer term contracts
under which we supply our customers, including under umbrella
agreements such as those described under Item 1.
Business Our Customers, are subject to
renewal, renegotiation or re-pricing at periodic intervals or
upon changes in competitive supply conditions. Our failure to
successfully renew, renegotiate or re-price such agreements
could result in a reduction or loss in customer purchase volume
or revenue, and if we are not successful in replacing business
lost from such customers, our results of operations or cash
flows could be adversely affected. The markets in which we
operate are competitive and customers may seek to consolidate
supplier relationships or change suppliers to obtain cost
savings and other benefits.
Our
profitability or cash flows could be adversely affected by our
inability to pass through metal price increases due to metal
price ceilings in certain of our sales contracts.
Prices for metal are volatile, have been impacted by recent
structural changes in the market, and may increase from time to
time. Nearly all of our products have a price structure with two
components: (i) a pass-through aluminum price based on the
LME plus local market premiums and (ii) a conversion
premium price based on the conversion cost to produce the
rolled product and the competitive market conditions for that
product. Sales contracts representing 257 kt and 300 kt of our
fiscal 2009 and 2008 shipments, respectively, contained a
ceiling over which metal prices could not be contractually
passed through to certain customers, unless adjusted. This
negatively impacted our margins and operating cash flows when
the price we paid for metal was above the ceiling price
contained in these contracts. We calculate and report this
difference to be approximately the difference between the quoted
purchase price on the LME (adjusted for any local premiums and
for any price lag associated with purchasing or processing time)
and the metal price ceiling in our contracts. Cash flows from
operations are negatively impacted by the same amounts, adjusted
for any timing difference between customer receipts and vendor
payments, and offset partially by reduced income taxes.
During the years ended March 31, 2009, 2008 and 2007, we
were unable to pass through approximately $176 million,
$230 million and $460 million, respectively, of metal
purchase costs associated with sales under these contracts. As a
result of falling LME prices and based on a March 31, 2009
aluminum price of $1,365 per tonne, there is no unfavorable
revenue or cash flow impact estimated through December 31,
2009 when these contracts expire. However, if metal prices
increase above the metal price ceiling, our margins and
operating cash flows will be negatively impacted.
Our
efforts to mitigate the risk of rising metal prices may not be
effective.
We employ the following strategies to manage and mitigate the
risk associated with metal price ceilings and rising prices that
we cannot pass through to certain customers:
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We maximize the amount of our internally supplied metal inputs
from our smelting, refining and mining operations in Brazil and
rely on output from our recycling operations which utilize used
beverage cans (UBCs). Both of these sources of aluminum supply
have historically provided an offsetting benefit to the metal
price ceiling contracts. We refer to these two sources as
internal hedges.
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We entered into derivative instruments to hedge projected
aluminum volume requirements above our assumed internal hedge
position mitigating our exposure to further increases in LME. As
a result of
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these instruments, we will continue to incur cash losses related
to these contracts even if LME remains below the ceiling price.
As of March 31, 2009 the fair value of the liability
associated with these derivative instruments was
$141 million.
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Our
results and cash flows can be negatively impacted by timing
differences between the prices we pay under purchase contracts
and metal prices we charge our customers.
In some of our contracts there is a timing difference between
the metal prices we pay under our purchase contracts and the
metal prices we charge our customers. As a result, changes in
metal prices impact our results, since during such periods we
bear the additional cost or benefit of metal price changes,
which could have a material effect on our profitability and cash
flows.
Our
operations consume energy and our profitability or cash flows
may decline if energy costs were to rise, or if our energy
supplies were interrupted.
We consume substantial amounts of energy in our rolling
operations, our cast house operations and our Brazilian smelting
operations. The factors that affect our energy costs and supply
reliability tend to be specific to each of our facilities. A
number of factors could materially adversely affect our energy
position including:
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increases in costs of natural gas;
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significant increases in costs of supplied electricity or fuel
oil related to transportation;
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interruptions in energy supply due to equipment failure or other
causes;
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the inability to extend energy supply contracts upon expiration
on economical terms; and
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the inability to pass through energy costs in certain sales
contracts.
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If energy costs were to rise, or if energy supplies or supply
arrangements were disrupted, our profitability or cash flows
could decline.
We may
not have sufficient cash to repay indebtedness and we may be
limited in our ability to access financing for future capital
requirements, which may prevent us from increasing our
manufacturing capability, improving our technology or addressing
any gaps in our product offerings.
Although historically our cash flow from operations has been
sufficient to repay indebtedness, satisfy working capital
requirements and fund capital expenditure and research and
development requirements, in the future we may need to incur
additional debt or issue equity in order to fund these
requirements as well as to make acquisitions and other
investments. To the extent we are unable to raise new capital,
we may be unable to increase our manufacturing capability,
improve our technology or address any gaps in our product
offerings. If we raise funds through the issuance of debt or
equity, any debt securities or preferred shares issued may have
rights and preferences and privileges senior to those of our
common shares. The terms of the debt securities may impose
restrictions on our operations that have an adverse impact on
our financial condition.
Our
substantial indebtedness could adversely affect our business and
therefore make it more difficult for us to fulfill our
obligations under our Credit Agreements and our Senior
Notes.
On July 6, 2007, we entered into new senior secured credit
facilities (Credit Agreements) providing for aggregate
borrowings of up to $1.76 billion. The Credit Agreements
consist of (1) a $960 million seven-year Term Loan
facility (Term Loan facility) and (2) an $800 million
five year multi-currency asset-based revolving credit line and
letter of credit facility (ABL facility). As of March 31,
2009, we had total indebtedness of $2.8 billion, including
our $1.1 billion of senior unsecured debt securities
(Senior Notes) (excluding unamortized fair value adjustments
recorded as a result of the Arrangement). Our substantial
indebtedness and
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interest expense could have important consequences to our
Company and holders of our Senior Notes, including:
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limiting our ability to borrow additional amounts for working
capital, capital expenditures, debt service requirements,
execution of our growth strategy, or other general corporate
purposes;
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limiting our ability to use operating cash flow in other areas
of our business because we must dedicate a substantial portion
of these funds to service the debt;
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increasing our vulnerability to general adverse economic and
industry conditions;
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placing us at a competitive disadvantage as compared to our
competitors that have less leverage;
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limiting our ability to capitalize on business opportunities and
to react to competitive pressures and adverse changes in
government regulation;
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limiting our ability or increasing the costs to refinance
indebtedness; and
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limiting our ability to enter into marketing, hedging,
optimization and trading transactions by reducing the number of
counterparties with whom we can enter into such transactions as
well as the volume of those transactions.
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The
covenants in our Credit Agreements and the indenture governing
our Senior Notes impose significant operating and financial
restrictions on us.
The Credit Agreements and the indenture governing the Senior
Notes impose significant operating and financial restrictions on
us. These restrictions limit our ability and the ability of our
restricted subsidiaries, among other things, to:
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incur additional debt and provide additional guarantees;
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pay dividends beyond certain amounts and make other restricted
payments;
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create or permit certain liens;
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make certain asset sales;
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use the proceeds from the sales of assets and subsidiary stock;
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create or permit restrictions on the ability of our restricted
subsidiaries to pay dividends or make other distributions to us;
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engage in certain transactions with affiliates;
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enter into sale and leaseback transactions;
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designate subsidiaries as unrestricted subsidiaries; and
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consolidate, merge or transfer all or substantially all of our
assets or the assets of our restricted subsidiaries.
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The Credit Agreements also contains various affirmative
covenants, with which we are required to comply.
Although we currently expect to comply with these covenants, we
may be unable to comply with these covenants in the future. If
we do not comply with these covenants and are unable to obtain
waivers from our lenders, we would be unable to make additional
borrowings under these facilities, our indebtedness under these
agreements would be in default and could be accelerated by our
lenders and could cause a cross-default under our other
indebtedness, including our Senior Notes. If our indebtedness is
accelerated, we may not be able to repay our indebtedness or
borrow sufficient funds to refinance it. In addition, if we
incur additional debt in the future, we may be subject to
additional covenants, which may be more restrictive than those
that we are subject to now.
20
A
deterioration of our financial position or a downgrade of our
ratings by a credit rating agency could increase our borrowing
costs and our business relationships could be adversely
affected.
A deterioration of our financial position or a downgrade of our
ratings for any reason could increase our borrowing costs and
have an adverse effect on our business relationships with
customers, suppliers and hedging counterparties. From time to
time, we enter into various forms of hedging activities against
currency or metal price fluctuations and trade metal contracts
on the LME. Financial strength and credit ratings are important
to the availability and pricing of these hedging and trading
activities. As a result, any downgrade of our credit ratings may
make it more costly for us to engage in these activities, and
changes to our level of indebtedness may make it more difficult
or costly for us to engage in these activities in the future.
Adverse
changes in currency exchange rates could negatively affect our
financial results or cash flows and the competitiveness of our
aluminum rolled products relative to other
materials.
Our businesses and operations are exposed to the effects of
changes in the exchange rates of the U.S. dollar, the euro,
the British pound, the Brazilian real, the Canadian dollar, the
Korean won and other currencies. We have implemented a hedging
policy that attempts to manage currency exchange rate risks to
an acceptable level based on our managements judgment of
the appropriate trade-off between risk, opportunity and cost;
however, this hedging policy may not successfully or completely
eliminate the effects of currency exchange rate fluctuations
which could have a material adverse effect on our financial
results or cash flows.
We prepare our consolidated financial statements in
U.S. dollars, but a portion of our earnings and
expenditures are denominated in other currencies, primarily the
euro, the Korean won and the Brazilian real. Changes in exchange
rates will result in increases or decreases in our reported
costs and earnings, and may also affect the book value of our
assets located outside the U.S.
Most
of our facilities are staffed by a unionized workforce, and
union disputes and other employee relations issues could
materially adversely affect our financial results.
Approximately 70% of our employees are represented by labor
unions under a large number of collective bargaining agreements
with varying durations and expiration dates. We may not be able
to satisfactorily renegotiate our collective bargaining
agreements when they expire. In addition, existing collective
bargaining agreements may not prevent a strike or work stoppage
at our facilities in the future, and any such work stoppage
could have a material adverse effect on our financial results.
Our
operations have been and will continue to be exposed to various
business and other risks, changes in conditions and events
beyond our control in countries where we have operations or sell
products.
We are, and will continue to be, subject to financial,
political, economic and business risks in connection with our
global operations. We have made investments and carry on
production activities in various emerging markets, including
Brazil, Korea and Malaysia, and we market our products in these
countries, as well as China and certain other countries in Asia,
the Middle East and emerging markets in South America. While we
anticipate higher growth or attractive production opportunities
from these emerging markets, they also present a higher degree
of risk than more developed markets. In addition to the business
risks inherent in developing and servicing new markets, economic
conditions may be more volatile, legal and regulatory systems
less developed and predictable, and the possibility of various
types of adverse governmental action more pronounced. In
addition, inflation, fluctuations in currency and interest
rates, competitive factors, civil unrest and labor problems
could affect our revenues, expenses and results of operations.
Our operations could also be adversely affected by acts of war,
terrorism or the threat of any of these events as well as
government actions such as controls on imports, exports and
prices, tariffs, new forms of taxation, or changes in fiscal
regimes and increased government regulation in the countries in
which we operate or service customers. Unexpected or
uncontrollable events or circumstances in any of these markets
could have a material adverse effect on our financial results or
cash flows.
21
We
could be adversely affected by disruptions of our
operations.
Breakdown of equipment or other events, including catastrophic
events such as war or natural disasters, leading to production
interruptions in our plants could have a material adverse effect
on our financial results or cash flows. Further, because many of
our customers are, to varying degrees, dependent on planned
deliveries from our plants, those customers that have to
reschedule their own production due to our missed deliveries
could pursue financial claims against us. We may incur costs to
correct any of these problems, in addition to facing claims from
customers. Further, our reputation among actual and potential
customers may be harmed, resulting in a loss of business. While
we maintain insurance policies covering, among other things,
physical damage, business interruptions and product liability,
these policies may not cover all of our losses.
We may
not be able to successfully develop and implement new technology
initiatives in a timely manner.
We have invested in, and are involved with, a number of
technology and process initiatives. Several technical aspects of
these initiatives are still unproven and the eventual commercial
outcomes cannot be assessed with any certainty. Even if we are
successful with these initiatives, we may not be able to deploy
them in a timely fashion. Accordingly, the costs and benefits
from our investments in new technologies and the consequent
effects on our financial results may vary from present
expectations.
If we
fail to establish and maintain effective internal control over
financial reporting, we may have material misstatements in our
financial statements and we may not be able to report our
financial results in a timely manner.
In conjunction with this Annual Report on
Form 10-K
for the year ended March 31, 2009 and under the
authorization and direction of our Audit Committee, management
has assessed the effectiveness of the Companys internal
control over financial reporting as of March 31, 2009 and
determined that a material weakness relating to the application
of purchase accounting for an equity method investee including
related income tax accounts has been identified.
Loss
of our key management and other personnel, or an inability to
attract such management and other personnel, could adversely
impact our business.
We depend on our senior executive officers and other key
personnel to run our business. The loss of any of these officers
or other key personnel could materially adversely affect our
operations. Competition for qualified employees among companies
that rely heavily on engineering and technology is intense, and
the loss of qualified employees or an inability to attract,
retain and motivate additional highly skilled employees required
for the operation and expansion of our business could hinder our
ability to improve manufacturing operations, conduct research
activities successfully and develop marketable products.
Past
and future acquisitions or divestitures may adversely affect our
financial condition.
Historically, we have grown partly through the acquisition of
other businesses, including businesses acquired by Alcan in its
2000 acquisition of the Alusuisse Group Ltd. and its 2003
acquisition of Pechiney, both of which were integrated aluminum
companies. As part of our strategy for growth, we may continue
to pursue acquisitions, divestitures or strategic alliances,
which may not be completed or, if completed, may not be
ultimately beneficial to us. There are numerous risks commonly
encountered in business combinations, including the risk that we
may not be able to complete a transaction that has been
announced, effectively integrate businesses acquired or generate
the cost savings and synergies anticipated. Failure to do so
could have a material adverse effect on our financial results.
We
could be required to make unexpected contributions to our
defined benefit pension plans as a result of adverse changes in
interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit
pension plans for our employees in the U.S., the U.K. and
Canada, unfunded pension benefits in Germany, and lump sum
indemnities payable to our employees in France, Italy, Korea and
Malaysia upon retirement or termination. Our pension plan assets
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consist primarily of funds invested in listed stocks and bonds.
Our estimates of liabilities and expenses for pensions and other
postretirement benefits incorporate a number of assumptions,
including expected long-term rates of return on plan assets and
interest rates used to discount future benefits. Our results of
operations, liquidity or shareholders equity in a
particular period could be adversely affected by capital market
returns that are less than their assumed long-term rate of
return or a decline of the rate used to discount future benefits.
If the assets of our pension plans do not achieve assumed
investment returns for any period, such deficiency could result
in one or more charges against our earnings for that period. In
addition, changing economic conditions, poor pension investment
returns or other factors may require us to make unexpected cash
contributions to the pension plans in the future, preventing the
use of such cash for other purposes.
We
face risks relating to certain joint ventures and subsidiaries
that we do not entirely control. Our ability to generate cash
from these entities may be more restricted than if such entities
were wholly-owned subsidiaries.
Some of our activities are, and will in the future be, conducted
through entities that we do not entirely control or wholly own.
These entities include our Norf, Germany and Logan, Kentucky
joint ventures, as well as our majority-owned Korean and
Malaysian subsidiaries. Our Malaysian subsidiary is a public
company whose shares are listed for trading on the Bursa
Malaysia Securities Berhad. Under the governing documents or
agreements of securities laws applicable to or stock exchange
listing rules relative to certain of these joint ventures and
subsidiaries, our ability to fully control certain operational
matters may be limited. In addition, we do not solely determine
certain key matters, such as the timing and amount of cash
distributions from these entities. As a result, our ability to
generate cash from these entities may be more restricted than if
they were wholly-owned entities.
We
have supply agreements with Alcan for a portion of our raw
materials requirements. If Alcan is unable to deliver sufficient
quantities of these materials or if it terminates these
agreements, our ability to manufacture products on a timely
basis could be adversely affected.
The manufacture of our products requires sheet ingot that has
historically been, in part, supplied by Alcan. For the year
ended March 31, 2009, we purchased the majority of our
third party sheet ingot requirements from Alcans primary
metal group. In connection with the spin-off, we entered into
metal supply agreements with Alcan upon terms and conditions
substantially similar to market terms and conditions for the
continued purchase of sheet ingot from Alcan, which were amended
in March 2008. If Alcan is unable to deliver sufficient
quantities of this material on a timely basis or if Alcan
terminates one or more of these agreements, our production may
be disrupted and our net sales, profitability and cash flows
could be materially adversely affected. Although aluminum is
traded on the world markets, developing alternative suppliers
for that portion of our raw material requirements we expect to
be supplied by Alcan could be time consuming and expensive.
Our continuous casting operations at our Saguenay Works, Canada
facility depend upon a local supply of molten aluminum from
Alcan. For the fiscal year ended March 31, 2009,
Alcans primary metal group supplied 863 kt of such
material to us, representing approximately 20% of the molten
aluminum used at Saguenay Works. In connection with the
spin-off, we entered into a metal supply agreement on terms
determined primarily by Alcan for the continued purchase of
molten aluminum from Alcan. If this supply were to be disrupted,
our Saguenay Works production could be interrupted and our net
sales, profitability and cash flows materially adversely
affected.
We may
lose key rights if a change in control of our voting shares were
to occur.
Our separation agreement with Alcan provides that if we
experience a change in control in our voting shares during the
five years following the spin-off and if the entity acquiring
control does not refrain from using the Novelis assets to
compete against Alcan in the plate and aerospace products
markets, Alcan may terminate any or all of certain agreements we
currently have with Alcan. Hindalco delivered the requisite
23
non-compete
agreement to Alcan on June 14, 2007, following its
acquisition of our common shares. However, if Hindalco were to
sell its controlling interest in Novelis before January 6,
2010, a new acquirer would be required to provide a similar
agreement.
The termination of any of these agreements could deprive any
potential acquirer of certain services, resources or rights
necessary to the conduct of our business. Replacement of these
assets could be difficult or impossible, resulting in a material
adverse effect on our business operations, net sales,
profitability and cash flows. In addition, the potential
termination of these agreements could prevent us from entering
into future business transactions such as acquisitions or joint
ventures at terms favorable to us or at all.
Our
agreement not to compete with Alcan in certain end-use markets
may hinder our ability to take advantage of new business
opportunities.
In connection with the spin-off, we agreed not to compete with
Alcan for a period of five years from the spin-off date in the
manufacture, production and sale of certain products for use in
the plate and aerospace markets. As a result, it may be more
difficult for us to pursue successfully new business
opportunities, which could limit our potential sources of
revenue and growth.
Risks
Related to Our Industry
We
face significant price and other forms of competition from other
aluminum rolled products producers, which could hurt our results
of operations or cash flows.
Generally, the markets in which we operate are highly
competitive. We compete primarily on the basis of our value
proposition, including price, product quality, ability to meet
customers specifications, range of products offered, lead
times, technical support and customer service. Some of our
competitors may benefit from greater capital resources, have
more efficient technologies, or have lower raw material and
energy costs and may be able to sustain longer periods of price
competition.
In addition, our competitive position within the global aluminum
rolled products industry may be affected by, among other things,
the recent trend toward consolidation among our competitors,
exchange rate fluctuations that may make our products less
competitive in relation to the products of companies based in
other countries (despite the U.S. dollar-based input cost
and the marginal costs of shipping) and economies of scale in
purchasing, production and sales, which accrue to the benefit of
some of our competitors.
Increased competition could cause a reduction in our shipment
volumes and profitability or increase our expenditures, either
of which could have a material adverse effect on our financial
results or cash flows.
The
end-use markets for certain of our products are highly
competitive and customers are willing to accept substitutes for
our products.
The end-use markets for certain aluminum rolled products are
highly competitive. Aluminum competes with other materials, such
as steel, plastics, composite materials and glass, among others,
for various applications, including in beverage and food cans
and automotive end-use applications. In the past, customers have
demonstrated a willingness to substitute other materials for
aluminum. For example, changes in consumer preferences in
beverage containers have increased the use of polyethylene
terephthalate plastic (PET plastic) containers and glass bottles
in recent years. These trends may continue. The willingness of
customers to accept substitutes for aluminum products could have
a material adverse effect on our financial results or cash flows.
A
downturn in the economy could have a material adverse effect on
our financial results or cash flows.
Certain end-use applications for aluminum rolled products, such
as construction and industrial and transportation applications,
experience demand cycles that are highly correlated to the
general economic environment, which is sensitive to a number of
factors outside our control. A recession or a slowing of the
economy in any of the geographic segments in which we operate,
including China where significant economic growth is expected,
or a decrease in manufacturing activity in industries such as
automotive, construction and packaging and consumer goods, could
have a material adverse effect on our financial results or cash
flows. We
24
are not able to predict the timing, extent and duration of the
economic cycles in the markets in which we operate.
The
seasonal nature of some of our customers industries could
have a material adverse effect on our financial results or cash
flows.
The construction industry and the consumption of beer and soda
are sensitive to weather conditions and as a result, demand for
aluminum rolled products in the construction industry and for
can feedstock can be seasonal. Our quarterly financial results
could fluctuate as a result of climatic changes, and a prolonged
series of cold summers in the different regions in which we
conduct our business could have a material adverse effect on our
financial results or cash flows.
We are
subject to a broad range of environmental, health and safety
laws and regulations in the jurisdictions in which we operate,
and we may be exposed to substantial environmental, health and
safety costs and liabilities.
We are subject to a broad range of environmental, health and
safety laws and regulations in the jurisdictions in which we
operate. These laws and regulations impose increasingly
stringent environmental, health and safety protection standards
and permitting requirements regarding, among other things, air
emissions, wastewater storage, treatment and discharges, the use
and handling of hazardous or toxic materials, waste disposal
practices, the remediation of environmental contamination,
post-mining reclamation and working conditions for our
employees. Some environmental laws, such as Superfund and
comparable laws in U.S. states and other jurisdictions
worldwide, impose joint and several liability for the cost of
environmental remediation, natural resource damages, third party
claims, and other expenses, without regard to the fault or the
legality of the original conduct.
The costs of complying with these laws and regulations,
including participation in assessments and remediation of
contaminated sites and installation of pollution control
facilities, have been, and in the future could be, significant.
In addition, these laws and regulations may also result in
substantial environmental liabilities associated with divested
assets, third party locations and past activities. In certain
instances, these costs and liabilities, as well as related
action to be taken by us, could be accelerated or increased if
we were to close, divest of or change the principal use of
certain facilities with respect to which we may have
environmental liabilities or remediation obligations. Currently,
we are involved in a number of compliance efforts, remediation
activities and legal proceedings concerning environmental
matters, including certain activities and proceedings arising
under Superfund and comparable laws in U.S. states and
other jurisdictions worldwide.
We have established reserves for environmental remediation
activities and liabilities where appropriate. However, the cost
of addressing environmental matters (including the timing of any
charges related thereto) cannot be predicted with certainty, and
these reserves may not ultimately be adequate, especially in
light of potential changes in environmental conditions, changing
interpretations of laws and regulations by regulators and
courts, the discovery of previously unknown environmental
conditions, the risk of governmental orders to carry out
additional compliance on certain sites not initially included in
remediation in progress, our potential liability to remediate
sites for which provisions have not been previously established
and the adoption of more stringent environmental laws. Such
future developments could result in increased environmental
costs and liabilities and could require significant capital
expenditures, any of which could have a material adverse effect
on our financial condition, results or cash flows. Furthermore,
the failure to comply with our obligations under the
environmental laws and regulations could subject us to
administrative, civil or criminal penalties, obligations to pay
damages or other costs, and injunctions or other orders,
including orders to cease operations. In addition, the presence
of environmental contamination at our properties could adversely
affect our ability to sell property, receive full value for a
property or use a property as collateral for a loan.
Some of our current and potential operations are located or
could be located in or near communities that may regard such
operations as having a detrimental effect on their social and
economic circumstances.
25
Environmental laws typically provide for participation in
permitting decisions, site remediation decisions and other
matters. Concern about environmental justice issues may affect
our operations. Should such community objections be presented to
government officials, the consequences of such a development may
have a material adverse impact upon the profitability or, in
extreme cases, the viability of an operation. In addition, such
developments may adversely affect our ability to expand or enter
into new operations in such location or elsewhere and may also
have an effect on the cost of our environmental remediation
projects.
We use a variety of hazardous materials and chemicals in our
rolling processes, as well as in our smelting operations in
Brazil and in connection with maintenance work on our
manufacturing facilities. Because of the nature of these
substances or related residues, we may be liable for certain
costs, including, among others, costs for health-related claims
or removal or re-treatment of such substances. Certain of our
current and former facilities incorporate asbestos-containing
materials, a hazardous substance that has been the subject of
health-related claims for occupation exposure. In addition,
although we have developed environmental, health and safety
programs for our employees, including measures to reduce
employee exposure to hazardous substances, and conduct regular
assessments at our facilities, we are currently, and in the
future may be, involved in claims and litigation filed on behalf
of persons alleging injury predominantly as a result of
occupational exposure to substances or other hazards at our
current or former facilities. It is not possible to predict the
ultimate outcome of these claims and lawsuits due to the
unpredictable nature of personal injury litigation. If these
claims and lawsuits, individually or in the aggregate, were
finally resolved against us, our results of operations and cash
flows could be adversely affected.
We may
be exposed to significant legal proceedings or
investigations.
From time to time, we are involved in, or the subject of,
disputes, proceedings and investigations with respect to a
variety of matters, including environmental, health and safety,
product liability, employee, tax, personal injury, contractual
and other matters as well as other disputes and proceedings that
arise in the ordinary course of business. Certain of these
matters are discussed in the preceding risk factor and certain
others are discussed below under Item 3. Legal
Proceedings. Any claims against us or any investigations
involving us, whether meritorious or not, could be costly to
defend or comply with and could divert managements
attention as well as operational resources. Any such dispute,
litigation or investigation, whether currently pending or
threatened or in the future, may have a material adverse effect
on our financial results and cash flows.
Product
liability claims against us could result in significant costs or
negatively impact our reputation and could adversely affect our
business results and financial condition.
We are sometimes exposed to warranty and product liability
claims. There can be no assurance that we will not experience
material product liability losses arising from such claims in
the future and that these will not have a negative impact on our
net sales and profitability. We generally maintain insurance
against many product liability risks, but there can be no
assurance that this coverage will be adequate for any
liabilities ultimately incurred. In addition, there is no
assurance that insurance will continue to be available on terms
acceptable to us. A successful claim that exceeds our available
insurance coverage could have a material adverse effect on our
financial results and cash flows.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
26
Our executive offices are located in Atlanta, Georgia. We have
32 operating facilities, one research facility and several
market-focused innovation centers in 11 countries as of
March 31, 2009. We believe our facilities are generally
well-maintained and in good operating condition and have
adequate capacity to meet our current business needs. Our
principal properties and assets have been pledged to banks
pursuant to our senior secured credit facilities, as described
in Description of Material Indebtedness.
The following tables provide information, by operating segment,
about the plant locations, processes and major end-use
markets/applications for the aluminum rolled products, recycling
and primary metal facilities we operated during all or part of
the year ended March 31, 2009.
North
America
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Berea, Kentucky
|
|
Recycling
|
|
Recycled ingot
|
Burnaby, British Columbia
|
|
Finishing
|
|
Foil containers
|
Fairmont, West Virginia
|
|
Cold rolling, finishing
|
|
Foil, HVAC material
|
Greensboro, Georgia
|
|
Recycling
|
|
Recycled ingot
|
Kingston, Ontario
|
|
Cold rolling, finishing
|
|
Automotive, construction/industrial
|
Logan, Kentucky(i)
|
|
Hot rolling, cold rolling, finishing, recycling
|
|
Can stock
|
Louisville, Kentucky(ii)
|
|
Cold rolling, finishing
|
|
Foil, converter foil
|
Oswego, New York
|
|
Novelis
Fusiontm
casting, hot rolling, cold rolling, recycling, finishing
|
|
Can stock, construction/industrial, semi-finished coil
|
Saguenay, Quebec
|
|
Continuous casting, recycling
|
|
Semi-finished coil
|
Terre Haute, Indiana
|
|
Cold rolling, finishing
|
|
Foil
|
Toronto, Ontario
|
|
Finishing
|
|
Foil, foil containers
|
Warren, Ohio
|
|
Coating
|
|
Can end stock
|
|
|
|
(i) |
|
We own 40% of the outstanding common shares of Logan Aluminum
Inc., but we have made subsequent equipment investments such
that we now have rights to approximately 64% of Logans
total production capacity. |
|
(ii) |
|
The Louisville, Kentucky plant was closed in June 2008. |
Our Oswego, New York facility operates modern equipment for used
beverage can recycling, ingot casting, hot rolling, cold rolling
and finishing. In March 2006, we commenced commercial production
using our Novelis
Fusiontm
technology able to produce a high quality ingot with
a core of one aluminum alloy, combined with one or more layers
of different aluminum alloy(s). The ingot can then be rolled
into a sheet product with different properties on the inside and
the outside, allowing previously unattainable performance for
flat rolled products and creating opportunity for new, premium
applications. Oswego produces can stock as well as building and
industrial products. Oswego also provides feedstock to our
Kingston, Ontario facility, which produces heat-treated
automotive sheet, and to our Fairmont, West Virginia facility,
which produces light gauge sheet.
The Logan, Kentucky facility is a processing joint venture
between us and Arco Aluminum Inc. (ARCO), a subsidiary of BP
plc. Our equity investment in the joint venture is 40%, while
ARCO holds the remaining 60% interest. Subsequent equipment
investments have resulted in us now having access to
approximately 64% of Logans total production capacity.
Logan, which was built in 1985, is the newest and largest hot
mill in North America. Logan operates modern and high-speed
equipment for ingot casting, hot-rolling, cold-rolling and
finishing. Logan is a dedicated manufacturer of aluminum sheet
products for the can stock market with modern equipment, an
efficient workforce and product focus. A portion of the can end
stock is coated at North Americas Warren, Ohio facility,
in addition to Logans
on-site
coating assets. Together with ARCO, we
27
operate Logan as a production cooperative, with each party
supplying its own primary metal inputs for transformation at the
facility. The transformed product is then returned to the
supplying party at cost. Logan does not own any of the primary
metal inputs or any of the transformed products. All of the
fixed assets at Logan are directly owned by us and ARCO in
varying ownership percentages or solely by each party. As
discussed in Note 1 Business and Summary of
Significant Accounting Policies in the accompanying consolidated
financial statements, our consolidated balance sheets include
our share of the assets and liabilities of Logan.
We share control of the management of Logan with ARCO through a
seven-member board of directors on which we appoint four members
and ARCO appoints three members. Management of Logan is led
jointly by two executive officers who are subject to approval by
at least five members of the board of directors.
Our Saguenay, Quebec facility operates the worlds largest
continuous caster, which produces feedstock for our two foil
rolling plants located in Terre Haute, Indiana; and Fairmont,
West Virginia. The continuous caster was developed through
internal research and development and we own the process
technology. Our Saguenay facility sources molten metal under
long-term supply arrangements we have with Alcan.
In June 2008, we completed the closure of our light gauge
converter products facility in Louisville, Kentucky. The closure
was intended to bring the capacity of our North American
operations in line with local market demand.
Our Burnaby, British Columbia and Toronto, Ontario facilities
spool and package household foil products and report to our foil
business unit based in Toronto, Ontario.
Along with our recycling center in Oswego, New York, we own two
other fully dedicated recycling facilities in North America,
located in Berea, Kentucky and Greensboro, Georgia. Each offers
a modern, cost-efficient process to recycle used beverage cans
and other recycled aluminum into sheet ingot to supply our hot
mills in Logan and Oswego. Berea is the largest used beverage
can recycling facility in the world.
Europe
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Berlin, Germany
|
|
Converting
|
|
Packaging
|
Bresso, Italy
|
|
Finishing, painting
|
|
Painted sheet, architectural
|
Bridgnorth, United Kingdom
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Dudelange, Luxembourg
|
|
Continuous casting, cold rolling, finishing
|
|
Foil
|
Göttingen, Germany
|
|
Cold rolling, finishing, painting
|
|
Can end, lithographic, painted sheet
|
Latchford, United Kingdom
|
|
Recycling
|
|
Sheet ingot from recycled metal
|
Ludenscheid, Germany
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Nachterstedt, Germany
|
|
Cold rolling, finishing
|
|
Automotive, industrial
|
Norf, Germany(i)
|
|
Hot rolling, cold rolling
|
|
Can stock, foilstock, feeder stock for finishing operations
|
Ohle, Germany
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Pieve, Italy
|
|
Continuous casting, cold rolling
|
|
Coil for Bresso, industrial
|
Rogerstone, United Kingdom(ii)
|
|
Hot rolling, cold rolling
|
|
Foilstock, paintstock, reroll, industrial
|
Rugles, France
|
|
Continuous casting, cold rolling, finishing
|
|
Foil
|
Sierre, Switzerland(iii)
|
|
Novelis
Fusiontm
casting, hot rolling, cold rolling
|
|
Automotive sheet, industrial
|
|
|
|
(i) |
|
Operated as a 50/50 joint venture between us and Hydro Aluminium
Deutschland GmbH (Hydro). |
28
|
|
|
(ii) |
|
In March 2009, management approved the closure of our aluminum
sheet mill in Rogerstone, South Wales, U.K. The facility ceased
operations in April 2009. |
|
(iii) |
|
We have entered into an agreement with Alcan pursuant to which
Alcan retains access to the plate production capacity, which
represents a portion of the total production capacity of the
Sierre hot mill. |
Aluminium Norf GmbH (Norf) in Germany, a 50/50
production-sharing joint venture between us and Hydro, is a
large scale, modern manufacturing hub for several of our
operations in Europe, and is the largest aluminum rolling mill
and remelting operation in the world. Norf supplies hot coil for
further processing through cold rolling to some of our other
plants, including Goettingen and Nachterstedt in Germany and
provides foilstock to our plants in Ohle and Ludenscheid in
Germany and Rugles in France. Together with Hydro, we operate
Norf as a production cooperative, with each party supplying its
own primary metal inputs for transformation at the facility. The
transformed product is then transferred back to the supplying
party on a pre-determined cost-plus basis. The facilitys
capacity is shared 50/50. We own 50% of the equity interest in
Norf and Hydro owns the other 50%. We share control of the
management of Norf with Hydro through a jointly-controlled
shareholders committee. Management of Norf is led jointly
by two managing executives, one nominated by us and one
nominated by Hydro.
In March 2009, management approved the closure of our aluminum
sheet mill in Rogerstone, South Wales, U.K. The facility ceased
operations in April 2009. The Rogerstone mill in the United
Kingdom supplied Bridgnorth and other foil plants with foilstock
and produced hot coil for Nachterstedt and Pieve. In addition,
Rogerstone produced standard sheet and coil for the European
distributor market.
The Pieve plant, located near Milan, Italy, mainly produces
continuous cast coil that is cold rolled into paintstock and
sent to the Bresso plant for painting and some specialist
finishing. Goettingen also has a paint line as well as lines for
can end, food and lithographic sheet.
The Dudelange and Rugles foil plants in Luxembourg and France
utilize continuous twin roll casting equipment and are two of
the few foil plants in the world capable of producing 6 micron
foil for aseptic packaging applications from continuous cast
material. The Sierre hot rolling plant in Switzerland, along
with Nachterstedt in Germany, are Europes leading
producers of automotive sheet in terms of shipments. Sierre also
supplies plate stock to Alcan. In April 2008, we announced the
commissioning of a new aluminum casthouse in Sierre and began
producing multi-alloy sheet ingots in the plant using Novelis
Fusiontm
in August 2008.
Our recycling operation in Latchford, United Kingdom is the only
major recycling plant in Europe dedicated to used beverage cans.
European operations also include Novelis PAE in Voreppe, France,
which sells casthouse technology, including liquid metal
treatment devices, such as degassers and filters, chill sheet
ingot casters and twin roll continuous casters, in many parts of
the world.
Asia
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Bukit Raja, Malaysia(i)
|
|
Continuous casting, cold rolling
|
|
Construction/industrial, heavy and light gauge foils
|
Ulsan, Korea(ii)
|
|
Novelis
Fusiontm
casting, hot rolling, cold rolling, recycling
|
|
Can stock, construction/industrial, electronics, foilstock, and
recycled material
|
Yeongju, Korea(iii)
|
|
Hot rolling, cold rolling, recycling
|
|
Can stock, construction/industrial, electronics, foilstock and
recycled material
|
|
|
|
(i) |
|
Ownership of the Bukit Raja plant corresponds to our 58% equity
interest in Aluminium Company of Malaysia Berhad. |
|
(ii) |
|
We hold a 68% equity interest in the Ulsan plant. |
|
(iii) |
|
We hold a 68% equity interest in the Yeongju plant. |
29
Our Korean subsidiary, in which we hold a 68% interest, was
formed through acquisitions in 1999 and 2000. Since our
acquisitions, product capability has been developed to address
higher value and more technically advanced markets such as can
sheet.
We hold a 58% equity interest in the Aluminium Company of
Malaysia Berhad, a publicly traded company that wholly owns and
controls the Bukit Raja, Selangor light gauge rolling facility.
Unlike our production sharing joint ventures at Norf, Germany
and Logan, Kentucky, our Korean partners are financial partners
and we market 100% of the plants output.
Asia also operates recycling furnaces at both its Ulsan and
Yeongju facilities in Korea for the conversion of customer and
third party recycled aluminum, including used beverage cans.
Metal from recycled aluminum purchases represented 4% of
Asias total shipments in fiscal 2009. In June 2008, our
plant in Ulsan began the commercial production of Novelis
Fusiontm.
South
America
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Pindamonhangaba, Brazil
|
|
Hot rolling, cold rolling, recycling
|
|
Construction/industrial, can stock, foilstock, recycled ingot,
foundry ingot, forge stock
|
Utinga, Brazil
|
|
Finishing
|
|
Foil
|
Ouro Preto, Brazil(i)
|
|
Smelting
|
|
Primary aluminum (sheet ingot and billets)
|
Aratu, Brazil
|
|
Smelting
|
|
Primary aluminum (sheet ingot)
|
|
|
|
(i) |
|
In May 2009, we ceased the production of alumina at our Ouro
Preto facility in Brazil. |
Our Pindamonhangaba (Pinda) rolling and recycling facility in
Brazil has an integrated process that includes recycling, sheet
ingot casting, hot mill and cold mill operations. A leased
coating line produces painted products, including can end stock.
Pinda supplies foilstock to our Utinga foil plant, which
produces converter, household and container foil.
Pinda is the largest aluminum rolling and recycling facility in
South America in terms of shipments and the only facility in
South America capable of producing can body and end stock. Pinda
recycles primarily used beverage cans, and is engaged in tolling
recycled metal for our customers.
During fiscal 2009, we conducted bauxite mining, alumina
refining, primary aluminum smelting and hydro-electric power
generation operations at our Ouro Preto, Brazil facility. Our
owned power generation supplies approximately 25% of our smelter
needs. We also own the mining rights to bauxite reserves in the
Ouro Preto, Cataguases and Carangola regions.
In May 2009, we ceased the production of alumina at our Ouro
Preto facility in Brazil. The global economic crisis and the
recent dramatic drop in alumina prices have made alumina
production at Ouro Preto economically unfeasible. Going forward,
the plant will purchase alumina through third-parties. Other
activities related to the facility, including electric power
generation and the production of primary aluminum metal, will
continue unaffected.
We also conduct primary aluminum smelting operations at our
Aratu facility in Candeias, Brazil.
|
|
Item 3.
|
Legal
Proceedings
|
In connection with our spin-off from Alcan, we assumed a number
of liabilities, commitments and contingencies mainly related to
our historical rolled products operations, including liabilities
in respect of legal claims and environmental matters. As a
result, we may be required to indemnify Alcan for claims
successfully brought against Alcan or for the defense of legal
actions that arise from time to time in the normal course of our
rolled products business including commercial and contract
disputes, employee-related claims and tax
30
disputes (including several disputes with Brazils Ministry
of Treasury regarding various forms of manufacturing taxes and
social security contributions). In addition to these assumed
liabilities and contingencies, we may, in the future, be
involved in, or subject to, other disputes, claims and
proceedings that arise in the ordinary course of our business,
including some that we assert against others, such as
environmental, health and safety, product liability, employee,
tax, personal injury and other matters. Where appropriate, we
have established reserves in respect of these matters (or, if
required, we have posted cash guarantees). While the ultimate
resolution of, and liability and costs related to, these matters
cannot be determined with certainty due to the considerable
uncertainties that exist, we do not believe that any of these
pending actions, individually or in the aggregate, will
materially impair our operations or materially affect our
financial condition or liquidity. The following describes
certain environmental matters relating to our business,
including those for which we assumed liability as a result of
our spin-off from Alcan.
Environmental
Matters
We are involved in proceedings under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, also
known as CERCLA or Superfund, or analogous state provisions
regarding liability arising from the usage, storage, treatment
or disposal of hazardous substances and wastes at a number of
sites in the United States, as well as similar proceedings under
the laws and regulations of the other jurisdictions in which we
have operations, including Brazil and certain countries in the
European Union. Many of these jurisdictions have laws that
impose joint and several liability, without regard to fault or
the legality of the original conduct, for the costs of
environmental remediation, natural resource damages, third party
claims, and other expenses. In addition, we are, from time to
time, subject to environmental reviews and investigations by
relevant governmental authorities.
As described further in the following paragraph, we have
established procedures for regularly evaluating environmental
loss contingencies, including those arising from such
environmental reviews and investigations and any other
environmental remediation or compliance matters. We believe we
have a reasonable basis for evaluating these environmental loss
contingencies, and we believe we have made reasonable estimates
of the costs that are likely to be borne by us for these
environmental loss contingencies. Accordingly, we have
established reserves based on our reasonable estimates for the
currently anticipated costs associated with these environmental
matters. We estimate that the undiscounted remaining
clean-up
costs related to all of our known environmental matters as of
March 31, 2009 will be approximately $52 million. Of
this amount, $31 million is included in Other long-term
liabilities, with the remaining $21 million included in
Accrued expenses and other current liabilities in our
consolidated balance sheet as of March 31, 2009. Management
has reviewed the environmental matters, including those for
which we assumed liability as a result of our spin-off from
Alcan. As a result of this review, management has determined
that the currently anticipated costs associated with these
environmental matters will not, individually or in the
aggregate, materially impair our operations or materially
adversely affect our financial condition, results of operations
or liquidity.
With respect to environmental loss contingencies, we record a
loss contingency on a non-discounted basis whenever such
contingency is probable and reasonably estimable. The evaluation
model includes all asserted and unasserted claims that can be
reasonably identified. Under this evaluation model, the
liability and the related costs are quantified based upon the
best available evidence regarding actual liability loss and cost
estimates. Except for those loss contingencies where no estimate
can reasonably be made, the evaluation model is fact-driven and
attempts to estimate the full costs of each claim. Management
reviews the status of, and estimated liability related to,
pending claims and civil actions on a quarterly basis. The
estimated costs in respect of such reported liabilities are not
offset by amounts related to cost-sharing between parties,
insurance, indemnification arrangements or contribution from
other potentially responsible parties (PRPs) unless otherwise
noted.
Butler Tunnel Site. Novelis Corporation was a
party in a 1989 U.S. Environmental Protection Agency (EPA)
lawsuit before the U.S. District Court for the Middle
District of Pennsylvania involving the Butler
31
Tunnel Superfund site, a third-party disposal site. In May 1991,
the court granted summary judgment against Novelis Corporation
for alleged disposal of hazardous waste. After unsuccessful
appeals, Novelis Corporation paid the entire judgment plus
interest.
The EPA filed a second cost recovery action against Novelis
Corporation seeking recovery of expenses associated with the
installation of an early warning and response system for
potential future releases from the Butler Tunnel site. In
January 2008, Novelis Corporation and the Department of Justice,
on behalf of the EPA, entered into a consent decree whereby
Novelis Corporation agreed to pay approximately $2 million
in three installments in settlement of its liability with the
U.S. government. The settlement has been fully paid.
Prior to the execution of the Novelis Corporation consent
decree, the EPA entered into consent decrees with the other
Butler Tunnel PRPs to finance and construct the early warning
and response system. On October 30, 2008, the trustee for
the PRPs provided a detailed analysis of the past and future
costs associated with the implementation of the early warning
system and advised us of their intention to file a contribution
action against us.
On February 3, 2009, Butler Tunnel PRPs and Novelis
Corporation entered into a settlement agreement resolving the
contribution claims. On March 5, 2009, pursuant to these
agreements, Novelis Corporation remitted its settlement payment
of past costs in the amount of approximately $1 million. As
part of the settlement, Novelis became a member of the PRP
group. Accordingly, Novelis bears an allocated share of certain
future costs in the approximate annual amount of $75,000 between
2009 and 2018 related to the costs to complete and maintain the
early warning and response system at the Butler Tunnel site.
In December 2005, the United States Environmental Protection
Agency (USEPA) issued a Notice of Violation (NOV) to the
Companys subsidiary, Logan Aluminum, Inc. (Logan),
alleging violations of Logans Title V Operating
Permit, which regulates emissions of air pollutants from the
facility. In March 2006, the Kentucky Department of
Environmental Protection (KDEP) issued a separate NOV to Logan
alleging other violations of the Title V Operating Permit.
In March 2009, as a result of these enforcement actions, Logan
agreed to install new air pollution control equipment. Logan has
also agreed to settle the USEPA NOV, including the payment of a
civil penalty of $285,000. The KDEP NOV is currently subject to
a Tolling Agreement with the state agency.
Legal
Proceedings
Coca-Cola
Lawsuits. A lawsuit was commenced against Novelis
Corporation on February 15, 2007 by
Coca-Cola
Bottlers Sales and Services Company LLC (CCBSS) in Georgia
state court. CCBSS is a consortium of
Coca-Cola
bottlers across the United States, including
Coca-Cola
Enterprises Inc. CCBSS alleges that Novelis Corporation breached
an aluminum can stock supply agreement between the parties, and
seeks monetary damages in an amount to be determined at trial
and a declaration of its rights under the agreement. The
agreement includes a most favored nations provision
regarding certain pricing matters. CCBSS alleges that Novelis
Corporation breached the terms of the most favored
nations provision. The dispute will likely turn on the
facts that are presented to the court by the parties and the
courts finding as to how certain provisions of the
agreement ought to be interpreted. If CCBSS were to prevail in
this litigation, the amount of damages would likely be material.
Novelis Corporation has filed its answer and the parties are
proceeding with discovery.
ARCO Aluminum Complaint. On May 24, 2007,
Arco Aluminum Inc. (ARCO) filed a complaint against Novelis
Corporation and Novelis Inc. in the United States District Court
for the Western District of Kentucky. ARCO and Novelis are
partners in a joint venture rolling mill located in Logan
County, Kentucky. In the complaint, ARCO alleged that its
consent was required in connection with Hindalcos
acquisition of Novelis. Failure to obtain consent, ARCO alleged,
put us in default of the joint venture agreements, thereby
triggering certain provisions in those agreements. The
provisions include a reversion of the production management at
the joint venture to Logan Aluminum from Novelis, and a
reduction of the board of directors of the entity that manages
the joint venture from seven members (four appointed by Novelis
and three appointed by ARCO) to six members (three appointed by
each of Novelis and ARCO). ARCO sought a court declaration that
32
(1) Novelis and its affiliates are prohibited from
exercising any managerial authority or control over the joint
venture, (2) Novelis interest in the joint venture is
limited to an economic interest only and (3) ARCO has
authority to act on behalf of the joint venture. Alternatively,
ARCO sought a reversion of the production management function to
Logan Aluminum, and a change in the composition of the board of
directors of the entity that manages the joint venture. Novelis
filed its answer to the complaint on July 16, 2007.
On July 3, 2007, ARCO filed a motion for partial summary
judgment with respect to one of the counts of its complaint
relating to the claim that Novelis breached the joint venture
agreement by not seeking ARCOs consent. On July 30,
2007, Novelis filed a motion to hold ARCOs motion for
summary judgment in abeyance (pending further discovery), along
with a demand for a jury. On February 14, 2008, the judge
issued an order granting our motion to hold ARCOs summary
judgment motion in abeyance. Following this ruling, the joint
venture continued to conduct operational, management and board
activities as normal.
On June 4, 2009, ARCO and Novelis entered into a settlement
agreement to address and resolve all matters at issue in the
lawsuit, including the Logan Joint Venture governance issues. On
June 22, 2009, the parties requested an order from the
United States District Court for the Western District of
Kentucky to dismiss the lawsuit with prejudice. As a result of
the settlement, among other things, Novelis will retain control
of the Logan board of directors, production management
responsibilities will revert to Logan, and certain Novelis
employees who work at Logan will become employees of Logan.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
33
PART II
|
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Item 5.
|
Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
On May 15, 2007, all of our common shares were acquired by
Hindalco through its indirect wholly-owned subsidiary AV Metals
Inc. (Acquisition Sub) pursuant to a plan of arrangement (the
Arrangement). Immediately following the Arrangement, Acquisition
Sub transferred our common shares to its wholly-owned subsidiary
AV Aluminum Inc. (AV Aluminum). As of the date of filing, AV
Aluminum is the sole shareholder of record of our shares.
Subsequent to completion of the Arrangement on May 15,
2007, all of our common shares were indirectly held by Hindalco,
and we became a foreign private issuer. We continue to file
periodic reports under section 15(d) of the Securities and
Exchange Act of 1934 because our 7.25% Senior Notes are
publicly traded (see Note 12 Debt to our
accompanying consolidated financial statements).
We currently do not pay dividends and do not intend to do so in
the foreseeable future. No dividends have been declared since
October 26, 2006. Future dividends are at the discretion of
the board of directors and will depend on, among other things,
our financial resources, cash flows generated by our business,
our cash requirements, restrictions under the instruments
governing our indebtedness, being in compliance with the
appropriate indentures and covenants under the instruments that
govern our indebtedness that would allow us to legally pay
dividends and other relevant factors.
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data presented below as of
and for the year ended March 31, 2009; the periods
May 16, 2007 through March 31, 2008 and April 1,
2007 through May 15, 2007; the three months ended
March 31, 2007 and as of and for the years ended
December 31, 2006, 2005 and 2004 were derived from the
audited consolidated financial statements of Novelis Inc. The
selected consolidated financial data should be read in
conjunction with our consolidated financial statements for the
respective periods and the related notes included elsewhere in
this
Form 10-K.
As of May 15, 2007, all of our common shares were
indirectly held by Hindalco; thus, earnings per share data is
not reported (in millions, except per share amounts).
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May 16,
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April 1,
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Three
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2007
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2007
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Months
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Year Ended
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Through
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Through
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Ended
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March 31,
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March 31,
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May 15,
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March 31,
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Year Ended December 31,
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2009
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2008(A)
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2007(A)
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2007(B)
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2006
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2005(C)
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2004(D)
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Successor
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Successor
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Predecessor
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Predecessor
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Predecessor
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Predecessor
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Predecessor
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Net sales
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$
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10,177
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$
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9,965
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$
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1,281
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|
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$
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2,630
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|
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$
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9,849
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|
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$
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8,363
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|
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$
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7,755
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Net income (loss)(E)
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$
|
(1,910
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)
|
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$
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(20
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)
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|
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$
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(97
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)
|
|
$
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(64
|
)
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$
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(275
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)
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|
$
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90
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|
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$
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55
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Dividends per common share
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$
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|
|
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$
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|
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$
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|
|
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$
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|
|
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$
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0.20
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|
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$
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0.36
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|
|
$
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|
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|
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|
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|
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|
|
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March 31,
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March 31,
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March 31,
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December 31,
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2009
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2008
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2007
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2006
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2005(C)
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2004(D)
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Successor
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Successor
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Predecessor
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Predecessor
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Predecessor
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Predecessor
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Total assets(A)
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$
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7,567
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$
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10,737
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$
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5,970
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$
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5,792
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$
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5,476
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$
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5,954
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Long-term debt (including current portion)
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$
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2,559
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$
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2,575
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$
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2,300
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$
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2,302
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|
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$
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2,603
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$
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2,737
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Short-term borrowings
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$
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264
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$
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115
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|
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$
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245
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$
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133
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$
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27
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$
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541
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Cash and cash equivalents
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$
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248
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$
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326
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$
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128
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$
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73
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$
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100
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|
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$
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31
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Shareholders/invested equity
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$
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1,419
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$
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3,523
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|
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$
|
175
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|
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$
|
195
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|
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$
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433
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$
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555
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34
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(A) |
|
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary. The acquisition
was recorded in accordance with Staff Accounting
Bulletin No. 103, Push Down Basis of Accounting
Required in Certain Limited Circumstances (SAB 103). In
the accompanying consolidated balance sheets, the consideration
and related costs paid by Hindalco in connection with the
acquisition have been pushed down to us and have
been allocated to the assets acquired and liabilities assumed in
accordance with Financial Accounting Standards Board (FASB)
Statement No. 141, Business Combinations (FASB 141).
Due to the impact of push down accounting, the Companys
consolidated financial statements and certain note presentations
for the year ended March 31, 2008 are presented in two
distinct periods to indicate the application of two different
bases of accounting between the periods presented: (1) the
period up to, and including, the acquisition date (April 1,
2007 through May 15, 2007, labeled Predecessor)
and (2) the period after that date (May 16, 2007
through March 31, 2008, labeled Successor). The
accompanying consolidated financial statements include a black
line division which indicates that the Predecessor and Successor
reporting entities shown are not comparable. |
|
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|
The consideration paid by Hindalco to acquire Novelis has been
pushed down to us and allocated to the assets acquired and
liabilities assumed based on our estimates of fair value, using
methodologies and assumptions that we believe are reasonable.
This allocation of fair value results in additional charges or
income to our post-acquisition consolidated statements of
operations. |
|
(B) |
|
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. |
|
(C) |
|
The consolidated financial statements for the year ended
December 31, 2005 include the results for the period from
January 1 to January 5, 2005 prior to our spin-off from
Alcan, in addition to the results for the period from January 6
to December 31, 2005. The combined financial results for
the period from January 1 to January 5, 2005 present our
operations on a carve-out accounting basis. The consolidated
balance sheet as of December 31, 2005 (and subsequent
periods) and the consolidated results for the period from
January 6 (the date of the spin-off from Alcan) to
December 31, 2005 (and subsequent periods) present our
financial position, results of operations and cash flows as a
stand-alone entity. |
|
|
|
All income earned and cash flows generated by us as well as the
risks and rewards of these businesses from January 1 to
January 5, 2005 were primarily attributed to us and are
included in our consolidated results for the year ended
December 31, 2005, with the exception of losses of
$43 million ($29 million net of tax) arising from the
change in fair market value of derivative contracts, primarily
with Alcan. These
mark-to-market
losses for the period from January 1 to January 5, 2005
were recorded in the consolidated statement of operations for
the year ended December 31, 2005 and were recognized as a
decrease in Owners net investment. |
|
(D) |
|
Our historical combined financial statements for the year ended
December 31, 2004 have been derived from the accounting
records of Alcan using the historical results of operations and
historical basis of assets and liabilities of the businesses
subsequently transferred to us. Management believes the
assumptions underlying the historical combined financial
statements are reasonable. However, the historical combined
financial statements included herein may not necessarily reflect
what our results of operations, financial position and cash
flows would have been had we been a stand-alone company during
the periods presented. Alcans investment in the Novelis
businesses, presented as Owners net investment in the
historical combined financial statements, includes the
accumulated earnings of the businesses as well as cash transfers
related to cash management functions performed by Alcan. |
|
(E) |
|
Net income (loss) for the year ended March 31, 2009
includes non-cash pre-tax impairment charges of
$1.5 billion, pre-tax unrealized losses on derivatives
instruments of $519 million, a $122 million pre-tax
gain on extinguishment of debt and $95 million in pre-tax
restructuring charges. For additional discussion on non-cash
impairment charges, see Note 3 Impairment of
Goodwill and Investment in Affiliate in the accompanying notes
to the consolidated financial statements. Restructuring charges,
net for the period May 16, 2007 through March 31,
2008; April 1, 2007 through May 15, 2007; the three
months ended March 31, 2007; and the years ended
December 31, 2006, 2005 and 2004 were $6 million;
$1 million; |
35
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$9 million; $19 million; $10 million and
$20 million, respectively. For additional discussion on
restructuring actions, see Note 4 Restructuring
Programs in the accompanying notes to the consolidated financial
statements. |
|
|
|
Certain non-recurring expenses were incurred related to the
acquisition by Hindalco. The three months ended March 31,
2007 and the period May 16, 2007 through March 31,
2008 each include $32 million of sales transaction fees.
The period May 16, 2007 through March 31, 2008 also
includes $45 million of stock compensation expense related
to the Arrangement. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
AND REFERENCES
Novelis is the worlds leading aluminum rolled products
producer based on shipment volume. We produce aluminum sheet and
light gauge products for the beverage and food can,
transportation, construction and industrial, and foil products
markets. As of March 31, 2009, we had operations in 11
countries on four continents: North America; South America; Asia
and Europe, through 32 operating plants, one research facility
and several market-focused innovation centers. In addition to
aluminum rolled products plants, our South American businesses
include bauxite mining, alumina refining, primary aluminum
smelting and power generation facilities that are integrated
with our rolling plants in Brazil. We are the only company of
our size and scope focused solely on aluminum rolled products
markets and capable of local supply of technologically
sophisticated products in all of these geographic regions.
The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to,
those discussed below and elsewhere in this Annual Report on
Form 10-K,
particularly in Special Note Regarding Forward-Looking
Statements and Market Data and Risk Factors.
References herein to Novelis, the
Company, we, our, or
us refer to Novelis Inc. and its subsidiaries unless
the context specifically indicates otherwise. References herein
to Hindalco refer to Hindalco Industries Limited. In
October 2007, the Rio Tinto Group purchased all the outstanding
shares of Alcan, Inc. References herein to Alcan
refer to Rio Tinto Alcan Inc.
BACKGROUND
AND BASIS OF PRESENTATION
On May 18, 2004, Alcan announced its intention to transfer
its rolled products businesses into a separate company and to
pursue a spin-off of that company to its shareholders. The
spin-off occurred on January 6, 2005 following approval by
Alcans board of directors and shareholders, and legal and
regulatory approvals. Alcan shareholders received one Novelis
common share for every five Alcan common shares held.
Acquisition
of Novelis Common Stock
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary pursuant to a plan
of arrangement (the Arrangement) at a price of $44.93 per share.
The aggregate purchase price for all of the Companys
common shares was $3.4 billion and Hindalco also assumed
$2.8 billion of Novelis debt for a total transaction
value of $6.2 billion. Subsequent to completion of the
Arrangement on May 15, 2007, all of our common shares were
indirectly held by Hindalco.
As discussed in Note 1 Business and Summary of
Significant Accounting Policies in the accompanying condensed
consolidated financial statements, the Arrangement was recorded
in accordance with Staff Accounting Bulletin No. 103,
Push Down Basis of Accounting Required in Certain Limited
Circumstances. Accordingly, in the accompanying consolidated
balance sheets, the consideration and related costs paid by
Hindalco in connection with the acquisition have been
pushed down to us and have been allocated to the
assets acquired and liabilities assumed in accordance with FASB
Statement No. 141, Business Combinations (FASB 141).
Due to the impact of push down accounting, the Companys
consolidated financial statements and certain note presentations
separate the Companys presentation into two distinct
periods to indicate the
36
application of two different bases of accounting between the
periods presented: (1) the periods up to, and including,
the May 15, 2007 acquisition date (labeled
Predecessor) and (2) the periods after that
date (labeled Successor). The accompanying
consolidated financial statements include a black line division
which indicates that the Predecessor and Successor reporting
entities shown are not comparable.
Combined
Financial Results of the Predecessor and Successor
For purposes of managements discussion and analysis of the
results of operations in this
Form 10-K,
we combined the results of operations for the period ended
May 15, 2007 of the Predecessor with the period ended
March 31, 2008 of the Successor. We believe the combined
results of operations for the year ended March 31, 2008
(fiscal 2008) provide management and investors with a more
meaningful perspective on Novelis financial and
operational performance than if we did not combine the results
of operations of the Predecessor and the Successor in this
manner. Similarly, we combine the financial results of the
Predecessor and the Successor when discussing segment
information and sources and uses of cash for the year ended
March 31, 2008.
The combined results of operations are non-GAAP financial
measures, do not include any proforma assumptions or adjustments
and should not be used in isolation or substitution of
Predecessor and Successor results. Shown below are combining
schedules of (1) shipments and (2) our results of
operations for periods allocable to the Successor, Predecessor
and the combined presentation for the year ended March 31,
2008 that we use throughout the discussion of results from
operations.
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May 16, 2007
|
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April 1, 2007
|
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Through
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Through
|
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Year Ended
|
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March 31,
|
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|
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May 15,
|
|
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March 31,
|
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|
2008
|
|
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|
2007
|
|
|
2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Shipments (kt)(A):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products(B)
|
|
|
2,640
|
|
|
|
|
348
|
|
|
|
2,988
|
|
Ingot products(C)
|
|
|
147
|
|
|
|
|
15
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
2,787
|
|
|
|
|
363
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
One kilotonne (kt) is 1,000 metric tonnes. One metric tonne is
equivalent to 2,204.6 pounds. |
|
(B) |
|
Rolled products include tolling (the conversion of
customer-owned metal). |
|
(C) |
|
Ingot products include primary ingot in Brazil, foundry products
in Korea and Europe, secondary ingot in Europe and other
miscellaneous recyclable aluminum. |
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
Year Ended
|
|
|
|
2008
|
|
|
|
2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Results of Operations (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,965
|
|
|
|
$
|
1,281
|
|
|
$
|
11,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
9,042
|
|
|
|
|
1,205
|
|
|
|
10,247
|
|
Selling, general and administrative expenses
|
|
|
319
|
|
|
|
|
95
|
|
|
|
414
|
|
Depreciation and amortization
|
|
|
375
|
|
|
|
|
28
|
|
|
|
403
|
|
Research and development expenses
|
|
|
46
|
|
|
|
|
6
|
|
|
|
52
|
|
Interest expense and amortization of debt issuance costs
|
|
|
191
|
|
|
|
|
27
|
|
|
|
218
|
|
Interest income
|
|
|
(18
|
)
|
|
|
|
(1
|
)
|
|
|
(19
|
)
|
Gain on change in fair value of derivative instruments, net
|
|
|
(22
|
)
|
|
|
|
(20
|
)
|
|
|
(42
|
)
|
Restructuring charges, net
|
|
|
6
|
|
|
|
|
1
|
|
|
|
7
|
|
Equity in net income of non-consolidated affiliates
|
|
|
(25
|
)
|
|
|
|
(1
|
)
|
|
|
(26
|
)
|
Other (income) expenses, net
|
|
|
(6
|
)
|
|
|
|
35
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,908
|
|
|
|
|
1,375
|
|
|
|
11,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
share
|
|
|
57
|
|
|
|
|
(94
|
)
|
|
|
(37
|
)
|
Income tax provision
|
|
|
(73
|
)
|
|
|
|
(4
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interests share
|
|
|
(16
|
)
|
|
|
|
(98
|
)
|
|
|
(114
|
)
|
Minority interests share
|
|
|
(4
|
)
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20
|
)
|
|
|
$
|
(97
|
)
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fiscal Year End
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. Accordingly, the accompanying consolidated and
combined financial statements present our financial position as
of March 31, 2009 and 2008; and the results of our
operations, cash flows and changes in shareholders equity
for the following periods: year ended March 31, 2009
(Successor); May 16, 2007 through March 31, 2008
(Successor); April 1, 2007 through May 15, 2007
(Predecessor) (on a combined basis, fiscal year ended
March 31, 2008); the three months ended March 31,
2007; and the year ended December 31, 2006.
Throughout Managements Discussion and Analysis
(MD&A), data for all periods, except as of and for the year
ended March 31, 2007, are derived from our audited
consolidated and combined financial statements included in this
Annual Report on
Form 10-K.
All data as of and for the year ended March 31, 2007 are
derived from our unaudited condensed consolidated financial
statements included in our transition period ended
March 31, 2007 and our Quarterly Report on
Form 10-Q
for the period ended December 31, 2007.
CURRENT
YEAR HIGHLIGHTS
The decrease in sales volumes relating to the deterioration of
global economic conditions had a significant impact on our
results of operations and liquidity during the second half of
fiscal 2009. Key factors that
38
impacted these results are discussed briefly below and are
discussed in further detail throughout the MD&A and Segment
Review.
|
|
|
|
|
We reported a net loss of $1.9 billion for the year ended
March 31, 2009, which includes non-cash impairment charges
of $1.5 billion, unrealized losses on derivatives
instruments of $519 million, $95 million in
restructuring charges and a $122 million gain on a debt
exchange transaction, compared to a loss of $117 million
for the corresponding period in fiscal 2008. The prior year loss
included $45 million of stock compensation expense and
$32 million of transaction fees associated with
Hindalcos acquisition of Novelis.
|
|
|
|
|
|
Impairment charges made to goodwill and investments in
affiliates totaling $1.5 billion reflect the global
economic environment and the related market increase in the cost
of capital.
|
|
|
|
The unrealized loss on derivative instruments for fiscal 2009
was $519 million, compared to a $3 million loss in the
prior year period. We use derivative instruments to hedge
forecasted purchases of aluminum and other commodities and
related foreign currency exposures. This loss primarily reflects
the drop in the price of aluminum during the current year from
$3,292 per tonne in July 2008 to $1,365 per tonne at
March 31, 2009. With the exception of losses associated
with metal prices ceilings, we expect an offsetting benefit once
the related sales volumes have been shipped.
|
|
|
|
|
|
Shipments of flat rolled products decreased 7% in the current
year to 2,770 kt from 2,988 kt in the prior year period.
Shipments to automotive, construction and industrial companies
were significantly impacted by the economic downturn in the
second half of fiscal 2009, while can sheet shipments remain
stable in most regions.
|
|
|
|
Inventory levels were effectively managed despite slowing
business conditions. Metal inventories as of March 31, 2009
totaled 299 kt, down 22% versus March 31, 2008 levels.
|
BUSINESS
AND INDUSTRY CLIMATE
Global economic trends impact the Company, and there is a large
amount of uncertainty with regard to economic trends and the
timing of recovery. On an overall basis, markets in North
America, Europe and Asia experienced significant economic
downturns in the past year. Consumer confidence is low and
credit remains tight in most global markets. The impact of
demand reductions for flat rolled products varies for each
region based upon the nature of the industry sectors in which we
operate. In general, can shipments have remained relatively
stable while construction, automotive and other industrial
production markets experienced significant declines in demand
during the second half of our 2009 fiscal year.
As discussed in further detail in Segment Review, we have taken
a number of actions to adjust our metal intake, cut back on
production and reduce fixed costs which will effectively manage
our working capital.
|
|
|
|
|
We reduced labor and overhead costs in all regions through
capacity and staff reductions, including the closure of our
Rogerstone facility in the United Kingdom, and staff reductions
in the United States, Germany, France, Brazil and South Korea.
We ceased operations at our alumina refinery in Brazil effective
May 2009. We also implemented a salary freeze and a hiring
freeze for all but the most critical positions. We believe we
will begin to benefit from these actions in the coming months.
|
|
|
|
We have reduced capital spending with a focus on preserving
maintenance and safety.
|
|
|
|
We worked to lower pricing from suppliers of commodity goods and
services.
|
39
The average and closing prices based upon the London Metal
Exchange (LME) for aluminum for the years ended March 31,
2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
|
|
Year Ended March 31,
|
|
|
versus
|
|
|
versus
|
|
London Metal Exchange Prices
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Aluminum (per metric tonne, and presented in U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing cash price as of end of period
|
|
$
|
1,365
|
|
|
$
|
2,935
|
|
|
$
|
2,792
|
|
|
|
(53.5
|
)%
|
|
|
5.1
|
%
|
Average cash price during period
|
|
$
|
2,234
|
|
|
$
|
2,624
|
|
|
$
|
2,665
|
|
|
|
(14.9
|
)%
|
|
|
(1.5
|
)%
|
LME prices for aluminum (LME prices) rose to a peak of $3,292
per tonne in July 2008, but have significantly declined since
the high point due to falling demand for primary aluminum.
Prices closed at $1,365 per tonne at March 31, 2009, after
hitting a low of $1,254 per tonne in February 2009. Aluminum
prices have subsequently increased to $1,383 per tonne as of
May 31, 2009.
Most of our business is conducted under a conversion model,
which allows us to pass through increases or decreases in the
price of aluminum to our customers. Nearly all of our products
have a price structure with two components: (i) a
pass-through aluminum price based on the LME plus local market
premiums and (ii) a conversion premium price on
the conversion cost to produce the rolled product which
reflects, among other factors, the competitive market conditions
for that product.
A key component of our conversion model is the use of derivative
instruments on projected aluminum requirements to preserve our
conversion margin. We enter into forward metal purchases
simultaneous with the sales contracts that contain fixed metal
prices. These forward metal purchases directly hedge the
economic risk of future metal price fluctuation associated with
these contracts. We also enter into forward metal purchases,
aluminum futures and options to hedge our exposure to rising
metal prices and sales contracts with metal price ceilings.
Additionally, we sell short-term LME futures contracts to reduce
the cash flow volatility of fluctuating metal prices associated
with the metal price lag.
Rapidly declining LME prices had the following impacts on our
business during the second half of fiscal 2009:
|
|
|
|
|
Our products have a price structure based upon the LME price.
Decreases in the LME price reduce net sales, cost of goods sold
and working capital.
|
|
|
|
Unrealized losses were recorded for the change in the fair value
of metal derivative instruments. The offsetting benefit from
fixed forward price billings to customers will not be recognized
until the related sales volume are delivered.
|
|
|
|
We paid cash to brokers to settle derivative contracts in
advance of billing and collecting cash from our customers, which
negatively impacted our liquidity position. This typically
ranges from 30 to 60 days.
|
Metal
Price Ceilings
Sales contracts representing approximately 257 kt and 300 kt of
our fiscal 2009 and 2008 shipments, respectively, contained a
ceiling over which metal prices could not be contractually
passed through to certain customers. This negatively impacted
our margins and operating cash flows when the price we paid for
metal was above the ceiling price contained in these contracts.
We calculate and report this difference to be approximately the
difference between the quoted purchase price on the LME
(adjusted for any local premiums and for any price lag
associated with purchasing or processing time) and the metal
price ceiling in our contracts. Cash flows from operations are
negatively impacted by the same amounts, adjusted for any timing
difference between customer receipts and vendor payments, and
offset partially by reduced income taxes.
During the years ended March 31, 2009, 2008 and 2007, we
were unable to pass through approximately $176 million,
$230 million and $460 million, respectively, of metal
purchase costs associated with sales under
40
these contracts. Based on current LME price levels, no further
unfavorable revenue or cash flow impacts are expected through
December 31, 2009 when these contracts expire.
We employ the following strategies to manage and mitigate the
risk associated with metal price ceilings and rising prices that
we cannot pass through to certain customers:
|
|
|
|
|
We maximize the amount of our internally supplied metal inputs
from our smelting, refining and mining operations in Brazil and
rely on output from our recycling operations which utilize used
beverage cans (UBCs). Both of these sources of aluminum supply
have historically provided an offsetting benefit to the metal
price ceiling contracts. We refer to these two sources as
internal hedges.
|
|
|
|
We enter into derivative instruments to hedge projected aluminum
volume requirements above our assumed internal hedge position
mitigating our exposure to further increases in LME prices. As a
result of these instruments, we will continue to incur cash
losses related to these contracts even if LME prices remains
below the ceiling price. Projected cash outflows associated with
these derivative instruments was $141 million as of
March 31, 2009
|
In connection with the allocation of the purchase price paid by
Hindalco, we established reserves totaling $655 million as
of May 15, 2007 to record these sales contracts at fair
value. These reserves are being accreted into net sales over the
remaining lives of the underlying contracts. This accretion has
no impact on cash flow. For the years ended March 31, 2009
and 2008, we recorded accretion of $233 million and
$270 million, respectively. As of March 31, 2009, the
balance of these reserves is approximately $152 million.
Metal
Price Lag
On certain sales contracts we experience timing differences on
the pass through of changing aluminum prices from our suppliers
to our customers. Additional timing differences occur in the
flow of metal costs through moving average inventory cost values
and cost of goods sold. In periods of declining prices, our
earnings are negatively impacted by this timing difference while
the opposite is true in periods of rising prices. We refer to
this timing difference as metal price lag. We sell
short-term LME forward contracts to help mitigate our exposure
to metal price lag.
Certain of our sales contracts, most notably in Europe, contain
fixed metal prices for periods of time ranging from four to
thirty-six months. We typically enter into forward metal
purchases simultaneous with these sales contracts.
Foreign
Exchange Impact
Fluctuations in foreign exchange rates also impact our operating
results. The following table presents the average of the month
end exchange rates and changes from the prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
U.S. Dollar
|
|
|
Year Ended
|
|
|
U.S. Dollar
|
|
|
|
March 31,
|
|
|
Strengthen/
|
|
|
March 31,
|
|
|
Strengthen/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Weaken)
|
|
|
2008
|
|
|
2007
|
|
|
(Weaken)
|
|
|
U.S. dollar per Euro
|
|
|
1.411
|
|
|
|
1.432
|
|
|
|
1.5
|
%
|
|
|
1.432
|
|
|
|
1.294
|
|
|
|
(10.7
|
)%
|
Brazilian real per U.S. dollar
|
|
|
1.982
|
|
|
|
1.837
|
|
|
|
7.9
|
|
|
|
1.837
|
|
|
|
2.148
|
|
|
|
(14.5
|
)
|
South Korean won per U.S. dollar
|
|
|
1,224
|
|
|
|
932
|
|
|
|
31.3
|
|
|
|
932
|
|
|
|
944
|
|
|
|
(1.3
|
)
|
Canadian dollar per U.S. dollar
|
|
|
1.134
|
|
|
|
1.025
|
|
|
|
10.6
|
|
|
|
1.025
|
|
|
|
1.135
|
|
|
|
(9.7
|
)
|
The U.S. dollar strengthened as compared to the local
currency in all regions during the year ended March 31,
2009, as compared to a weakened U.S. dollar for the year
ended March 31, 2008. In Asia, the strengthening of the
U.S. dollar resulted in foreign exchange losses as the
operations there are recorded in local currency, with a larger
portion of our liabilities denominated in the U.S. dollar,
including metal purchases and long-term debt. In Brazil, where
we have predominantly U.S. dollar selling prices and local
currency operating costs, we generally benefit as the
U.S. dollar strengthens. While we began hedging with
derivatives in the short-term, we are still exposed to long-term
fluctuations in the Brazilian real.
41
RESULTS
OF OPERATIONS
Year
Ended March 31, 2009 Compared With the Year Ended
March 31, 2008 (Twelve Months Combined Non-GAAP)
Positive trends in the demand for aluminum products and
inflationary movement in average LME prices during the first six
months of fiscal 2009 reversed sharply in the third fiscal
quarter of fiscal 2009 and continued into the fourth quarter.
For the year ended March 31, 2009, we realized a net loss
of $1.9 billion on net sales of $10.2 billion,
compared to the year ended March 31, 2008 when we realized
a net loss of $117 million on net sales of
$11.2 billion. The reduction in sales is due to the
decrease in the average LME price as well as a reduction in
demand for flat rolled products in most regions during the last
six months of fiscal 2009.
Costs of goods sold decreased $1.0 billion, or 10%, and
stayed flat as percentage of net sales as compared to the prior
year period on an overall basis. Selling, general and
administrative expenses decreased $96 million, or 23%,
primarily due to reductions in professional fees and
employee-related costs, including incentive compensation
associated with the Arrangement.
The current year results include non-cash asset impairment
charges totaling $1.5 billion. The impairment charges are
discussed in more detail under Critical Accounting Policies and
Estimates.
The current year was also impacted by $519 million in
unrealized losses on derivative instruments and $95 million
in restructuring charges. These negative factors were partially
offset by a $122 million gain on the extinguishment of
debt. We also recorded an income tax benefit of
$246 million on our net loss, as compared to a
$77 million income tax provision in the prior year. These
items are discussed in further detail below.
Segment
Review (On a combined non-GAAP basis)
The tables below show selected segment financial information (in
millions, except shipments which are in kilotonnes (kt)). For
additional financial information related to our operating
segments, see Note 21 Segment, Geographical Area and
Major Customer Information in the accompanying consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Results
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
|
|
Year Ended March 31, 2009
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net sales
|
|
$
|
3,930
|
|
|
$
|
3,718
|
|
|
$
|
1,536
|
|
|
$
|
1,007
|
|
|
$
|
(14
|
)
|
|
$
|
10,177
|
|
Shipments (kt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,067
|
|
|
|
910
|
|
|
|
447
|
|
|
|
346
|
|
|
|
|
|
|
|
2,770
|
|
Ingot products
|
|
|
42
|
|
|
|
99
|
|
|
|
13
|
|
|
|
19
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,109
|
|
|
|
1,009
|
|
|
|
460
|
|
|
|
365
|
|
|
|
|
|
|
|
2,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Results
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
|
|
Year Ended March 31, 2008
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Eliminations
|
|
|
Total
|
|
(Combined)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,101
|
|
|
$
|
4,338
|
|
|
$
|
1,818
|
|
|
$
|
994
|
|
|
$
|
(5
|
)
|
|
$
|
11,246
|
|
Shipments (kt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,102
|
|
|
|
1,071
|
|
|
|
491
|
|
|
|
324
|
|
|
|
|
|
|
|
2,988
|
|
Ingot products
|
|
|
64
|
|
|
|
35
|
|
|
|
39
|
|
|
|
24
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,166
|
|
|
|
1,106
|
|
|
|
530
|
|
|
|
348
|
|
|
|
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The following table reconciles changes in Segment income for the
year ended March 31, 2008 to the year ended March 31,
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
Changes in Segment Income
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Total
|
|
|
Segment income year ended March 31, 2008
|
|
$
|
242
|
|
|
$
|
273
|
|
|
$
|
52
|
|
|
$
|
161
|
|
|
$
|
728
|
|
Volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
(28
|
)
|
|
|
(156
|
)
|
|
|
(35
|
)
|
|
|
5
|
|
|
|
(214
|
)
|
Other
|
|
|
|
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
(16
|
)
|
Conversion premium and product mix
|
|
|
22
|
|
|
|
68
|
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
113
|
|
Conversion costs(A)
|
|
|
(57
|
)
|
|
|
12
|
|
|
|
(14
|
)
|
|
|
(36
|
)
|
|
|
(95
|
)
|
Metal price lag
|
|
|
(87
|
)
|
|
|
66
|
|
|
|
63
|
|
|
|
(1
|
)
|
|
|
41
|
|
Foreign exchange
|
|
|
(26
|
)
|
|
|
(40
|
)
|
|
|
(10
|
)
|
|
|
14
|
|
|
|
(62
|
)
|
Other changes(B)
|
|
|
16
|
|
|
|
16
|
|
|
|
8
|
|
|
|
8
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income year ended March 31, 2009
|
|
$
|
82
|
|
|
$
|
236
|
|
|
$
|
86
|
|
|
$
|
139
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Conversion costs include expenses incurred in production such as
direct and indirect labor, energy, freight, scrap usage, alloys
and hardeners, coatings, alumina and melt loss. Fluctuations in
this component reflect cost efficiencies during the period as
well as cost inflation (deflation). |
|
(B) |
|
Other changes include selling, general &
administrative costs and research and development for all
segments and certain other items which impact one or more
regions, including such items as the impact of purchase
accounting and metal price ceiling contracts. Significant
fluctuations in these items are discussed below. |
North
America
As of March 31, 2009, North America manufactured aluminum
sheet and light gauge products through 11 plants, including two
dedicated recycling facilities. Important end-use applications
include beverage cans, containers and packaging, automotive and
other transportation applications, building products and other
industrial applications.
In the second half of 2009, North America experienced a
reduction in demand as all industry sectors were impacted by the
ongoing economic downturn. Net sales for fiscal 2009 were down
$171 million, or 4%, as compared to fiscal 2008 due to
lower volume and a lower average LME price. While shipments were
down 5% for fiscal 2009 as compared to fiscal 2008, shipments in
the second half of fiscal 2009 were down 16% as compared to the
first half of the year. The can business remains relatively
stable, but shipments of most other products are below the prior
year level. Shipments to the construction market was down 25% as
compared to the prior year, due to reduced production and
demand. We anticipate that demand for can sheet will remain
stable, but expect demand in the construction and automotive
sectors to remain weak for at least the first half of fiscal
2010.
The current economic environment has also resulted in customers
in the auto industry filing for bankruptcy. We believe our
exposure to outstanding receivables from customers in bankruptcy
is minimal.
Segment income for the 2009 period was $82 million, down
$160 million as compared to the prior year, due to the
negative impact of metal price lag, conversion costs, volume
decreases and foreign exchange related to our operations in
Canada. The negative impact of conversion costs relates to
increases in energy costs and freight as compared to the prior
year.
Other changes reflect $11 million in acquisition-related
stock compensation expense in the prior year period, and an
$18 million favorable impact related to metal price ceiling
contracts as compared to the prior year. Selling, general and
administrative costs were down $22 million as compared to
the prior year as the cost reduction initiatives have begun to
favorably impact results. These favorable changes were partially
offset
43
by a $23 million reduction in the net favorable impact of
acquisition-related fair value adjustments and a
$13 million reduction in the benefit associated with
recycling used beverage cans.
In response to reductions in demand, we announced a Voluntary
Separation Program (VSP) available to salaried employees in
North America and the Corporate office aimed at reducing staff
levels. This VSP plan was supplemented by an Involuntary
Severance Program (ISP). Through the VSP and ISP, we eliminated
approximately 120 positions during the fourth quarter of fiscal
2009 and the first quarter of fiscal 2010.
Europe
As of March 31, 2009, our European segment provided
European markets with value-added sheet and light gauge products
through 13 aluminum rolled products facilities and one dedicated
recycling facility. Europe serves a broad range of aluminum
rolled product end-use markets in various applications including
can, automotive, lithographic, foil products and painted
products.
Europe has also experienced a significant reduction in demand in
all industry sectors with flat rolled shipments and net sales
down 15% and 14%, respectively, compared to the prior year. The
volume reduction had a $404 million unfavorable impact on
net sales, with the remaining decrease reflecting the impact of
lower LME prices and a stronger U.S. dollar. Demand for
specialty, painted and light gauge products has been down all
year mainly as a result of the weak construction market, as well
as recent reductions in demand for automotive products.
Increases in beverage can and lithographic shipments in the
first six months were reversed in the second half of the year,
resulting in
year-over-year
declines in both sectors.
Segment income for the 2009 period was $236 million, as
compared to $273 million in the comparative period of the
prior year. Volume and foreign currency remeasurement
unfavorably impacted Segment income but these impacts were
partially offset by favorable conversion premiums, metal price
lag and conversion costs. The favorable impact of conversion
costs relates to a reduction in labor costs, partially offset by
increases in energy costs as compared to the prior year.
Other changes reflect a $13 million net favorable impact of
income and expense items associated with acquisition-related
fair value adjustments and $6 million of stock compensation
expense in the prior year.
In the fourth quarter of 2009, we announced a number of
restructuring actions across Europe, including the closure of
our plant in Rogerstone, United Kingdom effective April 30,
2009. The closure of the Rogerstone plant resulted in the
elimination of 440 positions and approximately $20 million
in severance-related costs. We also recorded $20 million in
environmental remediation expenses and $3 million in other
exit related costs related to the closure of this plant. We also
recorded $12 million in non-cash fixed asset impairments,
an $8 million write-down of parts and supplies, and a
$3 million reduction to reserves associated with
unfavorable contracts established as part of the Arrangement.
Cost reductions were also implemented through capacity and staff
reductions at our Rugles, France and Ohle, Germany facilities
with severance-related costs associated with these actions
totaling $10 million in 2009.
Asia
As of March 31, 2009, Asia operated three manufacturing
facilities with production balanced between foil, construction
and industrial, and beverage and food can end-use applications.
Asia also experienced downturns in demand and shipments, with
the largest reductions in beverage can products, followed by
electronics, construction and general purpose foil products.
Total shipments and net sales decreased 13% and 16%,
respectively. The volume reduction had a $242 million
unfavorable impact on net sales with the remaining decrease
reflecting the impact of lower LME prices. Asia has begun to see
signs of recovering demand, with orders for the first quarter of
fiscal 2010 higher than those in the fourth quarter of fiscal
2009.
The improvement in Segment income of $34 million from
fiscal 2008 to fiscal 2009 was due to the favorable impact of
metal price lag, improved conversion premiums and product mix,
partially offset by the
44
volume decreases, increases to conversion costs and foreign
currency remeasurement. The conversion cost increases were
primarily related to increases in energy costs as compared to
the prior year period.
Other influences which may positively impact sales going forward
include demand improvements within and outside of China, the
impact of Chinas stimulus package, inventory restocking by
customers, and the price gap between the Shanghai Futures
Exchange (SHFE) and the LME. For the first time in five years,
the metal price gap that existed between the LME prices for
aluminum and the SHFE reversed in January 2009 such that the LME
price is now lower than the SHFE. As the SHFE-LME gap reversed,
products manufactured with LME priced aluminum are now more
competitive in the region versus those produced inside China.
The gap was favorable by an average of $179 per tonne in March,
and continues to increase throughout April 2009.
In response to reduced demand, we eliminated 34 positions in
Asia in the fourth quarter of 2009 and recorded approximately
$1 million in severance-related costs related to a
voluntary retirement program. Also, during the year ended
March 31, 2009, we recorded an impairment charge of
approximately $5 million in Novelis Korea due to the
obsolescence of certain production related fixed assets.
South
America
As of March 31, 2009, South America operated two rolling
plants in Brazil along with two smelters, an alumina refinery,
bauxite mines and power generation facilities. South America
manufactures various aluminum rolled products for the beverage
and food can, construction and industrial and transportation
end-use markets.
The economic slowdown impacting the other three regions has not
yet affected the demand for flat rolled canstock in South
America, with shipments of can products increasing as compared
to the prior year. Total shipments increased 5% over prior year,
with rolled products shipments up 7%, but net sales increased
only 1% as compared to the prior year due to lower LME prices.
Segment income for South America decreased $22 million as
compared to the prior year period. Conversion costs increased
due to cost inflation for energy, alumina, alloys and hardeners.
Other changes reflect a $9 million net favorable impact of
income and expense items associated with acquisition-related
fair value adjustments, a $6 million reduction in selling,
general and administrative expenses and $3 million of stock
compensation expense in the prior year. These positive impacts
were partially offset by an $11 million decrease in the
smelter benefit as the benefit from our smelter operations in
South America declines as average LME prices decrease.
On January 26, 2009, we announced that we will cease the
production of alumina at our Ouro Preto facility in May 2009.
The sustained decline in alumina prices has made alumina
production economically infeasible. For the foreseeable future,
the plant will purchase alumina through third parties. This
resulted in the reduction of approximately 290 positions,
including 150 employees and 140 contractors, and we
recorded restructuring charges totaling $2 million related
to severance in the fourth quarter of fiscal 2009. Other exit
costs include less than $1 million related to the idling of
the refinery. Other activities related to the facility,
including electric power generation and the production of
primary aluminum, will continue unaffected.
Other
Costs and Expenses
Costs such as depreciation and amortization, interest expense
and unrealized gains (losses) on changes in the fair value of
derivatives are not utilized by our chief operating decision
maker in evaluating segment performance. Additionally, many
other functions are managed directly from our corporate office,
which focuses on strategy development and oversees governance,
policy, legal compliance, human resources and finance matters
that are not allocated or managed by the regions.
45
The table below reconciles total Segment income to net loss for
the year ended March 31, 2009 and 2008 (in millions).
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Total Segment income
|
|
$
|
543
|
|
|
$
|
728
|
|
Depreciation and amortization
|
|
|
(439
|
)
|
|
|
(403
|
)
|
Interest expense and amortization of debt issuance costs
|
|
|
(182
|
)
|
|
|
(218
|
)
|
Interest income
|
|
|
14
|
|
|
|
19
|
|
Unrealized losses on change in fair value of derivative
instruments, net
|
|
|
(519
|
)
|
|
|
(3
|
)
|
Realized gains on corporate derivative instruments, net
|
|
|
4
|
|
|
|
13
|
|
Impairment of goodwill
|
|
|
(1,340
|
)
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
122
|
|
|
|
|
|
Impairment charges on long-lived assets
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Minority interests share
|
|
|
12
|
|
|
|
(3
|
)
|
Adjustment to eliminate proportional consolidation(A)
|
|
|
(226
|
)
|
|
|
(43
|
)
|
Restructuring charges, net
|
|
|
(95
|
)
|
|
|
(7
|
)
|
Corporate selling, general and administrative expenses
|
|
|
(54
|
)
|
|
|
(90
|
)
|
Other costs, net
|
|
|
5
|
|
|
|
(32
|
)
|
Income tax benefit (provision)
|
|
|
246
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,910
|
)
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Our financial information for our segments (including Segment
income) includes the results of our non-consolidated affiliates
on a proportionately consolidated basis, which is consistent
with the way we manage our business segments. However, under
GAAP, these non-consolidated affiliates are accounted for using
the equity method of accounting. Therefore, in order to
reconcile Total Segment income to net loss, the proportional
Segment income of these non-consolidated affiliates is removed
from Total Segment income, net of our share of their net
after-tax results, which is reported as Equity in net (income)
loss of non-consolidated affiliates on our condensed
consolidated statements of operations. See
Note 10 Investment in and Advances to
Non-Consolidated Affiliates and Related Party Transactions for
further information about these non-consolidated affiliates. |
Depreciation and amortization increased $36 million
primarily due to the increases in bases of our property, plant
and equipment and intangible assets resulting from the
Arrangement in the first quarter of fiscal 2008.
Interest expense and amortization of debt issuance costs
decreased primarily due to lower average interest rates on our
variable rate debt. Approximately 29% of our debt was variable
rate as of March 31, 2009.
Unrealized losses on the change in fair value of derivative
instruments represent the
mark-to-market
accounting for changes in the fair value of our derivatives that
do not receive hedge accounting treatment. In the year ended
March 31, 2009, these unrealized losses increased primarily
attributable to falling LME prices. Our principal exposure to
LME prices is related to derivatives on fixed forward price
contracts. We hedge these contracts by purchasing aluminum
futures contracts and these contracts decrease in value in
periods of declining LME prices.
We recorded a $1.34 billion impairment charge related to
goodwill in fiscal 2009.
The gain on extinguishment of debt relates to the exchange of
Senior Notes with a principal value of $275 million for
additional term loan with a face value of $220 million and
an estimated fair value of $165 million. See Liquidity and
Capital Resources below for additional discussion about the
accounting for this exchange.
46
The adjustment to eliminate proportional consolidation includes
a $160 million impairment charge related to our investment
in Norf. Excluding this impairment charge, the adjustment to
eliminate proportional consolidation increased from
$43 million in fiscal 2008 to $66 million in fiscal
2009 primarily related to our Norf joint venture due to a change
in the statutory tax rate in Germany that was reflected in the
prior year period. Income taxes related to our equity method
investments, such as Norf, are reflected in the carrying value
of the investment and not in our consolidated income tax
provision.
Corporate selling, general and administrative expenses decreased
primarily due to $45 million of stock compensation expenses
associated with the Arrangement in fiscal 2008 and lower
incentive compensation expenses in the current year.
Other costs, net for the 2009 fiscal year includes a
$26 million non-cash gain on reversal of a legal accrual.
Sales transaction fees of $32 million associated with the
Arrangement were recorded in the 2008 fiscal year.
We have experienced significant fluctuations in income tax
expense and the corresponding effective tax rate. The primary
factors contributing to the effective tax rate differing from
the statutory Canadian rate include:
|
|
|
|
|
We recorded a non-deductible goodwill impairment charge during
fiscal 2009.
|
|
|
|
Our functional currency in Canada and Brazil is the
U.S. dollar and the company holds significant
U.S. dollar denominated debt in these locations. As the
value of the local currencies strengthens and weakens against
the dollar, unrealized gains or losses are created in those
locations for tax purposes, while the underlying gains or losses
are not recorded in our income statement.
|
During the year ended March 31, 2009, Canadian legislation
was enacted allowing us to elect to determine our Canadian
taxable income in U.S. dollars. Our election was effective
April 1, 2008, and such U.S. dollar taxable gains and
losses no longer exist in Canada as of that date.
|
|
|
|
|
We have significant net deferred tax liabilities in Brazil that
are remeasured to account for currency fluctuations as the taxes
are payable in local currency.
|
|
|
|
Our income is taxed at various statutory tax rates in varying
jurisdictions. Applying the corresponding amounts of income and
loss to the various tax rates results in differences when
compared to our Canadian statutory tax rate.
|
|
|
|
Under Canadian law, 50% of capital gains and losses are excluded
from taxable income. Prior to the year ended March 31,
2009, we had significant unrealized capital gains and losses
related to currency fluctuations in Canada.
|
|
|
|
We record increases to valuation allowances primarily related to
tax losses in certain jurisdictions where we believe it is more
likely than not that we will not be able to utilize those losses.
|
For the year ended March 31, 2009, we recorded a
$246 million income tax benefit on our pre-tax loss of
$2.0 billion, before our equity in net (income) loss of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of 12%. Our effective
tax rate differs from the benefit at the Canadian statutory rate
primarily due to the following factors:
(1) $415 million related to a non-deductible goodwill
impairment charge, (2) a $48 million benefit for
exchange remeasurement of deferred income taxes, (3) a
$61 million increase in valuation allowances primarily
related to tax losses in certain jurisdictions where we believe
it is more likely than not that we will not be able to utilize
those losses, (4) a $33 million benefit from
differences between the Canadian statutory and foreign effective
tax rates applied to entities in different jurisdictions and
(5) a $2 million expense related to an increase in
uncertain tax positions.
For the year ended March 31, 2008, we recorded a
$77 million income tax provision on our pre-tax loss of
$63 million, before our equity in net (income) loss of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of (122)%. Our effective
tax rate differs from the benefit at the Canadian statutory rate
primarily due to the following factors: (1) a
$62 million provision for (a) pre-tax foreign currency
gains or losses with no tax effect and (b) the tax effect
of U.S. dollar denominated currency
47
gains or losses with no pre-tax effect, (2) a
$30 million increase for exchange remeasurement of deferred
income taxes, (3) a $17 million benefit from the
effects of enacted tax rate changes on cumulative taxable
temporary differences, (4) a $7 million increase in
valuation allowances primarily related to tax losses in certain
jurisdictions where we believe it is more likely than not that
we will not be able to utilize those losses, and (5) a
$17 million increase in uncertain tax positions recorded
under the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48).
Year
Ended March 31, 2008 Compared With the Year Ended
March 31, 2007 (Twelve Months Combined Non-GAAP for both
periods)
For the year ended March 31, 2008, we realized a net loss
of $117 million on net sales of $11.2 billion, as
compared to the year ended March 31, 2007 when we realized
a net loss of $265 million on net sales of
$10.2 billion. The 11% increase in net sales was primarily
due to increases in conversion premiums in all regions as well
as $270 million of accretion in fair value reserves
associated with the metal price ceiling contracts.
The reduction in the net loss as compared to the prior year was
primarily driven by the favorable impact of purchase accounting
and increases in conversion premiums, partially offset by
increased depreciation and amortization expense due to the
acquisition by Hindalco.
Costs of goods sold increased $618 million, or 6%, but
decreased as a percentage of net sales as compared to the prior
year period as a result of pricing improvements across all
regions, partially offset by certain operating cost increases.
Selling, general and administrative expenses decreased slightly
as a result of reduced corporate costs, offset by increased
stock compensation associated with the Arrangement. For the year
ended March 31, 2008, we recorded income tax expense of
$77 million, as compared to a $99 million income tax
benefit. These items are discussed in further detail below.
Segment
Review (On a combined non-GAAP basis)
The tables below show selected segment financial information (in
millions, except shipments which are in kilotonnes (kt)).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Results
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
|
|
Year Ended March 31, 2008
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Eliminations
|
|
|
Total
|
|
(Combined)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,101
|
|
|
$
|
4,338
|
|
|
$
|
1,818
|
|
|
$
|
994
|
|
|
$
|
(5
|
)
|
|
$
|
11,246
|
|
Shipments (kt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,102
|
|
|
|
1,071
|
|
|
|
491
|
|
|
|
324
|
|
|
|
|
|
|
|
2,988
|
|
Ingot products
|
|
|
64
|
|
|
|
35
|
|
|
|
39
|
|
|
|
24
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,166
|
|
|
|
1,106
|
|
|
|
530
|
|
|
|
348
|
|
|
|
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Results
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
|
|
Year Ended March 31, 2007
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Eliminations
|
|
|
Total
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,721
|
|
|
$
|
3,851
|
|
|
$
|
1,711
|
|
|
$
|
889
|
|
|
$
|
(12
|
)
|
|
$
|
10,160
|
|
Shipments (kt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,135
|
|
|
|
1,071
|
|
|
|
460
|
|
|
|
285
|
|
|
|
|
|
|
|
2,951
|
|
Ingot products
|
|
|
74
|
|
|
|
15
|
|
|
|
45
|
|
|
|
28
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,209
|
|
|
|
1,086
|
|
|
|
505
|
|
|
|
313
|
|
|
|
|
|
|
|
3,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
The following table highlights changes in Segment income for the
twelve months ended March 31, 2008 as compared to the
twelve months ended March 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
|
|
Changes in Segment Income
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Total
|
|
|
Segment income year ended March 31, 2007
|
|
$
|
(54
|
)
|
|
$
|
276
|
|
|
$
|
72
|
|
|
$
|
182
|
|
|
$
|
476
|
|
Volume
|
|
|
(29
|
)
|
|
|
5
|
|
|
|
12
|
|
|
|
19
|
|
|
|
7
|
|
Conversion premium and product mix
|
|
|
47
|
|
|
|
59
|
|
|
|
9
|
|
|
|
58
|
|
|
|
173
|
|
Conversion costs(A)
|
|
|
(60
|
)
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
(10
|
)
|
|
|
(93
|
)
|
Metal price lag
|
|
|
(31
|
)
|
|
|
(61
|
)
|
|
|
9
|
|
|
|
(17
|
)
|
|
|
(100
|
)
|
Foreign exchange
|
|
|
6
|
|
|
|
16
|
|
|
|
(21
|
)
|
|
|
(35
|
)
|
|
|
(34
|
)
|
Purchase accounting
|
|
|
242
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
219
|
|
Other changes(B)
|
|
|
121
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(27
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income year ended March 31, 2008
|
|
$
|
242
|
|
|
$
|
273
|
|
|
$
|
52
|
|
|
$
|
161
|
|
|
$
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Conversion costs include expenses incurred in production such as
direct and indirect labor, energy, freight, scrap usage, alloys
and hardeners, coatings, alumina and melt loss. Fluctuations in
this component reflect cost efficiencies during the period as
well as cost inflation (deflation). |
|
(B) |
|
Other changes include selling, general &
administrative costs and research & development for
all segments and certain other items which impact one or more
regions, including such items as the impact of metal price
ceiling contracts and stock compensation expense. Significant
fluctuations in these items are discussed below. |
North
America
Net sales increased in the 2008 period as compared to the 2007
period primarily as a result of reduced exposure to contracts
with price ceilings and contract fair value accretion. During
fiscal 2008, we were unable to pass through approximately
$230 million of metal purchase costs. During the comparable
period in 2007, we were unable to pass through approximately
$460 million, for a net favorable impact of approximately
$230 million. Sales in 2008 were also favorably impacted by
$270 million related to the accretion of the contract fair
value reserves as discussed in Metal Price Ceilings, increases
in conversion premiums and the favorable impact of contracts
priced in prior periods.
These favorable changes in sales were partially offset by a
reduction in demand in the 2008 period as compared to 2007 and a
lower average LME. Rolled product shipments were down 3% in
North America in 2008 as compared to 2007 due to reduced
industrial products, light gauge and lower can volumes. The
reduction in demand led to a $165 million reduction in net
sales as compared to the prior year. The average LME was 1.5%
lower than in the prior year, which impacted sales in North
America by $88 million as compared to the prior year.
Segment income for the 2008 period was $242 million, an
increase of $296 million as compared to the 2007 period.
The reduction of
year-over-year
ceiling exposure net of derivatives losses combined with the
purchase accounting on these type of contracts favorably
impacted fiscal year 2008 Segment income. These favorable items
were partially offset by increased conversion costs, the
negative impact of metal price lag, lower volume and
$11 million of stock compensation recorded as a result of
the Arrangement.
Europe
Rolled product shipments were flat year over year driven by
increased can volume that was offset by lower volumes in painted
and general purpose products. Demand decreased due to lower
construction activity in the European market. Ingot product
shipment increased as a result of higher scrap sales.
Net sales increased 13% due to a strengthening of the euro
against the U.S. dollar, higher conversion premiums and
incremental volume of ingot products. While average LME was
lower year over year, net sales
49
increased from contracts priced in prior periods. This
contributed approximately $100 million to net sales as
compared to the prior year, but had no impact on Segment income
as the metal costs were hedged at prior period prices, which
were comparably higher.
Segment income for the 2008 period was $273 million, as
compared to $276 million in the prior year. Segment income
was favorably impacted by higher conversion premiums, increased
ingot sales and foreign currency benefits. These positive
factors were more than offset by unfavorable metal price lag,
increased conversion costs and other changes. Other changes
include a $6 million negative impact of incremental stock
compensation expense recorded as a result of the Arrangement.
Asia
Shipments of rolled products and net sales were up a comparable
7% and 6%, respectively. Net sales increased $132 million
as a result of higher conversion premiums and increased volume,
partially offset by lower average LME during the period, which
reduced net sales by $25 million. Increases in rolled
products was due to increased demand in the can market,
partially offset by a decline in shipments in the industrial and
foil stock markets as a result of continued price pressure from
Chinese exports, driven by the difference in aluminum metal
prices on the Shanghai Futures Exchange and the LME.
Segment income decreased $20 million for the 2008 period as
compared to the 2007 period. Segment income was unfavorably
impacted by conversion costs and foreign exchange, partially
offset by the benefit of increased volume and price. Other
changes include a $4 million of incremental stock
compensation expense recorded as a result of the Arrangement.
South
America
Rolled product shipments increased during the year ended
March 31, 2008 over the comparable prior year period
primarily due to an increase in can shipments driven by strong
market demand. This was slightly offset by reductions in the
industrial products market. Net sales increased primarily as a
result of increased price and volume.
Segment income for South America decreased $21 million as
compared to the prior year period as favorable trends in volume
and conversion premiums were more than offset by higher
conversion costs, metal price lag and foreign exchange
associated with the strengthening of the Brazilian real.
Conversion costs increased due to cost inflation for energy,
freight and other operating costs.
Other changes include an unfavorable impact of $13 million
related to the smelter operations, as the benefits from our
smelter operations in South America decline as average LME
prices decrease. Also included within Other changes is an
$11 million unfavorable impact of lower average LME prices
and $3 million of incremental stock compensation expense
recorded as a result of the Arrangement.
50
Other
Costs and Expenses
As discussed above, certain functions are managed directly from
our corporate office and are not allocated or managed by the
regions. The table below reconciles total Segment income to net
loss for the year ended March 31, 2008 and 2007 (in
millions), followed by a discussion of significant changes
between periods.
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Total Segment income
|
|
$
|
728
|
|
|
$
|
476
|
|
Depreciation and amortization
|
|
|
(403
|
)
|
|
|
(233
|
)
|
Interest expense and amortization of debt issuance costs
|
|
|
(218
|
)
|
|
|
(224
|
)
|
Interest income
|
|
|
19
|
|
|
|
16
|
|
Unrealized losses on change in fair value of derivative
instruments, net
|
|
|
(3
|
)
|
|
|
(152
|
)
|
Realized gains (losses) on corporate derivative instruments, net
|
|
|
13
|
|
|
|
(37
|
)
|
Impairment charges on long-lived assets
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Minority interests share
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Adjustment to eliminate proportional consolidation(A)
|
|
|
(43
|
)
|
|
|
(36
|
)
|
Restructuring charges, net
|
|
|
(7
|
)
|
|
|
(27
|
)
|
Gains on disposal of assets, net
|
|
|
|
|
|
|
(6
|
)
|
Corporate selling, general and administrative expenses
|
|
|
(90
|
)
|
|
|
(127
|
)
|
Other costs, net
|
|
|
(32
|
)
|
|
|
(3
|
)
|
Income tax benefit (provision)
|
|
|
(77
|
)
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(117
|
)
|
|
$
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Our financial information for our segments (including Segment
income) includes the results of our non-consolidated affiliates
on a proportionately consolidated basis, which is consistent
with the way we manage our business segments. However, under
GAAP, these non-consolidated affiliates are accounted for using
the equity method of accounting. Therefore, in order to
reconcile Total Segment income to net loss, the proportional
Segment income of these non-consolidated affiliates is removed
from Total Segment income, net of our share of their net
after-tax results, which is reported as Equity in net (income)
loss of non-consolidated affiliates on our condensed
consolidated statements of operations. See
Note 9 Investment in and Advances to
Non-Consolidated Affiliates and Related Party Transactions for
further information about these non-consolidated affiliates. |
Depreciation and amortization increased $170 million due to
our acquisition by Hindalco. As a result of the acquisition, the
consideration paid by Hindalco was pushed down to us and
allocated to the assets acquired and liabilities assumed. As a
result, property, plant and equipment and intangible assets
increased by approximately $2.3 billion. The increase in
asset values, all of which is non-cash, is charged to
depreciation and amortization expense in future periods based on
the estimated useful lives of the individual assets.
Interest expense and amortization of debt issuance costs
decreased primarily due to the elimination of penalty interest
incurred in the prior year as a result of our delayed filings
and lower interest rates on our variable rate debt in the
current year.
Unrealized losses on the change in fair value of derivative
instruments represent the
mark-to-market
accounting for changes in the fair value of our derivatives that
do not receive hedge accounting treatment. Unrealized losses for
the fiscal year ended March 31, 2008 decreased due to LME
prices rising at the end of the period. Our principal exposure
to LME prices is related to derivatives on fixed forward price
contracts. We hedge these contracts by purchasing aluminum
futures contracts and these contracts decrease in value in
periods of declining LME.
51
Restructuring expenses decreased for the 2008 period as compared
the 2007 period. During the 2007 period, we announced several
restructuring programs related to our central management and
administration offices in Zurich, Switzerland; our Neuhausen
research and development center in Switzerland; our Goettingen
facility in Germany; our facilities in Bridgnorth, U.K.; and the
reorganization of our plants in Ohle and Ludenscheid, Germany,
including the closing of two non-core business lines located
within those facilities. Additionally, we continued to incur
costs relating to the shutdown of our Borgofranco facility in
Italy. We incurred aggregate restructuring charges of
approximately $27 million in fiscal 2007 in connection with
these programs. Through March 31, 2008, these actions were
completed and no additional costs were incurred.
Corporate selling, general and administrative expenses decreased
primarily through reduced spending on third party consultants at
our corporate headquarters and lower long-term incentive
compensation.
Included within Other costs, net for 2008 and 2007 are sales
transaction fees of $32 million associated with the
Arrangement.
For the year ended March 31, 2008, we recorded a
$77 million income tax provision for taxes on our pre-tax
loss of $63 million, before our equity in net (income) loss
of non-consolidated affiliates and minority interests
share, which represented an effective tax rate of (122)%. Our
effective tax rate differs from the benefit at the Canadian
statutory rate due primarily to (1) a $62 million
provision for (a) pre-tax foreign currency gains or losses
with no tax effect and (b) the tax effect of
U.S. dollar denominated currency gains or losses with no
pre-tax effect, (2) a $30 million provision for
exchange remeasurement of deferred income taxes, (3) a
$17 million benefit from the effects of enacted tax rate
changes on cumulative taxable temporary differences, partially
offset by (4) a $7 million increase in valuation
allowances primarily related to tax losses in certain
jurisdictions where we believe it is more likely than not that
we will not be able to utilize those losses and (5) a
$17 million increase in uncertain tax positions recorded
under the provisions of FIN 48.
For the year ended March 31, 2007, we recorded a
$99 million income tax benefit on our pre-tax loss of
$377 million, before our equity in net (income) loss of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of 26%. Our effective
tax rate is less than the benefit at the Canadian statutory rate
due primarily to a $65 million benefit from differences
between the Canadian statutory and foreign effective tax rates
applied to entities in different jurisdictions, more than offset
by (1) a $61 million increase in valuation allowances
related to tax losses in certain jurisdictions where we believe
it is more likely than not that we will not be able to utilize
those losses, (2) an $11 million expense from
expense/income items with no tax effect net and
(3) $11 million for (a) pre-tax foreign currency
gains or losses with no tax effect and (b) the tax effect
of U.S. dollar denominated currency gains or losses with no
pre-tax effect.
LIQUIDITY
AND CAPITAL RESOURCES
We believe we have adequate liquidity to meet our operational
and capital requirements for the foreseeable future. Our primary
sources of liquidity are available cash and cash equivalents,
borrowing availability under our revolving credit facility and
future cash generated by operating activities. During the first
nine months of fiscal 2009, our liquidity position decreased by
$426 million as the global recession led to a rapid decline
in aluminum prices and end-customer demand for flat-rolled
products. However, for the five month period ended May 31,
2009 our business operated with positive cash flow before
financing activities despite continued low levels of demand and
net cash outflows to settle derivative positions. This reflects
our ongoing efforts to preserve liquidity through cost and
capital spending controls and effective management of working
capital. Risks associated with supplier terms, customer credit
and broker hedging capacity, while still present to some degree,
have been managed successfully to date with minimal negative
impact on our business. We are also beginning to see improved
capital market conditions. We expect our liquidity position to
improve during fiscal 2010 due primarily to reduced cash
outflows for metal derivatives and cash savings from
previously-announced restructuring programs.
52
Available
Liquidity
Our estimated liquidity as of May 31, 2009, March 31,
2009, January 31, 2009 and March 31, 2008 is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
March 31,
|
|
|
January 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
Cash and cash equivalents
|
|
$
|
274
|
|
|
$
|
248
|
|
|
$
|
190
|
|
|
$
|
326
|
|
Overdrafts
|
|
|
(13
|
)
|
|
|
(11
|
)
|
|
|
(19
|
)
|
|
|
(5
|
)
|
Availability under the ABL facility
|
|
|
229
|
|
|
|
233
|
|
|
|
255
|
|
|
|
582
|
|
Borrowing availability limitation due to fixed charge coverage
ratio
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated liquidity
|
|
$
|
410
|
|
|
$
|
390
|
|
|
$
|
346
|
|
|
$
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our liquidity position has improved since January 31, 2009
when our estimated liquidity was $346 million as disclosed
in our third quarter
Form 10-Q.
In February 2009, we obtained a $100 million unsecured
credit facility from an affiliate of the Aditya Birla group. We
anticipate that our liquidity position will remain stable
through the second quarter of fiscal 2010 and begin to improve
later in the year.
Borrowings under the ABL facility are generally based on 85% of
eligible accounts receivable and 70 to 75% of eligible
inventories. Under the ABL facility, if our excess availability,
as defined under the borrowing, is less than $80 million,
we are required to maintain a minimum fixed charge coverage
ratio of 1 to 1. As of March 31, 2009, our fixed charge
coverage ratio is less than 1 to 1, resulting in a reduction of
availability under our ABL facility of $80 million.
The cash and cash equivalent balance above includes cash held in
foreign countries in which we operate. These amounts are
generally available on a short-term basis, subject to regulatory
requirements, in the form of a dividend or inter-company loan.
Near
Term Challenges
Rapidly declining aluminum prices and reductions in demand
during the second half of fiscal 2009 negatively impacted the
cash generated by operations and increased the effect of timing
issues related to our settlement of aluminum forward contracts
versus cash collection from our customers. We enter into
derivative instruments to hedge forecasted purchases and sales
of aluminum. Based on the aluminum price forward curve as of
March 31, 2009, we forecast $499 million of cash
outflows related to settlement of these derivative instruments
through the end of fiscal 2010. Except for $141 million of
cash outflows related to hedges of our exposure to metal price
ceilings, we expect all of these outflows will be recovered
through collection of customer accounts receivable, typically on
a 30 60 day lag. Accordingly, this difference
in timing places pressure on our short-term liquidity.
We have an existing beverage can sheet umbrella agreement with
North American bottlers (BCS agreement). Pursuant to the BCS
agreement, an agent for the bottlers directs the can fabricators
to source a percentage of their requirements for beverage can
body, end and tab stock from us.
Under the BCS agreement, the bottlers agent has the right
to request that we hedge the exposure to the price the bottlers
will ultimately pay for aluminum. We treat this arrangement as a
derivative for accounting purposes under FAS 133. Upon
receiving such requests, we enter into corresponding derivative
instruments indexed to the LME price of aluminum with third
party brokers. We settle the positions with the brokers at
maturity and net settle the economic benefit or loss arising
from the pricing requests, which may not occur for up to
13 months.
As of March 31, 2009, we settled a net $95 million of
derivative losses for which we had not been reimbursed under the
BCS agreement. Based on the current forward curve of aluminum we
anticipate a further short-term negative impact on our liquidity
of approximately $70 million as a result of this
arrangement. We believe that collection on these receivables is
reasonably certain based on the credit worthiness of the
bottlers.
53
Operating
Activities
Free cash flow (which is a non-GAAP measure) consists of:
(a) Net cash provided by (used in) operating activities;
(b) less dividends and capital expenditures and
(c) plus or minus net proceeds from settlement of
derivative instruments (which is net of premiums paid to
purchase derivative instruments). Dividends include those paid
by our less than wholly-owned subsidiaries to their minority
shareholders. Management believes that Free cash flow is
relevant to investors as it provides a measure of the cash
generated internally that is available for debt service and
other value creation opportunities. However, Free cash flow does
not necessarily represent cash available for discretionary
activities, as certain debt service obligations must be funded
out of Free cash flow. We believe the line on our condensed
consolidated statements of cash flows entitled Net cash
provided by (used in) operating activities is the most
directly comparable measure to Free cash flow. Our method of
calculating Free cash flow may not be consistent with that of
other companies.
In our discussion of Metal Price Ceilings, we have disclosed
that certain customer contracts contain a fixed aluminum (metal)
price ceiling beyond which the cost of aluminum cannot be passed
through to the customer, unless adjusted. During the years ended
March 31, 2009, 2008 and 2007, we were unable to pass
through approximately $176 million, $230 million and
$460 million, respectively, of metal purchase costs
associated with sales under these contracts. Net cash provided
by operating activities were negatively impacted by the same
amounts, adjusted for timing difference between customer
receipts and vendor payments and offset partially by reduced
income taxes. Based on current LME price levels, no further
unfavorable revenue or cash flow impacts are expected through
December 31, 2009 when these contracts expire. However,
during the period of rising LME prices we entered into
derivative instruments to hedge our exposure to further
increases in LME. As a result of these instruments, we will
continue to incur cash outflows related to these contracts even
if LME remains below the ceiling price. As of March 31,
2009 and based on an aluminum price of $1,365 per tonne, the
fair value of the liability associated with these derivatives
was $141 million.
The following table shows the reconciliation from Net cash
provided by (used in) operating activities to Free cash flow,
the ending balances of cash and cash equivalents and the change
between periods (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Year Ended March 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(236
|
)
|
|
$
|
175
|
|
|
$
|
(166
|
)
|
|
$
|
(411
|
)
|
|
$
|
341
|
|
Net cash provided by (used in) investing activities
|
|
|
(111
|
)
|
|
|
(96
|
)
|
|
|
141
|
|
|
|
(15
|
)
|
|
|
(237
|
)
|
Less: Proceeds from sales of assets
|
|
|
(5
|
)
|
|
|
(8
|
)
|
|
|
(36
|
)
|
|
|
(3
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(352
|
)
|
|
$
|
71
|
|
|
$
|
(61
|
)
|
|
$
|
(423
|
)
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
248
|
|
|
$
|
326
|
|
|
$
|
128
|
|
|
$
|
(78
|
)
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operations consumed cash at a higher rate during the year
ended March 31, 2009 compared to the prior year period due
to slowing business conditions and higher working capital levels
associated with rapidly changing aluminum prices and the timing
of payments made to suppliers, to brokers to settle derivative
positions and ultimate settlement with our customers. Inventory
levels were effectively managed despite slowing business
conditions. Metal inventories as of March 31, 2009 totaled
299 kt, down 22% from March 31, 2008 levels.
54
We have historically maintained forfeiting and factoring
arrangements in Asia and South America that provided additional
liquidity in those segments. The current economic conditions
have negatively impacted our ability to forfait our customer
receivables as well as our suppliers ability to provide
extended payment terms.
In fiscal 2008, net cash provided by operating activities
increased as a result of our reduced exposure to metal price
ceiling contracts as discussed above. For the year ended
March 31, 2008 our exposure to metal price ceilings
decreased by approximately $230 million providing
additional operating cash flow as compared to the prior year.
Net cash used in operating activities for fiscal 2008 was
unfavorably impacted by one-time costs associated with or
triggered by the Arrangement including:
(1) $72 million paid in share-based compensation
payments, (2) $42 million paid for sale transaction
fees and (3) $25 million in bonus payments for the
2006 calendar year and the period from January 1, 2007
through May 15, 2007.
Dividends paid to our minority interests, primarily in our Asia
operating segment, were $6 million, $8 million and $10
for fiscal 2009, 2008 and 2007, respectively.
The majority of our capital expenditures for the 2009, 2008 and
2007 years have been for projects devoted to product
quality, technology, productivity enhancement and increased
capacity. Capital expenditures were slightly higher in the
fiscal 2008 period due, in part, to the construction of Novelis
Fusiontm
ingot casting lines in our European and Asian segments as well
as additional planned maintenance activities, improvements to
our Yeongju, Korea hot mill and other ancillary upgrades made in
the first quarter of fiscal 2008. As a result of the overall
economic downturn, we have reduced our capital spending, with a
focus on preserving maintenance and safety in the second half of
fiscal 2009.
The settlement of derivative instruments resulted in an outflow
of $8 million and reduction to Free cash flow for the year
ended March 31, 2009 as compared to $55 million in
cash contributed in fiscal 2008 and $191 million in fiscal
2007. The net outflow for fiscal 2009 was a result of
settlements of $188 million in the fourth quarter of net
derivative liabilities. Much of the proceeds received in 2007
related to aluminum call options purchased in the prior year to
hedge against the risk of rising aluminum prices.
In 2008, Free cash flow was used primarily to increase our
overall liquidity and pay for costs associated with the Hindalco
transaction. Although our total debt increased from
March 31, 2007 by $82 million, this was more than
offset by an increase in our cash and cash equivalents of
$198 million.
Investing
Activities
The following table presents information regarding our Net cash
provided by (used in) investing activities (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Year Ended March 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(145
|
)
|
|
$
|
(202
|
)
|
|
$
|
(119
|
)
|
|
$
|
57
|
|
|
$
|
(83
|
)
|
Proceeds from sales of assets
|
|
|
5
|
|
|
|
8
|
|
|
|
36
|
|
|
|
(3
|
)
|
|
|
(28
|
)
|
Changes to investment in and advances to non-consolidated
affiliates
|
|
|
20
|
|
|
|
25
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
23
|
|
Proceeds from related parties loans receivable, net
|
|
|
17
|
|
|
|
18
|
|
|
|
31
|
|
|
|
(1
|
)
|
|
|
(13
|
)
|
Net proceeds (outflow) from settlement of derivative instruments
|
|
|
(8
|
)
|
|
|
55
|
|
|
|
191
|
|
|
|
(63
|
)
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
(111
|
)
|
|
$
|
(96
|
)
|
|
$
|
141
|
|
|
$
|
(15
|
)
|
|
$
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Net proceeds from settlement of derivative instruments and the
magnitude of capital expenditures were discussed above in
Operating Activities as both are included in our definition of
Free cash flow. As noted above, we made reductions to capital
expenditures in 2009 as a result of the overall economic
downturn. We expect to maintain a level of capital expenditures
in fiscal 2010 of between $90 and $110 million for items
necessary to maintain comparable production, quality and market
position levels (maintenance capital).
The majority of proceeds from asset sales in 2009 and 2008 are
from the sale of land in Kingston, Ontario. Proceeds from sales
of assets in 2007 includes approximately $34 million
received from the sale of certain upstream assets in South
America.
Proceeds from loans receivable, net during all periods are
primarily comprised of payments we received related to a loan
due from our non-consolidated affiliate, Aluminium Norf GmbH.
Financing
Activities
The following table presents information regarding our Net cash
provided by financing activities (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Year Ended March 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$
|
|
|
|
$
|
92
|
|
|
$
|
|
|
|
$
|
(92
|
)
|
|
$
|
92
|
|
Proceeds from issuance of debt
|
|
|
354
|
|
|
|
1,250
|
|
|
|
41
|
|
|
|
(896
|
)
|
|
|
1,209
|
|
Principal repayments
|
|
|
(235
|
)
|
|
|
(1,010
|
)
|
|
|
(242
|
)
|
|
|
775
|
|
|
|
(768
|
)
|
Short-term borrowings, net
|
|
|
176
|
|
|
|
(181
|
)
|
|
|
210
|
|
|
|
357
|
|
|
|
(391
|
)
|
Dividends
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
2
|
|
Debt issuance costs
|
|
|
(3
|
)
|
|
|
(39
|
)
|
|
|
(10
|
)
|
|
|
36
|
|
|
|
(29
|
)
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
1
|
|
|
|
29
|
|
|
|
(1
|
)
|
|
|
(28
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
286
|
|
|
$
|
105
|
|
|
$
|
24
|
|
|
$
|
181
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2009, we entered into a transaction in which we
exchanged Senior Notes with a face value of $275 million
for additional floating rate Term Loan with a face value of
$220 million. The exchange was accounted for as a debt
extinguishment and issuance of new debt, with the new debt
recorded at its estimated fair value of $165 million.
In February 2009, to assist in maintaining adequate liquidity
levels, we entered into an unsecured credit facility of
$100 million (the Unsecured Credit Facility) with a
scheduled maturity date of January 15, 2015 from an
affiliate of the Aditya Birla group. For each advance under the
credit facility, interest is payable quarterly at a rate of 13%
per annum prior to the first anniversary of the advance and 14%
per annum thereafter, until the earlier of repayment or
maturity. As of March 31, 2009, we have drawn down
$91 million on the Unsecured Credit Facility.
During 2009, we increased our short-term borrowings under our
revolving credit facility to provide for general working capital
requirements. As of March 31, 2009, our short-term
borrowings were $264 million consisting of
(1) $231 million of short-term loans under our ABL
facility, (2) a $9 million short-term loan in Italy,
(3) a $22 million short-term loan in Korea and
(4) $2 million in bank overdrafts. As of
March 31, 2009, $42 million of our ABL facility was
utilized for letters of credit and we had $233 million in
remaining availability under this revolving credit facility
before the covenant related restriction discussed below.
As of March 31, 2009, we had an additional $92 million
outstanding under letters of credit in Korea not included in our
revolving credit facility. The weighted average interest rate on
our total short-term borrowings was 2.75% and 4.12% as of
March 31, 2009 and 2008, respectively.
56
As a result of our acquisition by Hindalco, we were required to
refinance our existing credit facility in fiscal 2008.
Additionally, we refinanced debt in Asia due to its scheduled
maturity. See Note 12 Debt to our consolidated
and combined financial statements for additional information
regarding our financing activities.
During the first quarter of fiscal 2008, we also amended our
then existing senior secured credit facilities to increase its
capacity by $150 million. We used these proceeds to reduce
the outstanding balance of our then existing revolving credit
facility, thus increasing our borrowing capacity. This
additional capacity, along with $92 million of cash
received from the issuance of additional shares indirectly to
Hindalco, allowed us to fund general working capital
requirements and certain costs associated with the Arrangement
including the cash settlement of share-based compensation
arrangements and lender fees. In July 2007, we refinanced our
Credit Agreements, as discussed below.
Credit
Agreements and Predecessor Financing
In connection with our spin-off from Alcan, we entered into
senior secured credit facilities (Old Credit Facilities)
providing for aggregate borrowings of up to $1.8 billion.
The Old Credit Facilities consisted of (1) a
$1.3 billion seven-year senior secured Term Loan B
facility, bearing interest at London Interbank Offered Rate
(LIBOR) plus 1.75% (which was subject to change based on certain
leverage ratios), all of which was borrowed on January 10,
2005, and (2) a $500 million five-year multi-currency
revolving credit and letters of credit facility.
On April 27, 2007, our lenders consented to the sixth
amendment of our Old Credit Facilities. The amendment included
increasing the Term Loan B facility by $150 million. We
utilized the additional funds available under the Term Loan B
facility to reduce the outstanding balance of our
$500 million revolving credit facility. The additional
borrowing capacity under the revolving credit facility was used
to fund working capital requirements and certain costs
associated with the Arrangement, including the cash settlement
of share-based compensation arrangements and lender fees.
Additionally, the amendment included a limited waiver of the
change of control Event of Default (as defined) which
effectively extended the requirement to repay the Old Credit
Facilities to July 11, 2007.
On May 25, 2007, we entered into a Bank and Bridge
Facilities Commitment with affiliates of UBS and ABN AMRO, to
provide backstop assurance for the refinancing of our existing
indebtedness following the Arrangement. The commitments from UBS
and ABN AMRO, provided by the banks on a 50%-50% basis,
consisted of the following: (1) a senior secured term loan
of up to $1.06 billion; (2) a senior secured
asset-based revolving credit facility of up to $900 million
and (3) a commitment to issue up to $1.2 billion of
unsecured senior notes, if necessary. The commitment contained
terms and conditions customary for facilities of this nature.
On July 6, 2007, we entered into new senior secured credit
facilities with a syndicate of lenders led by affiliates of UBS
and ABN AMRO (Credit Agreements) providing for aggregate
borrowings of up to $1.76 billion. The Credit Agreements
consist of (1) a $960 million seven-year Term Loan
facility (Term Loan facility) and (2) an $800 million
five year multi-currency asset-based revolving credit line and
letter of credit facility (ABL facility).
The proceeds from the Term Loan facility of $960 million,
drawn in full at the time of closing, and an initial draw of
$324 million under the ABL facility were used to pay off
our old credit facility, pay for debt issuance costs of the
Credit Agreements and provide for additional working capital.
Mandatory minimum principal amortization payments under the Term
Loan facility are $2.4 million per calendar quarter. The
first minimum principal amortization payment was made on
September 30, 2007. Additional mandatory prepayments are
required to be made for certain collateral liquidations, asset
sales, debt and preferred stock issuances, equity issuances,
casualty events and excess cash flow (as defined in the Credit
Agreements). Any unpaid principal is due in full on July 6,
2014.
Under the Term Loan facility, loans characterized as alternate
base rate (ABR) borrowings bear interest annually at a rate
equal to the alternate base rate (which is the greater of
(a) the base rate in effect on a given day and (b) the
federal funds effective rate in effect on a given day, plus
0.50%) plus the applicable margin.
57
Loans characterized as Eurocurrency borrowings bear interest at
an annual rate equal to the adjusted LIBOR rate for the interest
period in effect, plus the applicable margin. Generally, for
both the Term Loan facility and ABL facility, interest rates
reset every three months and interest is payable on a monthly,
quarterly, or other periodic basis depending on the type of loan.
Borrowings under the ABL facility are generally based on 85% of
eligible accounts receivable and 70 to 75% of eligible
inventories. Commitment fees ranging from 0.25% to 0.375% are
based on average daily amounts outstanding under the ABL
facility during a fiscal quarter and are payable quarterly.
The Credit Agreements include customary affirmative and negative
covenants. Under the ABL facility, if our excess availability,
as defined under the borrowing, is less than $80 million,
we are required to maintain a minimum fixed charge coverage
ratio of 1 to 1. Substantially all of our assets are pledged as
collateral under the Credit Agreements.
As discussed above, in March 2009, we issued an additional Term
Loan with a face value of $220 million in exchange for
$275 million of Senior Notes. The additional Term Loan was
recorded at a fair value of $165 million determined using a
discounted cash flow model. The difference between the fair
value and the face value of the new Term Loan will be accreted
over the life of the Term Loan using the effective interest
method, resulting in additional non-cash interest expense.
7.25% Senior
Notes
On February 3, 2005, we issued $1.4 billion aggregate
principal amount of senior unsecured debt securities (Senior
Notes). The Senior Notes were priced at par, bear interest at
7.25% and mature on February 15, 2015.
Under the indenture that governs the Senior Notes, we are
subject to certain restrictive covenants applicable to incurring
additional debt and providing additional guarantees, paying
dividends beyond certain amounts and making other restricted
payments, sales and transfers of assets, certain consolidations
or mergers, and certain transactions with affiliates.
Pursuant to the terms of the indenture governing our Senior
Notes, we were obligated, within 30 days of closing of the
Arrangement, to make an offer to purchase the Senior Notes at a
price equal to 101% of their principal amount, plus accrued and
unpaid interest to the date the Senior Notes were purchased.
Consequently, we commenced a tender offer on May 16, 2007
to repurchase all of the outstanding Senior Notes at the
prescribed price. This offer expired on July 3, 2007 with
holders of approximately $1 million of principal presenting
their Senior Notes pursuant to the tender offer.
As described above, in March 2009, we entered into a transaction
in which we exchanged Senior Notes with a face value of
$275 million for additional floating rate Term Loan with a
face value of $220 million.
Korean
Bank Loans
In November 2004, Novelis Korea Limited (Novelis Korea),
formerly Alcan Taihan Aluminium Limited, entered into a Korean
won (KRW) 40 billion ($40 million) floating rate
long-term loan due November 2007. We immediately entered into an
interest rate swap to fix the interest rate at 4.80%. In August
2007, we refinanced this loan with a floating rate short-term
borrowing in the amount of $40 million due by August 2008.
We recognized a loss on extinguishment of debt of less than
$1 million in connection with this refinancing.
Additionally, we immediately entered into an interest rate swap
and cross currency swap for the new loan through a 3.94% fixed
rate KRW 38 billion ($38 million) loan.
In December 2004, we entered into (1) a $70 million
floating rate loan and (2) a KRW 25 billion
($25 million) floating rate loan, both due in December
2007. We immediately entered into an interest rate and cross
currency swap on the $70 million floating rate loan through
a 4.55% fixed rate KRW 73 billion ($73 million) loan
and an interest rate swap on the KRW 25 billion floating
rate loan to fix the interest rate at 4.45%. In October 2007, we
entered into a $100 million floating rate loan due October
2010 and immediately repaid the $70 million loan. In
December 2007, we repaid the KRW 25 billion loan from the
proceeds of the $100 million
58
floating rate loan. Additionally, we immediately entered into an
interest rate swap and cross currency swap for the
$100 million floating rate loan through a 5.44% fixed rate
KRW 92 billion ($92 million) loan.
In November 2008, we entered into a 7.47% interest rate KRW
10 billion ($7 million) bank loan due May 2009. In
February 2009, we entered into a 3.94% interest rate KRW
50 billion ($37 million) bank loan due February 2010.
Interest
Rate Swaps
As of March 31, 2009, we had entered into interest rate
swaps to fix the variable LIBOR interest rate on
$700 million of our floating rate Term Loan facility. We
are still obligated to pay any applicable margin, as defined in
our Credit Agreements. Interest rates swaps related to
$400 million at an effective weighted average interest rate
of 4.0% expire March 31, 2010. In January 2009, we entered
into two interest rate swaps to fix the variable LIBOR interest
rate on an additional $300 million of our floating rate
Term Loan facility at a rate of 1.49%, plus any applicable
margin. These interest rate swaps are effective from
March 31, 2009 through March 31, 2011.
As of March 31, 2009 approximately 71% of our debt was
fixed rate and approximately 29% was variable-rate.
Issuance
of Additional Common Stock
On June 22, 2007, we issued 2,044,122 additional shares to
AV Aluminum for $44.93 per share resulting in an additional
equity contribution of $92 million. This contribution was
equal in amount to certain payments made by Novelis related to
change in control compensation to certain employees and
directors, lender fees and other transaction costs incurred by
the Company.
OFF-BALANCE
SHEET ARRANGEMENTS
In accordance with SEC rules, the following qualify as
off-balance sheet arrangements:
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any obligation under certain derivative instruments;
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any obligation under certain guarantees or contracts;
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a retained or contingent interest in assets transferred to an
unconsolidated entity or similar entity or similar arrangement
that serves as credit, liquidity or market risk support to that
entity for such assets and
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any obligation under a material variable interest held by the
registrant in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to the registrant,
or engages in leasing, hedging or research and development
services with the registrant.
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The following discussion addresses the applicable off-balance
sheet items for our Company.
Derivative
Instruments
As of March 31, 2009, we have derivative financial
instruments, as defined by FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities
(FASB 133). See Note 16 Financial
Instruments and Commodity Contracts to our accompanying
consolidated financial statements.
In conducting our business, we use various derivative and
non-derivative instruments to manage the risks arising from
fluctuations in exchange rates, interest rates, aluminum prices
and energy prices. Such instruments are used for risk management
purposes only. We may be exposed to losses in the future if the
counterparties to the contracts fail to perform. We are
satisfied that the risk of such non-performance is remote due to
our monitoring of credit exposures. Our ultimate gain or loss on
these derivatives may differ from the amount recognized in the
accompanying March 31, 2009 consolidated balance sheet.
59
The decision of whether and when to execute derivative
instruments, along with the duration of the instrument, can vary
from period to period depending on market conditions, the
relative costs of the instruments and capacity to hedge. The
duration is always linked to the timing of the underlying
exposure, with the connection between the two being regularly
monitored.
The current and noncurrent portions of derivative assets and the
current portion of derivative liabilities are presented on the
face of our accompanying consolidated balance sheets. The
noncurrent portions of derivative liabilities are included in
Other long-term liabilities in the accompanying consolidated
balance sheets.
The fair values of our financial instruments and commodity
contracts as of March 31, 2009 and March 31, 2008 are
as follows (in millions):
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March 31, 2009
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Assets
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Liabilities
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Net Fair Value
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Current
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Noncurrent
|
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Current
|
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Noncurrent
|
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Assets/(Liabilities)
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Successor
|
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Derivatives designated as hedging instruments:
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Currency exchange contracts
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$
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$
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$
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$
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(11
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)
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$
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(11
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)
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Interest rate swaps
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|
|
|
|
|
|
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(13
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)
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(13
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)
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Electricity swap
|
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|
|
|
|
|
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(6
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)
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(12
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)
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(18
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)
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Total derivatives designated as hedging instruments
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(19
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)
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(23
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)
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(42
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)
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Derivatives not designated as hedging instruments:
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Aluminum contracts
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99
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41
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(532
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)
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(13
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)
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(405
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)
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Currency exchange contracts
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20
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|
|
|
31
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(77
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)
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(12
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)
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(38
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)
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Energy contracts
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|
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(12
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)
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(12
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)
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Total derivatives not designated as hedging instruments
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119
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72
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(621
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)
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(25
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)
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(455
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)
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|
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Total derivative fair value
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$
|
119
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$
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72
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$
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(640
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)
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$
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(48
|
)
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$
|
(497
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)
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|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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March 31, 2008
|
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|
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Assets
|
|
|
Liabilities
|
|
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Net Fair Value
|
|
|
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Current
|
|
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Noncurrent
|
|
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Current
|
|
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Noncurrent
|
|
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Assets/(Liabilities)
|
|
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Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Derivatives designated as hedging instruments:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Currency exchange contracts
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$
|
|
|
|
$
|
|
|
|
$
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|
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|
$
|
(184
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)
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$
|
(184
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)
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Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
(3
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)
|
|
|
(12
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)
|
|
|
(15
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)
|
Electricity swap
|
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|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Total derivatives designated as hedging instruments
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3
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|
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|
11
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|
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(3
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)
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(196
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)
|
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|
(185
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)
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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Derivatives not designated as hedging instruments:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Aluminum forward contracts
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|
131
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|
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|
4
|
|
|
|
(29
|
)
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|
|
|
|
|
|
106
|
|
Currency exchange contracts
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|
|
64
|
|
|
|
6
|
|
|
|
(116
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)
|
|
|
(5
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)
|
|
|
(51
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)
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Energy contracts
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|
5
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|
|
|
|
|
|
|
|
|
|
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|
5
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|
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|
|
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|
|
|
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|
|
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|
|
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Total derivatives not designated as hedging instruments
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200
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|
|
|
10
|
|
|
|
(145
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)
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(5
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)
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|
60
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total derivative fair value
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$
|
203
|
|
|
$
|
21
|
|
|
$
|
(148
|
)
|
|
$
|
(201
|
)
|
|
$
|
(125
|
)
|
|
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|
|
|
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60
Net
Investment Hedges
We use cross-currency swaps to manage our exposure to
fluctuating exchange rates arising from our loans to and
investments in our European operations. The effective portion of
gain or loss on the fair value of the derivative is included in
Other comprehensive income (loss) (OCI). Prior to the
Arrangement, the effective portion on the derivative was
included in Change in fair value of effective portion of hedges,
net. After the completion of the Acquisition, the effective
portion on the derivative is included in Currency translation
adjustments. The ineffective portion of gain or loss on the
derivative is included in (Gain) loss on change in fair value of
derivative instruments, net. We had cross-currency swaps of
Euro 135 million against the U.S. dollar
outstanding as of March 31, 2009.
The following table summarizes the amount of gain (loss) we
recognized in OCI related to our net investment hedge
derivatives (in millions).
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|
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May 16,
|
|
|
|
April 1,
|
|
|
|
|
|
|
2007
|
|
|
|
2007
|
|
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|
Year Ended
|
|
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Through
|
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|
Through
|
|
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|
March 31,
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Currency exchange contracts
|
|
$
|
169
|
|
|
$
|
(82
|
)
|
|
|
$
|
(8
|
)
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Cash Flow
Hedges
We own an interest in an electricity swap which we have
designated as a cash flow hedge against our exposure to
fluctuating electricity prices. The effective portion of gain or
loss on the derivative is included in OCI and reclassified when
settled into (Gain) loss on change in fair value of derivatives,
net in our accompanying consolidated statements of operations
and comprehensive loss. As of March 31, 2009, the
outstanding portion of this swap includes 20,888 megawatt hours
through 2017.
We use interest rate swaps to manage our exposure to changes in
the benchmark LIBOR interest rate arising from our variable-rate
debt. We have designated these as cash flow hedges. The
effective portion of gain or loss on the derivative is included
in OCI and reclassified when settled into Interest expense and
amortization of debt issuance costs in our accompanying
consolidated statements of operations and comprehensive loss. We
had $690 million of outstanding interest rate swaps
designated as cash flow hedges as of March 31, 2009.
For all derivatives designated as cash flow hedges, gains or
losses representing hedge ineffectiveness are recognized in
(Gain) loss on change in fair value of derivative instruments,
net in our current period earnings. If at any time during the
life of a cash flow hedge relationship we determine that the
relationship is no longer effective, the derivative will be
de-designated as a cash flow hedge. This could occur if the
underlying hedged exposure is determined to no longer be
probable, or if our ongoing assessment of hedge effectiveness
determines that the hedge relationship no longer meets the
measures we have established at the inception of the hedge.
Gains or losses recognized to date in AOCI would be immediately
reclassified into current period earnings, as would any
subsequent changes in the fair value of any such derivative.
During the next twelve months we expect to realize
$13 million in effective net losses from our cash flow
hedges. The maximum period over which we have hedged our
exposure to cash flow variability is through 2017.
61
The following table summarizes the impact on AOCI and earnings
of derivative instruments designated as cash flow hedge (in
millions).
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|
|
|
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Gain or (Loss)
|
|
|
|
|
|
|
|
|
|
Recognized in Income
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
(Ineffective Portion and Amount
|
|
|
|
Gain (Loss)
|
|
|
Reclassified from
|
|
|
Excluded from
|
|
|
|
Recognized in OCI
|
|
|
AOCI into Income
|
|
|
Effectiveness Testing)
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2009
|
|
|
March 31, 2009
|
|
|
March 31, 2009
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Energy contracts
|
|
$
|
(21
|
)
|
|
$
|
12
|
|
|
$
|
|
|
Interest rate swaps
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
Recognized in Income
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
(Ineffective Portion and Amount
|
|
|
|
Gain (Loss)
|
|
|
Reclassified from
|
|
|
Excluded from
|
|
|
|
Recognized in OCI
|
|
|
AOCI into Income
|
|
|
Effectiveness Testing)
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Through
|
|
|
|
Through
|
|
|
Through
|
|
|
|
Through
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Currency exchange contracts
|
|
$
|
|
|
|
|
$
|
4
|
|
|
$
|
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
$
|
|
|
Energy contracts
|
|
$
|
23
|
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Interest rate swaps
|
|
$
|
(15
|
)
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
|
|
Derivative
Instruments Not Designated as Hedges
We use aluminum forward contracts and options to hedge our
exposure to changes in the London Metal Exchange (LME) price of
aluminum. These exposures arise from firm commitments to sell
aluminum in future periods at fixed or capped prices, the
forecasted output of our smelter operations in South America and
the forecasted metal price lag associated with firm commitments
to sell aluminum in future periods at prices based on the LME.
In addition, transactions with certain customers meet the
definition of a derivative under FASB 133 and are recognized as
assets or liabilities at fair value on the accompanying
consolidated balance sheets. As of March 31, 2009, we had
294 kilotonnes (kt) of outstanding aluminum contracts not
designated as hedges.
We recognize a derivative position which arises from a
contractual relationship with a customer that entitles us to
pass-through the economic effect of trading positions that we
take with other third parties on our customers behalf.
We use foreign exchange forward contracts and cross-currency
swaps to manage our exposure to changes in exchange rates. These
exposures arise from recorded assets and liabilities, firm
commitments and forecasted cash flows denominated in currencies
other than the functional currency of certain of our operations.
As of March 31, 2009, we had outstanding currency exchange
contracts with a total notional amount of $1.4 billion not
designated as hedges.
We use heating oil swaps and natural gas swaps to manage our
exposure to fluctuating energy prices in North America. As of
March 31, 2009, we had 3.4 million gallons of heating
oil swaps and 3.8 million MMBtus of natural gas that
were not designated as hedges.
While each of these derivatives is intended to be effective in
helping us manage risk, they have not been designated as hedging
instruments under FASB 133. The change in fair value of these
derivative instruments is included in (Gain) loss on change in
fair value of derivative instruments, net in the accompanying
consolidated statement of operations.
62
The following table summarizes the gains (losses) recognized in
current period earnings (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
Through
|
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Derivative Instruments Not Designated as Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts
|
|
$
|
(561
|
)
|
|
$
|
44
|
|
|
|
$
|
7
|
|
Currency exchange contracts
|
|
|
24
|
|
|
|
(44
|
)
|
|
|
|
10
|
|
Energy contracts
|
|
|
(29
|
)
|
|
|
12
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized
|
|
|
(569
|
)
|
|
|
12
|
|
|
|
|
20
|
|
Derivative Instruments Designated as Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
Electricity swap
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on change in fair value of derivative instruments,
net
|
|
$
|
(556
|
)
|
|
$
|
22
|
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
of Indebtedness
We have issued guarantees on behalf of certain of our
subsidiaries and non-consolidated affiliates, including certain
of our wholly-owned subsidiaries and Aluminium Norf GmbH, which
is a fifty percent (50%) owned joint venture that does not meet
the requirements for consolidation under FASB Interpretation
No. 46 (Revised), Consolidation of Variable Interest
Entities (FIN 46(R)).
In the case of our wholly-owned subsidiaries, the indebtedness
guaranteed is for trade accounts payable to third parties. Some
of the guarantees have annual terms while others have no
expiration and have termination notice requirements. Neither we
nor any of our subsidiaries or non-consolidated affiliates holds
any assets of any third parties as collateral to offset the
potential settlement of these guarantees.
Since we consolidate wholly-owned and majority-owned
subsidiaries in our consolidated financial statements, all
liabilities associated with trade payables and short-term debt
facilities for these entities are already included in our
consolidated balance sheets.
The following table discloses information about our obligations
under guarantees of indebtedness of others as of March 31,
2009 (in millions). We did not have any obligations under
guarantees of indebtedness related to our majority-owned
subsidiaries as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Liability
|
|
|
|
Potential Future
|
|
|
Carrying
|
|
|
|
Payment
|
|
|
Value
|
|
|
Wholly-owned Subsidiaries
|
|
$
|
50
|
|
|
$
|
14
|
|
Aluminium Norf GmbH
|
|
|
13
|
|
|
|
|
|
We have no retained or contingent interest in assets transferred
to an unconsolidated entity or similar entity or similar
arrangement that serves as credit, liquidity or market risk
support to that entity for such assets.
Other
Arrangements
Forfaiting
of Trade Receivables
Novelis Korea Limited forfaits trade receivables in the ordinary
course of business. These trade receivables are typically
outstanding for 60 to 120 days. Forfaiting is a
non-recourse method to manage credit and interest rate risks.
Under this method, customers contract to pay a financial
institution. The institution assumes the risk of non-payment and
remits the invoice value (net of a fee) to us after presentation
of a proof
63
of delivery of goods to the customer. We do not retain a
financial or legal interest in these receivables, and they are
not included in our consolidated balance sheets.
Factoring
of Trade Receivables
Our Brazilian operations factor, without recourse, certain trade
receivables that are unencumbered by pledge restrictions. Under
this method, customers are directed to make payments on invoices
to a financial institution, but are not contractually required
to do so. The financial institution pays us any invoices it has
approved for payment (net of a fee). We do not retain financial
or legal interest in these receivables, and they are not
included in our consolidated balance sheets.
Summary
Disclosures of Forfaited and Factored Financial
Amounts
The following tables summarize our forfaiting and factoring
amounts (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Three Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Receivables forfaited
|
|
$
|
570
|
|
|
$
|
507
|
|
|
|
$
|
51
|
|
|
$
|
68
|
|
|
$
|
424
|
|
Receivables factored
|
|
$
|
70
|
|
|
$
|
75
|
|
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
71
|
|
Forfaiting expense
|
|
$
|
5
|
|
|
$
|
6
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
5
|
|
Factoring expense
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Forfaited receivables outstanding
|
|
$
|
71
|
|
|
$
|
149
|
|
Factored receivables outstanding
|
|
$
|
|
|
|
$
|
|
|
The amount of forfaited receivables outstanding decreased as of
March 31, 2009 as compared to March 31, 2008 primarily
due to decline in the LME price from March 31, 2008 to
March 31, 2009 which resulted in a smaller amount of
receivables available for forfaiting, as well as tightening in
the credit markets.
Other
As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities
(SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of March 31,
2009 and 2008, we were not involved in any unconsolidated SPE
transactions.
CONTRACTUAL
OBLIGATIONS
We have future obligations under various contracts relating to
debt and interest payments, capital and operating leases,
long-term purchase obligations, and postretirement benefit
plans. The following table presents our estimated future
payments under contractual obligations that exist as of
March 31, 2009, based on undiscounted amounts (in
millions). The future cash flow commitments that we may have
related to derivative contracts are not estimable and are
therefore not included. Furthermore, due to the difficulty in
determining
64
the timing of settlements, the table excludes $61 million
of uncertain tax positions. See Note 19 Income
Taxes to our accompanying consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Debt(A)
|
|
$
|
2,522
|
|
|
$
|
56
|
|
|
$
|
126
|
|
|
$
|
22
|
|
|
$
|
2,318
|
|
Interest on long-term debt(B)
|
|
|
754
|
|
|
|
159
|
|
|
|
306
|
|
|
|
200
|
|
|
|
89
|
|
Capital leases(C)
|
|
|
68
|
|
|
|
7
|
|
|
|
14
|
|
|
|
13
|
|
|
|
34
|
|
Operating leases(D)
|
|
|
96
|
|
|
|
19
|
|
|
|
30
|
|
|
|
24
|
|
|
|
23
|
|
Purchase obligations(E)
|
|
|
7,205
|
|
|
|
2,035
|
|
|
|
3,121
|
|
|
|
1,303
|
|
|
|
746
|
|
Unfunded pension plan benefits(F)
|
|
|
120
|
|
|
|
12
|
|
|
|
21
|
|
|
|
24
|
|
|
|
63
|
|
Other post-employment benefits(F)
|
|
|
114
|
|
|
|
7
|
|
|
|
17
|
|
|
|
21
|
|
|
|
69
|
|
Funded pension plans(F)
|
|
|
52
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,931
|
|
|
$
|
2,347
|
|
|
$
|
3,635
|
|
|
$
|
1,607
|
|
|
$
|
3,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes only principal payments on our Senior Notes, term
loans, revolving credit facilities and notes payable to banks
and others. These amounts exclude payments under capital lease
obligations. |
|
(B) |
|
Interest on our fixed rate debt is estimated using the stated
interest rate. Interest on our variable-rate debt is estimated
using the rate in effect as of March 31, 2009 and includes
the effect of current interest rate swap agreements. Actual
future interest payments may differ from these amounts based on
changes in floating interest rates or other factors or events.
These amounts include an estimate for unused commitment fees.
Excluded from these amounts are interest related to capital
lease obligations, the amortization of debt issuance and other
costs related to indebtedness. |
|
(C) |
|
Includes both principal and interest components of future
minimum capital lease payments. Excluded from these amounts are
insurance, taxes and maintenance associated with the property. |
|
(D) |
|
Includes the minimum lease payments for non-cancelable leases
for property and equipment used in our operations. We do not
have any operating leases with contingent rents. Excluded from
these amounts are insurance, taxes and maintenance associated
with the properties and equipment. |
|
(E) |
|
Includes agreements to purchase goods (including raw materials
and capital expenditures) and services that are enforceable and
legally binding on us, and that specify all significant terms.
Some of our raw material purchase contracts have minimum annual
volume requirements. In these cases, we estimate our future
purchase obligations using annual minimum volumes and costs per
unit that are in effect as of March 31, 2009. Due to
volatility in the cost of our raw materials, actual amounts paid
in the future may differ from these amounts. Excluded from these
amounts are the impact of any derivative instruments and any
early contract termination fees, such as those typically present
in energy contracts. |
|
(F) |
|
Obligations for postretirement benefit plans are estimated based
on actuarial estimates using benefit assumptions for, among
other factors, discount rates, rates of compensation increases,
and healthcare cost trends. Payments for unfunded pension plan
benefits and other post-employment benefits are estimated
through 2016. For funded pension plans, estimating the
requirements beyond fiscal 2010 is not practical, as it depends
on the performance of the plans investments, among other
factors. |
65
DIVIDENDS
On March 1, 2005, our board of directors approved the
adoption of a quarterly dividend on our common shares. The
following table shows information regarding dividends declared
on our common shares since our inception.
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Dividend/Share
|
|
|
Payment Date
|
|
March 1, 2005
|
|
March 11, 2005
|
|
$
|
0.09
|
|
|
March 24, 2005
|
April 22, 2005
|
|
May 20, 2005
|
|
$
|
0.09
|
|
|
June 20, 2005
|
July 27, 2005
|
|
August 22, 2005
|
|
$
|
0.09
|
|
|
September 20, 2005
|
October 28, 2005
|
|
November 21, 2005
|
|
$
|
0.09
|
|
|
December 20, 2005
|
February 23, 2006
|
|
March 8, 2006
|
|
$
|
0.09
|
|
|
March 23, 2006
|
April 27, 2006
|
|
May 20, 2006
|
|
$
|
0.09
|
|
|
June 20, 2006
|
August 28, 2006
|
|
September 7, 2006
|
|
$
|
0.01
|
|
|
September 25, 2006
|
October 26, 2006
|
|
November 20, 2006
|
|
$
|
0.01
|
|
|
December 20, 2006
|
No dividends have been declared since October 26, 2006.
Future dividends are at the discretion of the board of directors
and will depend on, among other things, our financial resources,
cash flows generated by our business, our cash requirements,
restrictions under the instruments governing our indebtedness,
being in compliance with the appropriate indentures and
covenants under the instruments that govern our indebtedness
that would allow us to legally pay dividends and other relevant
factors.
ENVIRONMENT,
HEALTH AND SAFETY
We strive to be a leader in environment, health and safety
(EHS). Our EHS system is aligned with ISO 14001, an
international environmental management standard, and OHSAS
18001, an international occupational health and safety
management standard. All of our facilities are expected to
implement the necessary management systems to support ISO 14001
and OHSAS 18001 certifications. As of March 31, 2009, all
of our manufacturing facilities worldwide were ISO 14001
certified, 31 facilities were OHSAS 18001 certified and 29 have
dedicated quality improvement management systems.
Our capital expenditures for environmental protection and the
betterment of working conditions in our facilities were
$5 million in fiscal 2009. We expect these capital
expenditures will be approximately $3 million and
$9 million in fiscal 2010 and 2011, respectively. In
addition, expenses for environmental protection (including
estimated and probable environmental remediation costs as well
as general environmental protection costs at our facilities)
were $24 million in fiscal 2009, and are expected to be
$36 million and $31 million in fiscal 2010 and 2011.
Generally, expenses for environmental protection are recorded in
Cost of goods sold. However, significant remediation costs that
are not associated with on-going operations are recorded in
Other (income) expenses, net.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and
liquidity and capital resources are based on our consolidated
financial statements which have been prepared in accordance with
GAAP. In connection with the preparation of our consolidated
financial statements, we are required to make assumptions and
estimates about future events, and apply judgments that affect
the reported amounts of assets, liabilities, revenue, expenses,
and the related disclosures. We base our assumptions, estimates
and judgments on historical experience, current trends and other
factors we believe to be relevant at the time we prepared our
consolidated financial statements. On a regular basis, we review
the accounting policies, assumptions, estimates and judgments to
ensure that our consolidated financial statements are presented
fairly and in accordance with GAAP. However, because future
events and their effects cannot be determined with certainty,
actual results could differ from our assumptions and estimates,
and such differences could be material.
Our significant accounting policies are discussed in
Note 1 Business and Summary of Significant
Accounting Policies to our accompanying consolidated financial
statements. We believe the following
66
accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, as
they require management to make difficult, subjective or complex
judgments, and to make estimates about the effect of matters
that are inherently uncertain. We have reviewed these critical
accounting policies and related disclosures with the Audit
Committee of our board of directors.
Derivative
Financial Instruments
We use derivative instruments to manage our exposure to changes
in commodity prices, foreign currency exchange rates, energy
prices and interest rates. Derivative instruments we use are
primarily commodity forward and option contracts, foreign
currency forward contracts and interest swaps. Our operations
and cash flows are subject to fluctuations due to changes in
commodity prices, foreign currency exchange rates, energy prices
and interest rates.
We are exposed to changes in aluminum prices through
arrangements where the customer has received a fixed price
commitment from us. We attempt to manage this risk by hedging
future purchases of metal required for these firm commitments.
In addition, we hedge a portion of our future production.
To the extent that these exposures are not fully hedged, we are
exposed to gains and losses when changes occur in the market
price of aluminum. Hedges of specific arrangements and future
production increase or decrease the fair value by approximately
$37 million for a 10% change in the market value of
aluminum as of March 31, 2009.
Short-term exposures to changing foreign currency exchange rates
occur due to operating cash flows denominated in foreign
currencies. We manage this risk with forward currency swap
contracts and currency exchange options. Our most significant
foreign currency exposures relate to the euro, Brazilian real
and the Korean won. We assess market conditions and determine an
appropriate amount to hedge based on pre-determined policies.
To the extent that foreign currency operating cash flows are not
fully hedged, we are exposed to foreign exchange gains and
losses. In the event that we choose not to hedge a foreign
currency cash flow, an adverse movement in rates could impact
our earnings and cash flows. A 10% instantaneous appreciation of
all foreign exchange rates against the U.S. dollar would
reduce the fair value of our currency derivatives by
approximately $15 million.
We are exposed to changes in interest rates due to our
financing, investing and cash management activities. We may
enter into interest rate swap contracts to protect against our
exposure to changes in future interest rates, which requires
deciding how much of the exposure to hedge based on our
sensitivity to variable-rate fluctuations.
To the extent that we choose to hedge our interest costs, we are
able to avoid the impacts of changing interest rates on our
interest costs. In the event that we do not hedge a floating
rate debt a movement in market interest rates could impact our
interest cost. As of March 31, 2009, a 10% change in the
market interest rate would increase or decrease the fair value
of our interest rate hedges by $3 million. A
12.5 basis point change in market interest rates as of
March 31, 2009 would increase or decrease our unhedged
interest cost on floating rate debt by approximately
$1 million.
The majority of our derivative contracts are valued using
industry-standard models that use observable market inputs as
their basis, such as time value, forward interest rates,
volatility factors, and current (spot) and forward market prices
for foreign exchange rates. See Note 17 Fair
Value of Assets and Liabilities to our accompanying consolidated
financial statements for discussion on fair value of derivative
instruments.
Impairment
of Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. As a result
of the Arrangement, we estimated fair value of goodwill using a
number of factors, including the application of multiples and
discounted cash flow estimates. We have allocated goodwill to
our operating segments in North America, Europe and South
America, which are also reporting units for purposes
67
of performing our goodwill impairment testing. Goodwill is not
amortized; instead, it is tested for impairment annually, or
more frequently if indicators of impairment exist. On an ongoing
basis, absent any impairment indicators, we perform our goodwill
impairment testing as of the last day of February of each year.
We test consolidated goodwill for impairment using a fair value
approach at the reporting unit level. We use our operating
segments as our reporting units and perform our goodwill
impairment test in two steps. Step one compares the fair value
of each reporting unit (operating segment) to its carrying
amount. If step one indicates that an impairment potentially
exists, the second step is performed to measure the amount of
impairment, if any. Goodwill impairment exists when the
estimated fair value of goodwill is less than its carrying value.
For purposes of our step one analysis, our estimate of fair
value for each reporting unit is based on a combination of
(1) quoted market prices/relationships (the market
approach), (2) discounted cash flows (the income approach)
and (3) a stock price
build-up
approach (the
build-up
approach). The estimated fair value for each reporting unit is
within the range of fair values yielded under each approach.
Under the market approach, the fair value of each reporting unit
is determined based upon comparisons to public companies engaged
in similar businesses. Under the income approach, the fair value
of each reporting unit is based on the present value of
estimated future cash flows. The income approach is dependent on
a number of significant management assumptions including markets
and market share, sales volumes and prices, costs to produce,
capital spending, working capital changes and the discount rate.
The discount rate is commensurate with the risk inherent in the
projected cash flows and reflects the rate of return required by
an investor in the current economic conditions. Under the
build-up
approach, which is a variation of the market approach, we
estimate the fair value of each reporting unit based on the
estimated contribution of each of the reporting units to
Hindalcos total business enterprise value.
During the third fiscal quarter of 2009, we concluded that
interim impairment testing was required due to the recent
deterioration in the global economic environment and the
resulting significant decrease in both the market capitalization
of our parent company and the valuation of our publicly traded
7.25% Senior Notes. In the third quarter of fiscal 2009,
the result of our step one test indicated a potential impairment.
For our reporting units in North America, Europe and South
America, we proceeded to step two for the goodwill impairment
calculation in which we determined the implied fair value of the
goodwill and compared it to the carrying value of the goodwill.
We allocated the fair value of the reporting unit to all of its
assets and liabilities as if the reporting unit has been
acquired and the fair value was the price paid to acquire each
reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities is
the implied fair value of the reporting units goodwill.
Step two was not performed for Asia as no goodwill has been
allocated to this reporting unit. As a result of our step two
evaluation, we recorded a $1.34 billion impairment charge
in third quarter of fiscal 2009.
For impairment tests conducted in the third and fourth quarters
of fiscal 2009, we used a discount rate of 12%, an increase of
approximately 3% from the rate used in our prior year impairment
test. An increase or decrease of 0.5% in the discount rate
impacted the estimated fair value by $25-75 million,
depending on the relative size of the reporting unit.
We performed our annual testing for goodwill impairment as of
the last day of February 2009 and no additional goodwill
impairment was identified.
Equity
Investments
We invest in a number of public and privately-held companies,
primarily through joint ventures and consortiums. These
investments are accounted for using the equity method and
include our investment in Aluminium Norf GmbH (Norf). As a
result of the Arrangement, investments in and advances to
affiliates as of May 16, 2007 were adjusted to reflect fair
value.
We review equity investments for impairment whenever certain
indicators are present suggesting that the carrying value of an
investment is not recoverable. This analysis requires a
significant amount of judgment to
68
identify events or circumstances indicating that an equity
investment may be impaired. Once an impairment indicator is
identified, we must determine if an impairment exists, and if
so, whether the impairment is other than temporary, in which
case the equity investment is written down to its estimated fair
value. In connection with the impairment testing conducted in
the third quarter of fiscal 2009 related to goodwill, we also
evaluated our investment in Norf for impairment using the income
approach. This resulted in an impairment charge of
$160 million, which is reported in Equity in net (income)
loss of non-consolidated affiliates on the consolidated
statement of operations.
Impairment
of Intangible Assets
Our other intangible assets of $787 million as of
March 31, 2009 consist of tradenames, technology, customer
relationships and favorable energy and supply contracts and are
amortized over 3 to 20 years. As of March 31, 2009, we
do not have any intangible assets with indefinite useful lives.
We consider the potential impairment of these other intangibles
assets in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. For tradenames and technology, we utilize a
relief-from-royalty method. All other intangible assets are
assessed using the income approach. As a result of these
assessments, no impairment was indicated.
Impairment
of Long Lived Assets
Long-lived assets, such as property and equipment, are reviewed
for impairment when events or changes in circumstances indicate
that the carrying value of the assets contained in our financial
statements may not be recoverable. When evaluating long-lived
assets for potential impairment, we first compare the carrying
value of the asset to the assets estimated, future net
cash flows (undiscounted and without interest charges). If the
estimated future cash flows are less than the carrying value of
the asset, we calculate and recognize an impairment loss. If we
recognize an impairment loss, the adjusted carrying amount of
the asset will be its new cost basis. For a depreciable
long-lived asset, the new cost basis will be depreciated over
the remaining useful life of that asset. Restoration of a
previously recognized impairment loss is prohibited.
Our impairment loss calculations require management to apply
judgments in estimating future cash flows and asset fair values,
including forecasting useful lives of the assets and selecting
the discount rate that represents the risk inherent in future
cash flows. We recorded impairment charges on long-lived assets
of $18 million (including $17 million classified as
Restructuring charges, net), $1 million and $8 million
during the years ended March 31, 2009 and 2008, and the
three months ended March 31, 2007, respectively. We had no
impairment charges on long-lived assets during the year ended
December 31, 2006.
If actual results are not consistent with our assumptions and
judgments used in estimating future cash flows and asset fair
values, we may be exposed to additional impairment losses that
could be material to our results of operations.
Pension
and Other Postretirement Plans
We account for our defined benefit pension plans and non-pension
postretirement benefit plans in accordance with FASB Statements
No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, No. 87,
Employers Accounting for Pensions, and
No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions. Liabilities and expense for
pension plans and other postretirement benefits are determined
using actuarial methodologies and incorporate significant
assumptions, including the rate used to discount the future
estimated liability, the long-term rate of return on plan
assets, and several assumptions related to the employee
workforce (salary increases, medical costs, retirement age, and
mortality).
The actuarial models use an attribution approach that generally
spreads the financial impact of changes to the plan and
actuarial assumptions over the average remaining service lives
of the employees in the plan. Changes in liability due to
changes in actuarial assumptions such as discount rate, rate of
compensation increases and mortality, as well as annual
deviations between what was assumed and what was experienced by
the plan are treated as gains or losses. Additionally, gains and
losses are amortized over the groups average future
service. The average future service for pension plans and other
postretirement benefit plans is 12.2 and
69
12.7 years respectively. The principle underlying the
required attribution approach is that employees render service
over their average remaining service lives on a relatively
smooth basis and, therefore, the accounting for benefits earned
under the pension or non-pension postretirement benefits plans
should follow the same relatively smooth pattern.
Our pension obligations relate to funded defined benefit pension
plans we have established in the United States, Canada,
Switzerland and the United Kingdom, unfunded pension benefits
primarily in Germany, and unfunded lump sum indemnities payable
upon retirement to employees of businesses in France, South
Korea, Malaysia and Italy. Pension benefits are generally based
on the employees service and either on a flat dollar rate
or on the highest average eligible compensation before
retirement. Our other postretirement benefit obligations include
unfunded healthcare and life insurance benefits provided to
retired employees in Canada, the U.S. and Brazil.
All net actuarial gains and losses are generally amortized over
the expected average remaining service life of the employees.
The costs and obligations of pension and other postretirement
benefits are calculated based on assumptions including the
long-term rate of return on pension assets, discount rates for
pension and other postretirement benefit obligations, expected
service period, salary increases, retirement ages of employees
and healthcare cost trend rates. These assumptions bear the risk
of change as they require significant judgment and they have
inherent uncertainties that management may not be able to
control.
The most significant assumption used to calculate pension and
other postretirement obligations is the discount rates used to
determine the present value of benefits. It is based on spot
rate yield curves and individual bond matching models for
pension and other postretirement plans in Canada and the United
States, and on published long-term high quality corporate bond
indices in other countries, at the end of each fiscal year.
Adjustments were made to the index rates based on the duration
of the plans obligations for each country. The weighted
average discount rate used to determine the pension benefit
obligation was 6.0% as of March 31, 2009, compared to 5.8%
and 5.4% for March 31, 2008 and December 31, 2006,
respectively. The weighted average discount rate used to
determine the other postretirement benefit obligation was 6.2%
as of March 31, 2009, compared to 6.1% and 5.7% for
March 31, 2008 and December 31, 2006, respectively.
The weighted average discount rate used to determine the net
periodic benefit cost is the rate used to determine the benefit
obligation in the previous year.
As of March 31, 2009, an increase in the discount rate of
0.5%, assuming inflation remains unchanged, would result in a
decrease of $82 million in the pension and other
postretirement obligations and in a decrease of $10 million
in the net periodic benefit cost. A decrease in the discount
rate of 0.5% as of March 31, 2009, assuming inflation
remains unchanged, would result in an increase of
$82 million in the pension and other postretirement
obligations and in an increase of $10 million in the net
periodic benefit cost. The calculation of the estimate of the
expected return on assets and additional discussion regarding
pension and other postretirement plans is described in
Note 14 Postretirement Benefit Plans to our
accompanying consolidated financial statements. The weighted
average expected return on assets was 6.9% for 2009, 7.3% for
2008 and 7.3% for 2006. The expected return on assets is a
long-term assumption whose accuracy can only be measured over a
long period based on past experience. A variation in the
expected return on assets by 0.5% as of March 31, 2009
would result in a variation of approximately $3 million in
the net periodic benefit cost.
Income
Taxes
We account for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. In addition,
deferred tax assets are also recorded with respect to net
operating losses and other tax attribute carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. Valuation allowances are
established when realization of the benefit of deferred tax
assets is not deemed to be more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
70
The ultimate recovery of certain of our deferred tax assets is
dependent on the amount and timing of taxable income that we
will ultimately generate in the future and other factors such as
the interpretation of tax laws. This means that significant
estimates and judgments are required to determine the extent
that valuation allowances should be provided against deferred
tax assets. We have provided valuation allowances as of
March 31, 2009 aggregating $228 million against such
assets based on our current assessment of future operating
results and these other factors.
By their nature, tax laws are often subject to interpretation.
Further complicating matters is that in those cases where a tax
position is open to interpretation, differences of opinion can
result in differing conclusions as to the amount of tax benefits
to be recognized under FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48).
FIN 48 utilizes a two-step approach for evaluating tax
positions. Recognition (Step 1) occurs when an enterprise
concludes that a tax position, based solely on its technical
merits, is more likely than not to be sustained upon
examination. Measurement (Step 2) is only addressed if Step
1 has been satisfied. Under Step 2, the tax benefit is measured
as the largest amount of benefit, determined on a cumulative
probability basis that is more likely than not to be realized
upon ultimate settlement. Consequently, the level of evidence
and documentation necessary to support a position prior to being
given recognition and measurement within the financial
statements is a matter of judgment that depends on all available
evidence.
As of March 31, 2009 the total amount of unrecognized
benefits that, if recognized, would affect the effective income
tax rate in future periods based on anticipated settlement dates
is $46 million. Although management believes that the
estimates and judgments discussed herein are reasonable, actual
results could differ, which could result in gains or losses that
could be material.
Assessment
of Loss Contingencies
We have legal and other contingencies, including environmental
liabilities, which could result in significant losses upon the
ultimate resolution of such contingencies. Environmental
liabilities that are not legal asset retirement obligations are
accrued on an undiscounted basis when it is probable that a
liability exists for past events.
We have provided for losses in situations where we have
concluded that it is probable that a loss has been or will be
incurred and the amount of the loss is reasonably estimable. A
significant amount of judgment is involved in determining
whether a loss is probable and reasonably estimable due to the
uncertainty involved in determining the likelihood of future
events and estimating the financial statement impact of such
events. If further developments or resolution of a contingent
matter are not consistent with our assumptions and judgments, we
may need to recognize a significant charge in a future period
related to an existing contingency.
RECENTLY
ISSUED ACCOUNTING STANDARDS
Recently
Adopted Accounting Standards
The following accounting standards have been adopted by us
during the twelve months ended March 31, 2009.
During the quarter ended March 31, 2009, we adopted FASB
Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (FASB 161). FASB 161 changes the
disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced
disclosures about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related
hedged items are accounted for under FASB 133 and its related
interpretations and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
results of operations and cash flows. This standard had no
impact on our consolidated financial position, results of
operations and cash flows.
During the quarter ended December 31, 2008, we adopted FASB
Staff Position (FSP)
No. FAS 140-4
and FASB Interpretation No. 46(R)-8 (FIN 46(R)-8),
Disclosures by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest Entities.
FIN 46(R)-8 calls for enhanced disclosures by
71
public entities about interests in variable interest entities
(VIE) and provides users of the financial statements with
greater transparency about an enterprises involvement with
variable interest entities. This FSP had no impact on our
consolidated financial position, results of operation and cash
flows.
On April 1, 2008, we adopted FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115 (FASB 159). FASB 159 permits entities to choose
to measure financial instruments and certain other assets and
liabilities at fair value on an
instrument-by-instrument
basis (the fair value option) with changes in fair
value reported in earnings each reporting period. The fair value
option enables some companies to reduce the volatility in
reported earnings caused by measuring related assets and
liabilities differently without applying the complex hedge
accounting requirements under FASB 133, to achieve similar
results. We previously recorded our derivative contracts and
hedging activities at fair value in accordance with FASB 133. We
did not elect the fair value option for any other financial
instruments or certain other financial assets and liabilities
that were not previously required to be measured at fair value.
On April 1, 2008, we adopted FASB Statement No. 157,
Fair Value Measurements (FASB 157), as it relates to
financial assets and financial liabilities. On October 10,
2008, we adopted FASB Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3).
The FSP clarifies the application of FASB 157 in a market that
is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
FAS 157-3
is effective for prior periods for which financial statements
have not been issued. This standard had no impact on our
consolidated financial position, results of operation and cash
flows. See Note 17 Fair Value of Assets and
Liabilities regarding our adoption of this standard.
On April 1, 2008, we adopted FASB Staff Position
No. FIN 39-1,
Amendment of FASB Interpretation No. 39, (FSP
FIN 39-1).
FSP
FIN 39-1
amends FASB Statement No. 39, Offsetting of Amounts
Related to Certain Contracts, by permitting entities that
enter into master netting arrangements as part of their
derivative transactions to offset in their financial statements
net derivative positions against the fair value of amounts (or
amounts that approximate fair value) recognized for the right to
reclaim cash collateral or the obligation to return cash
collateral under those arrangements. Our adoption of this
standard did not have a material impact on our consolidated
financial position, results of operations and cash flows.
Recently
Issued Accounting Standards
The following new accounting standards have been issued, but
have not yet been adopted by us as of March 31, 2009, as
adoption is not required until future reporting periods.
In April 2009, the FASB issued FASB Staff Position
No. 107-1
(FSP
FAS 107-1)
and APB Opinion
28-1 (APB
28-1),
Interim Disclosures about Fair Value of Financial
Instruments. FSP
FAS 107-1
and APB 28-1
amends FASB 107 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosures about the fair
value of financial instruments for interim reporting periods.
FSP
FAS 107-1
and APB 28-1
will be effective for interim reporting periods ending after
June 15, 2009. As FSP
FAS 107-1
and APB 28-1
only require enhanced disclosures, they will have no impact on
our consolidated financial position, results of operation and
cash flows.
In April 2009, the FASB issued FASB Staff Position
No. 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP
FAS 157-4).
FSP
FAS 157-4
provides additional guidance in accordance with FASB
No. 157, Fair Value Measurements, when the volume
and level of activity for the asset or liability has
significantly decreased. FSP
FAS 157-4
will be effective for interim and annual reporting periods
ending after June 15, 2009. This standard will have no
impact our consolidated financial position, results of
operations and cash flows.
In April 2009, the FASB issued FASB Staff Position
No. 115-2
(FSP
FAS 115-2)
and FASB Staff Position
No. 124-2
(FSP
FAS 124-2),
Recognition of
Other-than-Temporary-Impairments.
FSP
FAS No. 115-2
and FSP
72
FAS No. 124-2
amends the
other-than-temporary
impairment guidance in U.S. GAAP for debt and equity
securities. FSP
FAS No. 115-2
and FSP
FAS No. 124-2
will be effective for interim and annual reporting periods
ending after June 15, 2009. This standard will have no
impact our consolidated financial position, results of
operations and cash flows.
In December 2008, the FASB issued FSP No. 132(R)-1,
Employers Disclosures about Pensions and Other
Postretirement Benefits (FSP No. 132(R)-1). FSP
No. 132(R)-1 requires that an employer disclose the
following information about the fair value of plan assets:
1) how investment allocation decisions are made, including
the factors that are pertinent to understanding of investment
policies and strategies; 2) the major categories of plan
assets; 3) the inputs and valuation techniques used to
measure the fair value of plan assets; 4) the effect of
fair value measurements using significant unobservable inputs on
changes in plan assets for the period; and 5) significant
concentrations of risk within plan assets. FSP No. 132(R)-1
will be effective for fiscal years ending after
December 15, 2009, with early application permitted. At
initial adoption, application of FSP No. 132(R)-1 would not
be required for earlier periods that are presented for
comparative purposes. This standard will have no impact on our
consolidated financial position, results of operations and cash
flows.
In November 2008, the Emerging Issues Task Force (EITF) issued
Issue
No. 08-06,
Equity Method Investment Accounting Considerations
(EITF 08-06).
EITF 08-6
address questions that have arisen about the application of the
equity method of accounting for investments acquired after the
effective date of both FASB 141(R) and FASB Statement
No. 160, Non-controlling Interests in Consolidated
Financial Statements.
EITF 08-06
clarifies how to account for certain transactions involving
equity method investments.
EITF 08-6
is effective on a prospective basis for fiscal years beginning
after December 15, 2008, with early adoption prohibited. We
have not yet commenced evaluating the potential impact, if any,
of the adoption of
EITF 08-6
on our consolidated financial position, results of operations
and cash flows.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of Useful Life of Intangible Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing the
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB 142. FSP
FAS 142-3
also requires expanded disclosure related to the determination
of intangible asset useful lives. FSP
FAS 142-3
is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. We have not yet commenced
evaluating the potential impact, if any, of the adoption of FSP
FAS 142-3
on our consolidated financial position, results of operations
and cash flows.
In December 2007, the FASB issued Statement No. 141
(Revised), Business Combinations (FASB 141(R)). FASB
141(R) establishes principles and requirements for how the
acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, (ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
FASB 141(R) also requires acquirers to estimate the
acquisition-date fair value of any contingent consideration and
to recognize any subsequent changes in the fair value of
contingent consideration in earnings. We will be required to
apply this new standard prospectively to business combinations
occurring after March 31, 2009, with the exception of the
accounting for valuation allowances on deferred taxes and
acquired tax contingencies. FASB 141(R) amends certain
provisions of FASB 109 such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective
date of FASB 141(R) would also apply the provisions of FASB
141(R). Early adoption is prohibited.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(FASB 160). FASB 160 establishes accounting and reporting
standards that require: (i) the ownership interest in
subsidiaries held by parties other than the parent to be clearly
identified and presented in the consolidated balance sheet
within shareholders equity, but separate from the
parents equity; (ii) the amount of consolidated net
income attributable to the parent and the noncontrolling
interest to be clearly identified and presented on the face of
the consolidated statement of operations and (iii) changes
in a parents ownership interest while the parent retains
its controlling financial interest in its subsidiary to be
73
accounted for consistently. FASB 160 applies to fiscal years
beginning after December 15, 2008. Earlier adoption is
prohibited. We do not believe that the adoption of FASB 160 will
have a material effect on our consolidated financial position,
results of operations and cash flows.
We have determined that all other recently issued accounting
standards will not have a material impact on our consolidated
financial position, results of operations or cash flows, or do
not apply to our operations.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in commodity
prices (primarily aluminum, electricity and natural gas),
foreign currency exchange rates and interest rates that could
impact our results of operations and financial condition. We
manage our exposure to these and other market risks through
regular operating and financing activities and derivative
financial instruments. We use derivative financial instruments
as risk management tools only, and not for speculative purposes.
Except where noted, the derivative contracts are
marked-to-market
and the related gains and losses are included in earnings in the
current accounting period.
By their nature, all derivative financial instruments involve
risk, including the credit risk of non-performance by
counterparties. All derivative contracts are executed with
counterparties that, in our judgment, are creditworthy. Our
maximum potential loss may exceed the amount recognized in the
accompanying March 31, 2009 consolidated balance sheet.
The decision of whether and when to execute derivative
instruments, along with the duration of the instrument, can vary
from period to period depending on market conditions and the
relative costs of the instruments. The duration is always linked
to the timing of the underlying exposure, with the connection
between the two being regularly monitored.
Commodity
Price Risks
We have commodity price risk with respect to purchases of
certain raw materials including aluminum, electricity and
natural gas.
Aluminum
Most of our business is conducted under a conversion model,
which allows us to pass through increases or decreases in the
price of aluminum to our customers. Nearly all of our products
have a price structure with two components: (i) a pass
through aluminum price based on the LME plus local market
premiums and (ii) a conversion premium based on
the conversion cost to produce the rolled product and the
competitive market conditions for that product.
In situations where we offer customers fixed prices for future
delivery of our products, we may enter into derivative
instruments for the metal inputs in order to protect the profit
on the conversion of the product. Consequently, the gain or loss
resulting from movements in the price of aluminum on these
contracts would generally be offset by an equal and opposite
impact on the net sales and purchases being hedged.
In addition, sales contracts representing approximately 10% of
our total shipments for the year ended March 31, 2009
provide for a ceiling over which metal prices could not
contractually be passed through to certain customers, unless
adjusted. As a result, we were unable to pass through the
complete increase in metal prices for sales under these
contracts and this negatively impacts our margins when the metal
price is above the ceiling price. As result of falling LME
prices and based upon a March 31, 2009 aluminum price of
$1,365 per tonne, there is no unfavorable revenue or cash flow
impact estimated through December 31, 2009 when these
contracts expire.
We employ three strategies to mitigate our risk of rising metal
prices that we cannot pass through to certain customers due to
metal price ceilings. First, we maximize the amount of our
internally supplied metal inputs from our smelting, refining and
mining operations in Brazil. Second, we rely on the output from
our recycling operations which utilize used beverage cans
(UBCs). Both of these sources of aluminum supply have
74
historically provided a benefit as these sources of metal are
typically less expensive than purchasing aluminum from third
party suppliers. We refer to these two sources as our internal
hedges.
Beyond our internal hedges described above, our third strategy
to mitigate the risk of loss or reduced profitability associated
with the metal price ceilings is to purchase derivative
instruments on projected aluminum volume requirements above our
assumed internal hedge position. We purchased forward derivative
instruments to hedge our exposure to further metal price
increases.
During the fiscal year 2009, we sold short-term LME futures
contracts to reduce the cash flow volatility of fluctuating
metal prices associated with metal price lag. We enter into
forward metal purchases simultaneous with the contracts that
contain fixed metal prices. These forward metal purchases
directly hedge the economic risk of future metal price
fluctuation associated with these contracts. The positive or
negative impact on sales under these contracts has been included
in the metal price lag effect described above, without regard to
the fixed forward instruments we purchased to offset this risk.
Sensitivities
We estimate that a 10% change in the three month LME price would
result in a $37 million pre-tax gain (loss) related to the
change in fair value of our aluminum contracts as of
March 31, 2009.
Energy
We use several sources of energy in the manufacture and delivery
of our aluminum rolled products. In the year ended
March 31, 2009, natural gas and electricity represented
approximately 89% of our energy consumption by cost. We also use
fuel oil and transport fuel. The majority of energy usage occurs
at our casting centers, at our smelters in South America and
during the hot rolling of aluminum. Our cold rolling facilities
require relatively less energy.
We purchase our natural gas on the open market, which subjects
us to market pricing fluctuations. We seek to stabilize our
future exposure to natural gas prices through the use of forward
purchase contracts. Natural gas prices in Europe, Asia and South
America have historically been more stable than in the United
States. As of March 31, 2009, we have a nominal amount of
forward purchases outstanding related to natural gas.
A portion of our electricity requirements are purchased pursuant
to long-term contracts in the local regions in which we operate.
A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs. In South America,
we own and operate hydroelectric facilities that meet
approximately 25% of our total electricity requirements in that
segment. Additionally, we have entered into an electricity swap
in North America to fix a portion of the cost of our electricity
requirements.
We purchase a nominal amount of heating oil forward contracts to
hedge against fluctuations in the price of our transport fuel.
Fluctuating energy costs worldwide, due to the changes in supply
and international and geopolitical events, expose us to earnings
volatility as such changes in such costs cannot immediately be
recovered under existing contracts and sales agreements, and may
only be mitigated in future periods under future pricing
arrangements.
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
March 31, 2009 given a 10% change in spot prices for energy
contracts ($ in millions).
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Change in
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Change in
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Rate
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Fair Value
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Electricity
|
|
|
10
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%
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|
$
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3
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Natural Gas
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10
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%
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|
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1
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Heating Oil
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|
10
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%
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1
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75
Foreign
Currency Exchange Risks
Exchange rate movements, particularly the euro, the Canadian
dollar, the Brazilian real and the Korean won against the
U.S. dollar, have an impact on our operating results. In
Europe, where we have predominantly local currency selling
prices and operating costs, we benefit as the euro strengthens,
but are adversely affected as the euro weakens. In Korea, where
we have local currency selling prices for local sales and
U.S. dollar denominated selling prices for exports, we
benefit slightly as the won weakens, but are adversely affected
as the won strengthens, due to a slightly higher percentage of
exports compared to local sales. In Canada and Brazil, where we
have predominately U.S. dollar selling prices, metal costs
and local currency operating costs, we benefit as the local
currencies weaken, but are adversely affected as the local
currencies strengthen. Foreign currency contracts may be used to
hedge the economic exposures at our foreign operations.
It is our policy to minimize functional currency exposures
within each of our key regional operating segments. As such, the
majority of our foreign currency exposures are from either
forecasted net sales or forecasted purchase commitments in
non-functional currencies. Our most significant
non-U.S. dollar
functional currency operating segments are Europe and Asia,
which have the euro and the Korean won as their functional
currencies, respectively. South America is U.S. dollar
functional with Brazilian real transactional exposure.
We face translation risks related to the changes in foreign
currency exchange rates. Amounts invested in our foreign
operations are translated into U.S. dollars at the exchange
rates in effect at the balance sheet date. The resulting
translation adjustments are recorded as a component of
Accumulated other comprehensive income (loss) in the
Shareholders equity section of the accompanying
consolidated balance sheets. Net sales and expenses in our
foreign operations foreign currencies are translated into
varying amounts of U.S. dollars depending upon whether the
U.S. dollar weakens or strengthens against other
currencies. Therefore, changes in exchange rates may either
positively or negatively affect our net sales and expenses from
foreign operations as expressed in U.S. dollars.
Any negative impact of currency movements on the currency
contracts that we have entered into to hedge foreign currency
commitments to purchase or sell goods and services would be
offset by an equal and opposite favorable exchange impact on the
commitments being hedged. For a discussion of accounting
policies and other information relating to currency contracts,
see Note 1 Business and Summary of Significant
Accounting Policies and Note 16 Financial
Instruments and Commodity Contracts to our accompanying
consolidated financial statements.
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
March 31, 2009 given a 10% change in rates ($ in millions).
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Change in
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Change in
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Exchange Rate
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Fair Value
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Currency measured against the U.S. dollar
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Euro
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10
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%
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$
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(15
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)
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Korean won
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10
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%
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3
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Brazilian real
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10
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%
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25
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British pound
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10
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%
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6
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Canadian dollar
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10
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%
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3
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Swiss franc
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10
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%
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(19
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)
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Loans to and investments in European operations have been hedged
with EUR 135 million of cross-currency swaps. We
designated these as net investment hedges. While this has no
impact on our cash flows, subsequent changes in the value of
currency related derivative instruments that are not designated
as hedges are recognized in Gain (loss) on change in fair value
of derivative instruments, net in our consolidated statement of
operations.
76
We estimate that a 10% increase in the value of the Euro against
the US Dollar would result in an $18 million potential
pre-tax loss on these derivatives as of March 31, 2009.
Interest
Rate Risks
As of March 31, 2009, approximately 75% of our debt
obligations were at fixed rates. Due to the nature of fixed-rate
debt, there would be no significant impact on our interest
expense or cash flows from either a 10% increase or decrease in
market rates of interest.
We are subject to interest rate risk related to our floating
rate debt. For every 12.5 basis point increase in the
interest rates on our outstanding variable rate debt as of
March 31, 2009, which includes $452 million of term
loan debt and other variable rate debt of $265 million, our
annual pre-tax income would be reduced by approximately
$1 million.
From time to time, we have used interest rate swaps to manage
our debt cost. In Korea, we entered into interest rate swaps to
fix the interest rate on various floating rate debt. See
Note 12 Debt to our accompanying consolidated
financial statements for further information.
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
March 31, 2009 given a 10% change in rates ($ in millions).
|
|
|
|
|
|
|
|
|
|
|
Increase in
|
|
Change in
|
|
|
Rate
|
|
Fair Value
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
North America
|
|
|
10
|
%
|
|
$
|
3
|
|
Asia
|
|
|
10
|
%
|
|
|
|
|
77
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
TABLE OF
CONTENTS
78
Managements
Responsibility Report
Novelis management is responsible for the preparation,
integrity and fair presentation of the financial statements and
other information used in this Annual Report on
Form 10-K.
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America and include, where appropriate, estimates based on the
best judgment of management. Financial and operating data
elsewhere in the Annual Report on
Form 10-K
are consistent with that contained in the accompanying financial
statements.
Novelis policy is to maintain systems of internal control
over financial reporting and disclosure controls and procedures.
Such systems are designed to provide reasonable assurance that
the financial information is accurate and reliable and that
Company assets are adequately accounted for and safeguarded. The
Board of Directors oversees the Companys systems of
internal control over financial reporting and disclosure
controls and procedures through its Audit Committee, which is
comprised of directors who are not employees. The Audit
Committee meets regularly with representatives of the
Companys independent registered public accounting firm and
management, including internal audit staff, to satisfy
themselves that Novelis policy is being followed. The
Audit Committee has engaged PricewaterhouseCoopers LLP as the
independent registered public accounting firm.
The financial statements have been reviewed by the Audit
Committee and, together with the other required information in
this Annual Report on
Form 10-K,
approved by the Board of Directors. In addition, the financial
statements have been audited by PricewaterhouseCoopers LLP whose
reports are provided below.
|
|
|
|
|
/s/ Steven
Fisher
|
|
|
|
PHILIP MARTENS
President and Chief Operating Officer
|
|
STEVEN FISHER
Chief Financial Officer
|
June 29, 2009
79
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Novelis Inc.:
In our opinion, the accompanying consolidated balance sheets as
of March 31, 2009 and March 31, 2008 and the related
consolidated statements of operations and comprehensive income
(loss), shareholders equity and cash flows for the year
ended March 31, 2009 and the period from May 16, 2007
to March 31, 2008 present fairly, in all material respects,
the financial position of Novelis Inc. and its subsidiaries
(Successor) at March 31, 2009 and March 31, 2008, and
the results of their operations and their cash flows for the
year ended March 31, 2009 and the period from May 16,
2007 to March 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
Also in our opinion, the Company did not maintain, in all
material respects, effective internal control over financial
reporting as of March 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) because a
material weakness in internal control over financial reporting
with respect to the application of purchase accounting for an
equity method investee including related income tax accounts
existed as of that date. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
The material weakness referred to above is described in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A. We considered this
material weakness in determining the nature, timing, and extent
of audit tests applied in our audit of the 2009 consolidated
financial statements, and our opinion regarding the
effectiveness of the Companys internal control over
financial reporting does not affect our opinion on those
consolidated financial statements. The Companys management
is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting included in managements report
referred to above. Our responsibility is to express opinions on
these financial statements and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Atlanta, GA
June 29, 2009
80
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Novelis Inc.:
In our opinion, the accompanying consolidated statements of
operations and comprehensive income (loss),
shareholders/invested equity and cash flows for the
periods from April 1, 2007 to May 15, 2007, and
January 1, 2007 to March 31, 2007, and the year ended
December 31, 2006 present fairly, in all material respects,
the results of operations and cash flows of Novelis Inc. and its
subsidiaries (Predecessor) for the periods from April 1,
2007 to May 15, 2007, and January 1, 2007 to
March 31, 2007, and for the year ended December 31,
2006 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit pension and other postretirement plans
effective December 31, 2006.
/s/ PricewaterhouseCoopers
LLP
Atlanta, GA
June 29, 2009
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16,
|
|
|
|
April 1,
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2007
|
|
|
Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Net sales
|
|
$
|
10,177
|
|
|
$
|
9,965
|
|
|
|
$
|
1,281
|
|
|
$
|
2,630
|
|
|
$
|
9,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
9,251
|
|
|
|
9,042
|
|
|
|
|
1,205
|
|
|
|
2,447
|
|
|
|
9,317
|
|
Selling, general and administrative expenses
|
|
|
319
|
|
|
|
319
|
|
|
|
|
95
|
|
|
|
99
|
|
|
|
410
|
|
Depreciation and amortization
|
|
|
439
|
|
|
|
375
|
|
|
|
|
28
|
|
|
|
58
|
|
|
|
233
|
|
Research and development expenses
|
|
|
41
|
|
|
|
46
|
|
|
|
|
6
|
|
|
|
8
|
|
|
|
40
|
|
Interest expense and amortization of debt issuance costs
|
|
|
182
|
|
|
|
191
|
|
|
|
|
27
|
|
|
|
54
|
|
|
|
221
|
|
Interest income
|
|
|
(14
|
)
|
|
|
(18
|
)
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(15
|
)
|
(Gain) loss on change in fair value of derivative instruments,
net
|
|
|
556
|
|
|
|
(22
|
)
|
|
|
|
(20
|
)
|
|
|
(30
|
)
|
|
|
(63
|
)
|
Impairment of goodwill
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
95
|
|
|
|
6
|
|
|
|
|
1
|
|
|
|
9
|
|
|
|
19
|
|
Equity in net (income) loss of non-consolidated affiliates
|
|
|
172
|
|
|
|
(25
|
)
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(16
|
)
|
Other (income) expenses, net
|
|
|
86
|
|
|
|
(6
|
)
|
|
|
|
35
|
|
|
|
47
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,345
|
|
|
|
9,908
|
|
|
|
|
1,375
|
|
|
|
2,685
|
|
|
|
10,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
share
|
|
|
(2,168
|
)
|
|
|
57
|
|
|
|
|
(94
|
)
|
|
|
(55
|
)
|
|
|
(278
|
)
|
Income tax provision (benefit)
|
|
|
(246
|
)
|
|
|
73
|
|
|
|
|
4
|
|
|
|
7
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interests share
|
|
|
(1,922
|
)
|
|
|
(16
|
)
|
|
|
|
(98
|
)
|
|
|
(62
|
)
|
|
|
(274
|
)
|
Minority interests share
|
|
|
12
|
|
|
|
(4
|
)
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,910
|
)
|
|
|
(20
|
)
|
|
|
|
(97
|
)
|
|
|
(64
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
(122
|
)
|
|
|
59
|
|
|
|
|
31
|
|
|
|
11
|
|
|
|
172
|
|
Change in fair value of effective portion of hedges, net
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
(46
|
)
|
Postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in pension and other benefits
|
|
|
(84
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before income tax effect
|
|
|
(236
|
)
|
|
|
42
|
|
|
|
|
29
|
|
|
|
20
|
|
|
|
142
|
|
Income tax provision (benefit) related to items of other
comprehensive income (loss)
|
|
|
(42
|
)
|
|
|
(4
|
)
|
|
|
|
(4
|
)
|
|
|
5
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
(194
|
)
|
|
|
46
|
|
|
|
|
33
|
|
|
|
15
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(2,104
|
)
|
|
$
|
26
|
|
|
|
$
|
(64
|
)
|
|
$
|
(49
|
)
|
|
$
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
82
Novelis
Inc.
(In
millions, except number of shares)