Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 3, 2009

Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
(Mark One)    
 
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2009
    Or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 001-32312
 
Novelis Inc.
(Exact name of registrant as specified in its charter)
 
     
Canada
(State or other jurisdiction of
incorporation or organization)
  98-0442987
(I.R.S. Employer
Identification Number)
3399 Peachtree Road NE, Suite 1500
Atlanta, Georgia
(Address of principal executive offices)
  30326
(Zip Code)
 
Telephone: (404) 814-4200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 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):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(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 October 31, 2009, the registrant had 77,459,658 common shares outstanding. All of the Registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the Registrant’s parent company.
 


 

 
TABLE OF CONTENTS
 
                 
PART I. FINANCIAL INFORMATION
  Item 1.     Financial Statements        
        Condensed Consolidated Statements of Operations Three and Six Months Ended September 30, 2009 and 2008 (unaudited)     2  
        Condensed Consolidated Balance Sheets September 30, 2009 and March 31, 2009 (unaudited)     3  
        Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2009 and 2008 (unaudited)     4  
        Condensed Consolidated Statement of Shareholder’s Equity Six Months Ended September 30, 2009 (unaudited)     5  
        Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended September 30, 2009 (unaudited)     6  
        Notes to the Condensed Consolidated Financial Statements (unaudited)     7  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     42  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk     68  
  Item 4.     Controls and Procedures     71  
 
PART II. OTHER INFORMATION
  Item 1.     Legal Proceedings     74  
  Item 1A.     Risk Factors     74  
  Item 6.     Exhibits     75  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions)
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Net sales
  $ 2,181     $ 2,959     $ 4,141     $ 6,062  
                                 
Cost of goods sold (exclusive of depreciation and amortization shown below)
    1,728       2,791       3,261       5,622  
Selling, general and administrative expenses
    83       89       161       173  
Depreciation and amortization
    92       107       192       223  
Research and development expenses
    9       10       17       22  
Interest expense and amortization of debt issuance costs
    44       46       87       91  
Interest income
    (3 )     (5 )     (6 )     (10 )
(Gain) loss on change in fair value of derivative instruments, net
    (80 )     185       (152 )     120  
Restructuring charges, net
    3       —       6       (1 )
Equity in net (income) loss of non-consolidated affiliates
    10       (2 )     20       —  
Other (income) expenses, net
    (6 )     10       (19 )     33  
                                 
      1,880       3,231       3,567       6,273  
                                 
Income (loss) before income taxes
    301       (272 )     574       (211 )
Income tax provision (benefit)
    87       (168 )     199       (133 )
                                 
Net income (loss)
    214       (104 )     375       (78 )
Net income attributable to noncontrolling interests
    19       —       37       2  
                                 
Net income (loss) attributable to our common shareholder
  $ 195     $ (104 )   $ 338     $ (80 )
                                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)
 
                 
    September 30,
    March 31,
 
    2009     2009  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 246     $ 248  
Accounts receivable (net of allowances of $4 and $2 as of September 30, 2009 and March 31, 2009, respectively)
               
— third parties
    1,206       1,049  
— related parties
    13       25  
Inventories
    929       793  
Prepaid expenses and other current assets
    50       51  
Fair value of derivative instruments
    171       119  
Deferred income tax assets
    37       216  
                 
Total current assets
    2,652       2,501  
Property, plant and equipment, net
    2,769       2,799  
Goodwill
    611       582  
Intangible assets, net
    786       787  
Investment in and advances to non-consolidated affiliates
    764       719  
Fair value of derivative instruments, net of current portion
    48       72  
Deferred income tax assets
    5       4  
Other long-term assets
               
— third parties
    95       80  
— related parties
    24       23  
                 
Total assets
  $ 7,754     $ 7,567  
                 
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
               
Current portion of long-term debt
  $ 49     $ 51  
Short-term borrowings
    177       264  
Accounts payable
               
— third parties
    881       725  
— related parties
    55       48  
Fair value of derivative instruments
    145       640  
Accrued expenses and other current liabilities
    428       516  
Deferred income tax liabilities
    12       —  
                 
Total current liabilities
    1,747       2,244  
Long-term debt, net of current portion
               
— third parties
    2,596       2,417  
— related parties
    —       91  
Deferred income tax liabilities
    518       469  
Accrued postretirement benefits
    528       495  
Other long-term liabilities
    354       342  
                 
Total liabilities
    5,743       6,058  
                 
Commitments and contingencies
               
Shareholder’s equity
               
Common stock, no par value; unlimited number of shares authorized; 77,459,658 shares issued and outstanding as of September 30, 2009 and March 31, 2009
    —       —  
Additional paid-in capital
    3,497       3,497  
Accumulated deficit
    (1,592 )     (1,930 )
Accumulated other comprehensive loss
    (22 )     (148 )
                 
Total Novelis shareholder’s equity
    1,883       1,419  
Noncontrolling interests
    128       90  
                 
Total equity
    2,011       1,509  
                 
Total liabilities and shareholder’s equity
  $ 7,754     $ 7,567  
                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
 
                 
    Six Months Ended
 
    September 30,  
    2009     2008  
 
OPERATING ACTIVITIES
               
Net income (loss)
  $ 375     $ (78 )
Adjustments to determine net cash provided by (used in) operating activities:
               
Depreciation and amortization
    192       223  
(Gain) loss on change in fair value of derivative instruments, net
    (152 )     120  
Deferred income taxes
    196       (183 )
Write-off and amortization of fair value adjustments, net
    (98 )     (124 )
Equity in net (income) loss of non-consolidated affiliates
    20       —  
Foreign exchange remeasurement of debt
    (15 )     17  
Gain on reversal of accrued legal claim
    —       (26 )
Other, net
    5       3  
Changes in assets and liabilities:
               
Accounts receivable
    (97 )     (183 )
Inventories
    (84 )     (71 )
Accounts payable
    109       (24 )
Other current assets
    4       (25 )
Other current liabilities
    (4 )     (74 )
Other noncurrent assets
    (14 )     9  
Other noncurrent liabilities
    27       26  
                 
Net cash provided by (used in) operating activities
    464       (390 )
                 
INVESTING ACTIVITIES
               
Capital expenditures
    (46 )     (70 )
Proceeds from sales of assets
    4       2  
Changes to investment in and advances to non-consolidated affiliates
    2       13  
Proceeds from related party loans receivable, net
    14       13  
Net proceeds (outflow) from settlement of derivative instruments
    (416 )     94  
                 
Net cash provided by (used in) investing activities
    (442 )     52  
                 
FINANCING ACTIVITIES
               
Proceeds from issuance of debt, third parties
    177       —  
Proceeds from issuance of debt, related parties
    3       —  
Principal payments, third parties
    (16 )     (7 )
Principal payments, related parties
    (94 )     —  
Short-term borrowings, net
    (96 )     263  
Dividends, noncontrolling interest
    (13 )     (5 )
                 
Net cash provided by (used in) financing activities
    (39 )     251  
                 
Net decrease in cash and cash equivalents
    (17 )     (87 )
Effect of exchange rate changes on cash balances held in foreign currencies
    15       (20 )
Cash and cash equivalents — beginning of period
    248       326  
                 
Cash and cash equivalents — end of period
  $ 246     $ 219  
                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(In millions, except number of shares)
 
                                                         
    Novelis Inc. Shareholder              
                            Accumulated
             
                      Retained
    Other
             
                Additional
    Earnings
    Comprehensive
    Non-
       
    Common Stock     Paid-in
    (Accumulated
    Income (Loss)
    controlling
    Total
 
    Shares     Amount     Capital     Deficit)     (AOCI)     Interests     Equity  
 
Balance as of March 31, 2009
    77,459,658     $ —     $ 3,497     $ (1,930 )   $ (148 )   $ 90     $ 1,509  
Net income attributable to our common shareholder
    —       —       —       338       —       —       338  
Net income attributable to noncontrolling interests
    —       —       —       —       —       37       37  
Currency translation adjustment, net of tax provision of $6 included in AOCI
    —       —       —       —       124       14       138  
Change in fair value of effective portion of hedges, net of tax benefit of $2 included in AOCI
    —       —       —       —       (2 )     —       (2 )
Postretirement benefit plans:
                                                       
Change in pension and other benefits, net of tax provision of $2 included in AOCI
    —       —       —       —       4       —       4  
Noncontrolling interests’ cash dividends
    —       —       —       —       —       (13 )     (13 )
                                                         
Balance as of September 30, 2009
    77,459,658     $ —     $ 3,497     $ (1,592 )   $ (22 )   $ 128     $ 2,011  
                                                         
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In millions)
 
                                                 
    Three Months Ended
    Three Months Ended
 
    September 30, 2009     September 30, 2008  
    Attributable to
    Attributable to
          Attributable to
    Attributable to
       
    Our Common
    Noncontrolling
          Our Common
    Noncontrolling
       
    Shareholder     Interests     Total     Shareholder     Interests     Total  
 
Net income
  $ 195     $ 19     $ 214     $ (104 )   $ —     $ (104 )
                                                 
Other comprehensive income (loss):
                                               
Currency translation adjustment
    74       7       81       (73 )     (21 )     (94 )
Change in fair value of effective portion of hedges, net
    (15 )     —       (15 )     (16 )     —       (16 )
Postretirement benefit plans:
                                               
Change in pension and other benefits
    3       —       3       2       —       2  
                                                 
Other comprehensive income (loss) before income tax effect
    62       7       69       (87 )     (21 )     (108 )
Income tax provision (benefit) related to items of other comprehensive income (loss)
    (2 )     —       (2 )     (6 )     —       (6 )
                                                 
Other comprehensive income (loss), net of tax
    64       7       71       (81 )     (21 )     (102 )
                                                 
Comprehensive income
  $ 259     $ 26     $ 285     $ (185 )   $ (21 )   $ (206 )
                                                 
 
                                                 
    Six Months Ended
    Six Months Ended
 
    September 30, 2009     September 30, 2008  
    Attributable to
    Attributable to
          Attributable to
    Attributable to
       
    Our Common
    Noncontrolling
          Our Common
    Noncontrolling
       
    Shareholder     Interests     Total     Shareholder     Interests     Total  
 
Net income
  $ 338     $ 37     $ 375     $ (80 )   $ 2     $ (78 )
                                                 
Other comprehensive income (loss):
                                               
Currency translation adjustment
    130       14       144       (63 )     (23 )     (86 )
Change in fair value of effective portion of hedges, net
    (4 )     —       (4 )     3       —       3  
Postretirement benefit plans:
                                               
Change in pension and other benefits
    6       —       6       2       —       2  
                                                 
Other comprehensive income (loss) before income tax effect
    132       14       146       (58 )     (23 )     (81 )
Income tax provision related to items of other comprehensive income (loss)
    6       —       6       2       —       2  
                                                 
Other comprehensive income (loss), net of tax
    126       14       140       (60 )     (23 )     (83 )
                                                 
Comprehensive income
  $ 464     $ 51     $ 515     $ (140 )   $ (21 )   $ (161 )
                                                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
1.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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 “Rio Tinto Alcan” refer to Rio Tinto Alcan Inc.
 
Description of Business and Basis of Presentation
 
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the beverage and food can, transportation, construction and industrial, and foil products markets. As of September 30, 2009, we had operations on four continents: North America; Europe; Asia and South America, through 31 operating plants, one research facility and several market-focused innovation centers in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities that supply our rolling plants in Brazil.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the United States Securities and Exchange Commission (SEC) on June 29, 2009, and updated on Form 8-K filed August 5, 2009 to reflect the revised presentation of noncontrolling interests. Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. Further, in connection with the preparation of the condensed consolidated financial statements, the Company evaluated subsequent events after the balance sheet date of September 30, 2009 through November 3, 2009, the date these financial statements were issued.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairments of long lived assets, intangible assets and equity investments; (4) actuarial assumptions related to pension and other postretirement benefit plans; (5) income tax reserves and valuation allowances and (6) assessment of loss contingencies, including environmental and litigation reserves.
 
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 Company’s 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.
 
Consolidation Policy
 
Our consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our financial statements.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
In August 2009, we announced the formation of a joint venture entity, Evermore Recycling LLC (Evermore), to procure used beverage cans in North America. We own 55.8% of this limited liability corporation and have consolidated the results effective August 11, 2009. The results of Evermore were immaterial for the three and six months ended September 30, 2009.
 
Reclassifications and Adjustment
 
Certain reclassifications of prior period amounts and presentation have been made to conform to the presentation adopted for the current period.
 
During the second quarter of fiscal 2010, we identified an immaterial error in our consolidated annual and interim financial statements included in previously filed Forms 10-Q and Forms 10-K for fiscal 2008 and 2009. The error relates to deferred income taxes recorded in connection with purchase accounting in South America. We believe the correction of this error to be both quantitatively and qualitatively immaterial to our projected annual results for fiscal 2010 or to any of our previously issued financial statements. As a result, we did not adjust any prior period amounts. There was no impact to income (loss) before income taxes and noncontrolling interest share or cash flows from operating activities for any periods. We have reflected the correction of this error in the interim financial statements for the second quarter of 2010. As of and for the quarter ended September 30, 2009, the impact of the correction was an increase to goodwill of $29 million, an increase to deferred tax liabilities of $25 million and a reduction of our income tax expense of $4 million. Due to the fact that our South American subsidiaries are US dollar functional, the deferred tax liabilities fluctuate with changes in the exchange rate and are recorded as increases or decreases to income tax expense.
 
Recently Adopted Accounting Standards
 
The following accounting standards have been adopted by us during the six months ended September 30, 2009.
 
In June 2009, the Financial Accounting Standards Board (FASB) approved its Accounting Standards Codification (ASC) (Codification) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification which changes the referencing of financial standards is effective for interim or annual periods ending after September 15, 2009. As the codification is not intended to change or alter existing US GAAP, this standard had no impact on the Company’s financial position or results of operations.
 
We adopted the authoritative guidance in ASC 855, Subsequent Events, (prior authoritative literature: FASB Statement No. 165, Subsequent Events) which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This accounting standard requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This standard had no impact on our consolidated financial position, results of operations and cash flows.
 
We adopted the authoritative guidance in ASC 810, Consolidation, (prior authoritative literature: FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements) which 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 condensed consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of condensed consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the condensed consolidated statement of operations and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. We adopted this accounting standard effective April 1, 2009, and applied this standard prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
We adopted the authoritative guidance in ASC 350, Intangibles — Goodwill and Other, (prior authoritative literature: FASB Staff Position No. FAS 142-3, Determination of Useful Life of Intangible Assets) which 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. The accounting standard also requires expanded disclosure related to the determination of intangible asset useful lives. This standard had no impact on our consolidated financial position, results of operations and cash flows.
 
We adopted the authoritative guidance in ASC 820, Fair Value Measurements and Disclosures, (prior authoritative literature: FASB Staff Position No. 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments; 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) which requires disclosures about the fair value of financial instruments for interim reporting periods. This codification also provides additional guidance in determining fair value when the volume and level of activity for the asset or liability has significantly decreased. This standard had no impact on our consolidated financial position, results of operations and cash flows.
 
We adopted the authoritative guidance in ASC 320, Investments — Debt and Equity Securities, (prior authoritative literature: FASB Staff Position No. 115-2 and FASB Staff Position No. 124-2, Recognition of Other-than-Temporary-Impairments) which amends the other-than-temporary impairment guidance in GAAP for debt and equity securities. This standard had no impact on our consolidated financial position, results of operations and cash flows.
 
We adopted the authoritative guidance in ASC 805, Business Combinations, (prior authoritative literature: FASB Statement No. 141 (Revised), Business Combinations; FASB Staff Position No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies) (ASC 805) which 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. This standard 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. ASC 805 also clarifies the initial and subsequent recognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This standard requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if the acquisition-date fair value can be reasonably estimated. We will apply ASC 805 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. This standard amends certain provisions of preexisting tax guidance 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 this business combination guidance would also apply the provisions of this standard. This standard had no impact on our consolidated financial position, results of operations and cash flows.
 
We adopted the authoritative guidance in ASC 323, Investments — Equity Method and Joint Ventures, (prior authoritative literature: Emerging Issues Task Force Issue No. 08-06, Equity Method Investment Accounting Considerations) which addresses questions that have arisen about the application of the equity method of accounting for investments acquired after the effective date of newly issued business combination standards and non-controlling interest standards. This accounting standard clarifies how to account for certain transactions involving equity method investments, and is effective on a prospective basis. This standard had no impact on our consolidated financial position, results of operations and cash flows.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Recently Issued Accounting Standards
 
The following new accounting standards have been issued, but have not yet been adopted by us as of September 30, 2009, as adoption is not required until future reporting periods.
 
In June 2009, the FASB issued statement No. 167, Amendments to FASB Interpretation No. 46(R) (FASB 167). FASB 167 has not been incorporated by the FASB into the Codification as the guidance is not yet effective and early adoption is prohibited. FASB 167 is intended (1) to address the effects on certain provisions of the accounting standard dealing with consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) to clarify questions about the application of certain key provisions related to consolidation of variable interest entities, including those in which accounting and disclosures do not always provided timely and useful information about an enterprise’s involvement in a variable interest entity. FASB 167 will be effective for fiscal years ending after November 15, 2009. We do not anticipate this standard will have any impact on our consolidated financial position, results of operations and cash flows.
 
In December 2008, the FASB issued ASC 715, Compensation — Retirement Benefits, (prior authoritative literature: FASB issued FSP No. 132(R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits) which 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. This pronouncement will be effective for fiscal years ending after December 15, 2009, with early application permitted. At initial adoption, application of this standard 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.
 
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.
 
2.   RESTRUCTURING PROGRAMS
 
There were no new restructuring actions initiated during fiscal 2010. Restructuring charges of $6 million on the condensed consolidated statement of operations for the six months ended September 30, 2009, consisted of the following: (1) $3 million in costs related to our Rogerstone facility, (2) $1 million in additional severance costs related to our Rugles facility and (3) $2 million in other items at other European facilities.
 
The following table summarizes our restructuring accrual activity by region (in millions).
 
                                                 
          North
          South
          Restructuring
 
    Europe     America     Asia     America     Corporate     Reserves  
 
Balance as of March 31, 2009
  $ 61     $ 16     $ —     $ 2     $ 1     $ 80  
Provisions (recoveries), net
    3       —       —       —       —       3  
Cash payments
    (33 )     (6 )     —       (2 )     (1 )     (42 )
Impact of exchange rate changes
    7       —       —       1       —       8  
                                                 
Balance as of September 30, 2009
  $ 38     $ 10     $ —     $ 1     $ —     $ 49  
                                                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Europe
 
Restructuring charges in the table above includes $1 million in additional severance costs at our Rugles facility, $1 million of environmental costs at our Borgo Franco plant and $1 million of other costs related primarily to the Rogerstone plant closure and the exit of certain activities at our Rugles and Ohle plants.
 
We made the following payments relating to preexisting restructuring programs in Europe: $24 million in severance payments, $7 million in payments for environmental remediation and $2 million of other payments related primarily to contract terminations.
 
At our Rogerstone facility, we also incurred a $2 million charge related to the write down of parts and supplies and approximately $1 million of on-going maintenance expense related to the shut-down. The $2 million write down is not included in the table above as it was reflected as a reduction to the appropriate balance sheet accounts. We expect to incur approximately $1 million in additional maintenance expenses at our Rogerstone facility through the end of fiscal 2010.
 
North America
 
We made $6 million in severance payments related to the voluntary and involuntary separation programs initiated in the third quarter of fiscal 2009.
 
South America
 
We made $1 million in severance payments and $1 million in payments related to other exit costs.
 
3.   INVENTORIES
 
Inventories consist of the following (in millions).
 
                 
    September 30,
    March 31,
 
    2009     2009  
 
Finished goods
  $ 226     $ 215  
Work in process
    375       296  
Raw materials
    242       207  
Supplies
    91       79  
                 
      934       797  
Allowances
    (5 )     (4 )
                 
Inventories
  $ 929     $ 793  
                 
 
4.   CONSOLIDATION OF VARIABLE INTEREST ENTITIES
 
We have a variable interest in Logan Aluminum, Inc. (Logan). Based upon a previous restructuring program, Novelis acquired the right to use the excess capacity at Logan. To utilize this capacity, we installed and have sole ownership of a cold mill at the Logan facility which enabled us to have the ability to take the majority share of production and costs. These facts qualify Novelis as Logan’s primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated on our condensed consolidated balance sheets (in millions). There are significant other assets used in the operations of Logan that are not part of the joint venture.
 
                 
    September 30,
  March 31,
    2009   2009
 
Current assets
  $ 70     $ 64  
Total assets
  $ 132     $ 124  
Current liabilities
  $ (40 )   $ (35 )
Total liabilities
  $ (142 )   $ (135 )
Net carrying value
  $ (10 )   $ (11 )
 
5.   INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
 
The following table summarizes the condensed results of operations of our equity method affiliates (on a 100% basis, in millions) on a historical basis of accounting. These results do not include the incremental depreciation and amortization expense that we record in our equity method accounting, which arises as a result of the amortization of fair value adjustments we made to our investments in non-consolidated affiliates due to the Arrangement.
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Net sales
  $ 128     $ 167     $ 241     $ 324  
Costs, expenses and provisions for taxes on income
    131       146       247       288  
                                 
Net income (loss)
  $ (3 )   $ 21     $ (6 )   $ 36  
                                 
 
The table below summarizes our incremental depreciation and amortization expense on our equity method investments due to the Arrangement.
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Incremental depreciation and amortization expense
  $ 12     $ 13     $ 24     $ 27  
Tax benefit
    (3 )     (4 )     (7 )     (9 )
                                 
Incremental depreciation and amortization expense, net
  $ 9     $ 9     $ 17     $ 18  
                                 
 
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. We earned less than $1 million of interest income on a loan due from Aluminium


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Norf GmbH during each of the periods presented in the table below. The following table describes the nature and amounts of significant transactions that we had with these non-consolidated affiliates (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Purchases of tolling services and electricity
                               
Aluminium Norf GmbH(A)
  $ 64     $ 74     $ 120     $ 147  
Consorcio Candonga(B)
    —       10       1       13  
                                 
Total purchases from related parties
  $ 64     $ 84     $ 121     $ 160  
                                 
 
 
(A) We purchase tolling services from Aluminium Norf GmbH.
 
(B) We obtain electricity from Consorcio Candonga for our operations in South America.
 
The following table describes the period-end account balances that we have with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We have no other material related party balances with these non-consolidated affiliates.
 
                 
    September 30,
    March 31,
 
    2009     2009  
 
Accounts receivable(A)
  $ 13     $ 25  
Other long-term receivables(A)
  $ 24     $ 23  
Accounts payable(B)
  $ 55     $ 48  
 
 
(A) The balances represent current and non-current portions of a loan due from Aluminium Norf GmbH.
 
(B) We purchase tolling services from Aluminium Norf GmbH and electricity from Consorcio Candonga.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
6.   DEBT
 
Debt consists of the following (in millions).
 
                                                         
    September 30, 2009     March 31, 2009  
                Unamortized
                Unamortized
       
    Interest
          Fair Value
    Carrying
          Fair Value
    Carrying
 
    Rates(A)     Principal     Adjustments(B)     Value     Principal     Adjustments(B)     Value  
 
Third party debt:
                                                       
Short term borrowings
    2.09 %   $ 177     $ —     $ 177     $ 264     $ —     $ 264  
Novelis Inc.
                                                       
11.5% Senior Notes, due February 2015
    11.50 %     185       (4 )     181       —       —       —  
7.25% Senior Notes, due February 2015
    7.25 %     1,124       44       1,168       1,124       47       1,171  
Floating rate Term Loan Facility, due July 2014
    2.25 %(C)     293       —       293       295       —       295  
Novelis Corporation
                                                       
Floating rate Term Loan Facility, due July 2014
    2.27 %(C)     864       (50 )     814       867       (54 )     813  
Novelis Switzerland S.A.
                                                       
Capital lease obligation, due December 2019 (Swiss francs (CHF) 50 million)
    7.50 %     47       (3 )     44       45       (3 )     42  
Capital lease obligation, due August 2011 (CHF 2 million)
    2.49 %     2       —       2       2       —       2  
Novelis Korea Limited
                                                       
Bank loan, due October 2010
    3.00 %(C)     100       —       100       100       —       100  
Bank loan, due February 2010 (Korean won (KRW) 50 billion)
    3.81 %     42       —       42       37       —       37  
Bank loan, due May 2009 (KRW 10 billion)
    7.47 %     —       —       —       7       —       7  
Other
                                                       
Other debt, due December 2011 through December 2012
    1.00 %     1       —       1       1       —       1  
                                                         
Total debt — third parties
            2,835       (13 )     2,822       2,742       (10 )     2,732  
Less: Short term borrowings
            (177 )     —       (177 )     (264 )     —       (264 )
Current portion of long term debt
            (58 )     9       (49 )     (59 )     8       (51 )
                                                         
Long-term debt, net of current portion — third parties:
          $ 2,600     $ (4 )   $ 2,596     $ 2,419     $ (2 )   $ 2,417  
                                                         
Related party debt
                                                       
Novelis Inc.
                                                       
Unsecured credit facility — related party, due January 2015
    13.00 %   $ —     $ —     $ —     $ 91     $ —     $ 91  
                                                         
 
 
(A) Interest rates are as of September 30, 2009 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement and the debt exchange completed in the fourth quarter of fiscal 2009.
 
(B) Debt existing at the time of the Arrangement was recorded at fair value. Additional floating rate Term Loan with a face value of $220 million issued in March 2009 was recorded at a fair value of $165 million. Additional 11.5% Senior Note with a face value of $185 million issued in August 2009 was recorded at fair value of $181 million (see 11.5% Senior Notes below).
 
(C) Excludes the effect of related interest rate swaps and the effect of accretion of fair value.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized fair value adjustments and using rates of exchange as of September 30, 2009 for our debt denominated in foreign currencies) are as follows (in millions).
 
         
As of September 30, 2009
  Amount  
 
Within one year
  $ 58  
2 years
    116  
3 years
    16  
4 years
    16  
5 years
    1,114  
Thereafter
    1,338  
         
Total
  $ 2,658  
         
 
11.5% Senior Notes
 
On August 11, 2009, Novelis Inc. issued $185 million aggregate principal face amount of 11.5% senior unsecured notes at an effective rate of 12.0% (11.5% Senior Notes). The 11.5% Senior Notes were issued at a discount resulting in gross proceeds of $181 million. The net proceeds of this offering were used to repay a portion of the ABL Facility and $96 million outstanding under the unsecured credit facility from an affiliate of the Aditya Birla Group.
 
The 11.5% Senior Notes rank equally with all of our existing and future unsecured senior indebtedness, and are guaranteed, jointly and severally, on a senior unsecured basis, by the following:
 
  •  all of our existing and future Canadian and U.S. restricted subsidiaries,
 
  •  certain of our existing foreign restricted subsidiaries and
 
  •  our other restricted subsidiaries that guarantee debt in the future under any credit facilities, provided that the borrower of such debt is our company or a Canadian or a U.S. subsidiary.
 
The 11.5% Senior Notes contain certain covenants and events of default, including limitations on certain restricted payments, the incurrence of additional indebtedness and the sale of certain assets. As of September 30, 2009, we are compliant with these covenants. Interest on the 11.5% Senior Notes is payable on February 15 and August 15 of each year, commencing on February 15, 2010. The notes will mature on February 15, 2015.
 
Senior Secured Credit Facilities
 
Our senior secured credit facilities consist of (1) a $1.16 billion seven year term loan facility maturing July 2014 (Term Loan facility) and (2) an $800 million five-year multi-currency asset-backed revolving credit line and letter of credit facility (ABL Facility). The senior secured credit facilities include certain 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. As of September 30, 2009, our fixed charge coverage ratio is less than 1 to 1, resulting in a reduction of availability under the ABL Facility of $80 million. Substantially all of our assets are pledged as collateral under the senior secured credit facilities.
 
Short-Term Borrowings and Lines of Credit
 
As of September 30, 2009, our short-term borrowings were $177 million consisting of (1) $166 million of short-term loans under the ABL Facility, (2) a $4 million short-term loan in Italy and (3) $7 million in bank


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
overdrafts. As of September 30, 2009, $31 million of the ABL Facility was utilized for letters of credit and we had $400 million in remaining availability under the ABL Facility before covenant related restrictions. The weighted average interest rate on our total short-term borrowings was 2.09% and 2.75% as of September 30, 2009 and March 31, 2009, respectively.
 
As of September 30, 2009, we had an additional $122 million outstanding under letters of credit in Korea not included in the ABL Facility.
 
Interest Rate Swaps
 
As of September 30, 2009, we have interest rate swaps to fix the variable LIBOR interest rate on $920 million of our floating rate Term Loan facility. We are still obligated to pay any applicable margin, as defined in our senior secured credit facilities. Interest rate 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 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. In April 2009, we entered into an additional $220 million interest rate swap at a rate of 1.97%, which is effective through April 30, 2012.
 
We have a cross-currency interest rate swap in Korea to convert our $100 million variable rate bank loan to KRW 92 billion at a fixed rate of 5.44%. The swap expires October 2010, concurrent with the maturity of the loan.
 
As of September 30, 2009 approximately 84% of our debt was fixed rate and approximately 16% was variable rate.
 
7.   SHARE-BASED COMPENSATION
 
Total compensation expense related to share-based awards for the respective periods is presented in the table below (in millions). These amounts are included in Selling, general and administrative expenses in our condensed consolidated statements of operations.
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Novelis Long-Tem Incentive Plan 2009
  $ 1     $ —     $ 1     $ —  
Novelis Long-Tem Incentive Plan 2010
    1       —       1       —  
                                 
Total compensation expense
  $ 2     $ —     $ 2     $ —  
                                 
 
Novelis Long-Term Incentive Plan
 
In June 2009, our board of directors authorized the Novelis Long-Term Incentive Plan FY 2010 — FY 2013 (2010 LTIP) covering the performance period from April 1, 2009 through March 31, 2013. The terms of the 2010 LTIP are the same as the Novelis Long-Term Incentive Plan FY 2009 — FY 2012 (2009 LTIP) approved in June 2008. Under the 2010 LTIP, phantom stock appreciation rights (SARs) are to be granted to certain of our executive officers and key employees. The SARs will vest at the rate of 25% per year, subject to performance criteria (see below) and expire seven years from their grant date. Each SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise, where market values are denominated in Indian rupees and converted to the participant’s payroll currency at the time of exercise. The amount of cash paid is limited to (i) 2.5 times the target payout if exercised within one year of vesting or (ii) 3 times the target payout if exercised after one


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
year of vesting. The SARs do not transfer any shareholder rights in Hindalco to a participant. The SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.
 
The performance criterion for vesting is based on the actual overall Novelis operating earnings before interest, taxes, depreciation and amortization, as adjusted (adjusted Operating EBITDA) compared to the target adjusted Operating EBITDA established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target adjusted Operating EBITDA, at which point 75% of the SARs for that period would vest, with an equal pro rata amount of SARs vesting through 100% achievement of the target. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined. Accordingly, each of the four tranches associated with the 2010 LTIP and 2009 LTIP is deemed granted when the earnings target is determined.
 
The tables below show the SARs activity under our 2010 LTIP and 2009 LTIP.
 
                                 
          Weighted
    Weighted Average
    Aggregate
 
          Average
    Remaining
    Intrinsic
 
    Number of
    Exercise Price
    Contractual Term
    Value (USD
 
2010 LTIP
  SARs     (in Indian Rupees)     (In years)     in millions)  
 
SARs outstanding as of March 31, 2009
    —       —       —       (B )
Granted
    13,459,711 (A)     85.79                  
Exercised
    —       —               —  
Forfeited/Cancelled
    —       —                  
Expired
    —       —                  
                                 
SARs outstanding as of September 30, 2009
    13,459,711       85.79       6.74     $ 12  
                                 
 
                                 
          Weighted
    Weighted Average
    Aggregate
 
          Average
    Remaining
    Intrinsic
 
    Number of
    Exercise Price
    Contractual Term
    Value (USD
 
2009 LTIP
  SARs     (in Indian Rupees)     (In years)     in millions)  
 
SARs outstanding as of March 31, 2009
    20,606,906 (A)     60.05       6.22       (B )
Granted
    —       —                  
Exercised
    —       —                  
Forfeited/Cancelled
    (9,041,795 )     —                  
Expired
    —       —                  
                                 
SARs outstanding as of September 30, 2009
    11,565,111       60.05       5.72     $ 17  
                                 
 
 
(A) Represents total SARs approved by the Board of Directors for grant. As noted above, due to the performance criterion based on a future earnings target, the amount deemed granted for accounting purposes is limited to the individual tranches subject to an established earnings target, which includes the current and prior fiscal years.
 
(B) The aggregate intrinsic value is zero as the market value of a share of Hindalco stock was less than the SAR exercise price.
 
The fair value of each SAR is based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Black-Scholes valuation method. We used historical stock price volatility data of Hindalco on the Bombay Stock Exchange to


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
determine expected volatility assumptions. The fair value of each SAR under the 2010 LTIP and 2009 LTIP was estimated as of September 30, 2009 using the following assumptions:
 
         
    2010 LTIP   2009 LTIP
 
Expected volatility
  49.9 — 56.4%   54.0 — 57.1%
Weighted average volatility
  53.0%   55.9%
Dividend yield
  1.05%   1.05%
Risk-free interest rate
  6.8 — 7.1%   6.61 — 6.93%
Expected life
  3.7 — 5.2 years   3.2 — 4.2 years
 
The fair value of the SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criterion. Since the performance criteria for fiscal years 2011 through 2013 have not yet been established and therefore, measurement periods for SARs relating to those periods have not yet commenced, no compensation expense for those tranches has been recorded for the nine months ended September 30, 2009. No SARs were exercisable at September 30, 2009.
 
Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $14 million which is expected to be realized over a weighted average period of 4.16 years.
 
8.   POSTRETIREMENT BENEFIT PLANS
 
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K., unfunded pension plans in Germany, and unfunded lump sum indemnities in France, South Korea, Malaysia and Italy. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
 
                                 
    Pension Benefit Plans  
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Service cost
  $ 8     $ 11     $ 16     $ 21  
Interest cost
    14       15       28       30  
Expected return on assets
    (10 )     (13 )     (20 )     (26 )
Amortization — (gains) losses
    3       (1 )     6       (1 )
Curtailment/settlement losses
    —       —       —       1  
                                 
Net periodic benefit cost
  $ 15     $ 12     $ 30     $ 25  
                                 
 
                                 
    Other Benefits  
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Service cost
  $ 1     $ 1     $ 3     $ 3  
Interest cost
    3       2       6       5  
Amortization — (gains) losses
    —       1       —       1  
Curtailment/settlement losses
    —       —       —       (2 )
                                 
Net periodic benefit cost
  $ 4     $ 4     $ 9     $ 7  
                                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The expected long-term rate of return on plan assets is 6.7% in fiscal 2010.
 
Employer Contributions to Plans
 
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland, Malaysia and Brazil. We contributed the following amounts to all plans, including the Rio Tinto Alcan plans, that cover our employees (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Funded pension plans
  $ 9     $ 7     $ 12     $ 11  
Unfunded pension plans
    4       4       8       8  
Savings and defined contribution pension plans
    4       4       7       9  
                                 
Total contributions
  $ 17     $ 15     $ 27     $ 28  
                                 
 
During the remainder of fiscal 2010, we expect to contribute an additional $33 million to our funded pension plans, $6 million to our unfunded pension plans and $9 million to our savings and defined contribution plans.
 
9.   CURRENCY (GAINS) LOSSES
 
The following currency (gains) losses are included in the accompanying condensed consolidated statements of operations (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Net (gain) loss on change in fair value of currency derivative instruments(A)
  $ (29 )   $ (7 )   $ (51 )   $ (39 )
Net (gain) loss on remeasurement of monetary assets and liabilities(B)
    (3 )     36       (7 )     56  
                                 
    $ (32 )   $ 29     $ (58 )   $ 17  
                                 
 
 
(A) Included in (Gain) loss on change in fair value of derivative instruments, net.
 
(B) Included in Other (income) expenses, net.
 
The following currency gains (losses) are included in Accumulated other comprehensive income (loss), net of tax. (in millions).
 
                 
    Six Months Ended
    Year Ended
 
    September 30, 2009     March 31,2009  
 
Cumulative currency translation adjustment — beginning of period
  $ (78 )   $ 85  
Effect of changes in exchange rates
    138       (163 )
                 
Cumulative currency translation adjustment — end of period
  $ 60     $ (78 )
                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
10.   FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
 
The fair values of our financial instruments and commodity contracts as of September 30, 2009 and March 31, 2009 are as follows (in millions):
 
                                         
    September 30, 2009  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Currency exchange contracts
  $ —     $ —     $ (1 )   $ (27 )   $ (28 )
Interest rate swaps
    —       1       (13 )     —       (12 )
Electricity swap
    —       —       (6 )     (15 )     (21 )
                                         
Total derivatives designated as hedging instruments
    —       1       (20 )     (42 )     (61 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    130       19       (84 )     (3 )     62  
Currency exchange contracts
    40       27       (37 )     (7 )     23  
Energy contracts
    1       1       (4 )     —       (2 )
                                         
Total derivatives not designated as hedging instruments
    171       47       (125 )     (10 )     83  
                                         
Total derivative fair value
  $ 171     $ 48     $ (145 )   $ (52 )   $ 22  
                                         
 
                                         
    March 31, 2009  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Currency exchange contracts
  $ —     $ —     $ —     $ (11 )   $ (11 )
Interest rate swaps
    —       —       (13 )     —       (13 )
Electricity swap
    —       —       (6 )     (12 )     (18 )
                                         
Total derivatives designated as hedging instruments
    —       —       (19 )     (23 )     (42 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    99       41       (532 )     (13 )     (405 )
Currency exchange contracts
    20       31       (77 )     (12 )     (38 )
Energy contracts
    —       —       (12 )     —       (12 )
                                         
Total derivatives not designated as hedging instruments
    119       72       (621 )     (25 )     (455 )
                                         
Total derivative fair value
  $ 119     $ 72     $ (640 )   $ (48 )   $ (497 )
                                         
 
 
(A) The noncurrent portions of derivative liabilities are included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
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. We had cross-currency swaps of Euro 135 million as of September 30, 2009 and March 31, 2009, designated as net investment hedges. The effective portion of the change in fair value of the derivative is included in Other comprehensive income (loss) (OCI), as a part of Currency translation adjustments. The ineffective portion of gain or loss on derivatives is included in (Gain) loss on change in fair value of derivative instruments, net.
 
For our currency exchange contracts designated as net investment hedges, we recognized a $5 million loss and a $21 million loss in OCI for the three months and six months ended September 30, 2009, respectively. We recognized gains of $81 and $120 million in OCI for the three and six months ended September 30, 2008, respectively.
 
Cash Flow Hedges
 
We own an interest in an electricity swap which we have designated as a cash flow hedge of 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 condensed consolidated statements of operations. As of September 30, 2009, the outstanding portion of this swap includes 1.8 million 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 condensed consolidated statements of operations. We had $910 million and $690 million of outstanding interest rate swaps designated as cash flow hedges as of September 30, 2009 and March 31, 2009, respectively.
 
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 no longer be 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 $23 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.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions).
 
Three Month Comparison:
 
                                                 
            Amount of Gain or (Loss)
        Amount of Gain or (Loss)
  Recognized in Income on
    Amount of Gain or (Loss)
  Reclassified from Accumulated
  Derivative (Ineffective Portion
    Recognized in OCI on Derivative
  OCI into Income
  and Amount Excluded from
    (Effective Portion)   (Effective Portion)   Effectiveness Testing)
    Three Months
  Three Months
  Three Months
  Three Months
  Three Months
  Three Months
    Ended
  Ended
  Ended
  Ended
  Ended
  Ended
    September 30,
  September 30,
  September 30,
  September 30,
  September 30,
  September 30,
    2009   2008   2009   2008   2009   2008
 
Electricity swap
  $ (14 )   $ (13 )   $ 1     $ 4     $ —     $ —  
Interest rate swaps
  $ —     $ 1     $ —     $ —     $ —     $ —  
 
Six Month Comparison:
 
                                                 
            Amount of Gain or (Loss)
        Amount of Gain or (Loss)
  Recognized in Income on
    Amount of Gain or (Loss)
  Reclassified from Accumulated
  Derivative (Ineffective Portion
    Recognized in OCI on Derivative
  OCI into Income
  and Amount Excluded from
    (Effective Portion)   (Effective Portion)   Effectiveness Testing)
    Six Months
  Six Months
  Six Months
  Six Months
  Six Months
  Six Months
    Ended
  Ended
  Ended
  Ended
  Ended
  Ended
    September 30,
  September 30,
  September 30,
  September 30,
  September 30,
  September 30,
    2009   2008   2009   2008   2009   2008
 
Electricity swap
  $ (3 )   $ —     $ 2     $ 8     $ 2     $ —  
Interest rate swaps
  $ 1     $ 11     $ —     $ —     $ —     $ —  
 
Derivative Instruments 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. 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 condensed consolidated statement of operations.
 
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 US GAAP and are recognized as assets or liabilities at fair value on the accompanying condensed consolidated balance sheets. As of September 30, 2009 and March 31, 2009, we had 225 kilotonnes (kt) and 294 kt, respectively, 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 operations. As of September 30, 2009 and March 31, 2009, we had outstanding currency exchange contracts with a total notional amount of $1.5 billion and $1.4 billion, respectively, not designated as hedges.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
We use interest rate swaps to manage our exposure to fluctuating interest rates associated with variable-rate debt. As of September 30, 2009 and March 31, 2009, we had $11 million and $10 million, respectively, of outstanding interest rate swaps that were 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 September 30, 2009 and March 31, 2009, we had 2.4 million gallons and 3.4 million gallons, respectively, of heating oil swaps and 4.3 million MMBTUs and 3.8 million MMBTUs, respectively, of natural gas that were not designated as hedges. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
 
The following table summarizes the gains (losses) recognized in earnings (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Derivative Instruments Not Designated as Hedges
                               
Aluminum contracts
  $ 49     $ (181 )   $ 97     $ (159 )
Currency exchange contracts
    29       7       51       39  
Energy contracts
    —       (16 )     —       (9 )
                                 
Gain (loss) recognized
    78       (190 )     148       (129 )
Derivative Instruments Designated as Cash Flow Hedges
                               
Interest rate swaps
    —       —       —       —  
Electricity swap
    2       5       4       9  
                                 
Gain (loss) on change in fair value of derivative instruments, net
  $ 80     $ (185 )   $ 152     $ (120 )
                                 
 
11.   FAIR VALUE MEASUREMENTS
 
We record certain assets and liabilities, primarily derivative instruments, on our balance sheet at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, that are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent that observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
 
Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that we have the ability to access at the measurement date.
 
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level 3 — Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
The following assets and liabilities are measured and recognized at fair value on a recurring basis (in millions).
 
                                 
    September 30, 2009
    Fair Value Measurements Using
    Level 1(A)   Level 2(B)   Level 3(C)   Total
 
Assets — Derivative instruments
  $ —     $ 219     $ —     $ 219  
Liabilities — Derivative instruments
  $ —     $ (166 )   $ (31 )   $ (197 )
 
                                 
    March 31, 2009
    Fair Value Measurements Using
    Level 1(A)   Level 2(B)   Level 3(C)   Total
 
Assets — Derivative instruments
  $ —     $ 191     $ —     $ 191  
Liabilities — Derivative instruments
  $ —     $ (644 )   $ (44 )   $ (688 )
 
We measure the fair value of the majority of our derivative contracts 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. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts and certain energy-related forward contracts, including natural gas and heating oil contracts.
 
We classify the following derivative instruments in Level 3 of the valuation hierarchy. We have a highly customized electricity contract in a geographic region for which no active market exists. We value this contract using the observable market prices of similar contracts for nearby regions. We adjust these prices to account for geographical differences and structural differences in the terms of the contract. We also classify as Level 3 certain foreign exchange forward contracts between the USD and the BRL, and the USD and the KRW, for which the remaining time to maturity on the forward contract extends beyond the terms of quoted market prices.
 
We incurred unrealized losses of $5 million related to Level 3 financial instruments that were still held as of September 30, 2009. These unrealized losses are included in (Gain) loss on change in fair value of derivative instruments, net.
 
The following table presents a reconciliation of fair value activity for Level 3 derivative contracts on a net basis (in millions).
 
         
    Level 3
 
    Derivative
 
    Instruments(A)  
 
Balance as of March 31, 2009
  $ (44 )
Net realized/unrealized gains included in earnings(B)
    15  
Net realized/unrealized gains included in Other comprehensive income(C)
    (9 )
Net purchases, issuances and settlements
    7  
Net transfers in and/or (out) of Level 3
    —  
         
Balance as of September 30, 2009
  $ (31 )
         
 
 
(A) Represents derivative assets net of derivative liabilities.
 
(B) Included in (Gain) loss on change in fair value of derivative instruments, net.
 
(C) Included in Change in fair value of effective portion of hedges, net.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Financial Instruments Not Recorded at Fair Value
 
The table below presents the estimated fair value of certain financial instruments that are not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. The fair value of our letters of credit is based on the availability under such credit agreements.
 
                                 
    September 30 ,2009   March 31, 2009
    Carrying
  Fair
  Carrying
  Fair
    Value   Value   Value   Value
 
Assets
                               
Long-term receivables from related parties
  $ 24     $ 22     $ 23     $ 21  
Liabilities
                               
Long-term debt
                               
Novelis Inc.
                               
11.50% Senior Notes, due February 2015
    181       192       —       —  
7.25% Senior Notes, due February 2015
    1,168       981       1,171       454  
Floating rate Term Loan facility, due July 2014
    293       228       295       200  
Unsecured credit facility — related party, due January 2015
    —       —       91       93  
Novelis Corporation
                               
Floating rate Term Loan facility, due July 2014
    814       668       813       584  
Novelis Switzerland S.A.
                               
Capital lease obligation, due December 2019 (CHF 50 million)
    44       39       42       36  
Capital lease obligation, due August 2011 (CHF 2 million)
    2       1       2       2  
Novelis Korea Limited
                               
Bank loan, due October 2010
    100       92       100       83  
Bank loan, due February 2010 (KRW 50 billion)
    42       41       37       33  
Bank loan, due May 2009 (KRW 10 billion)
    —       —       7       7  
Other
                               
Other debt, due December 2011 through December 2012
    1       1       1       1  
Financial commitments
                               
Letters of credit
    —       153       —       134  
 
12.   OTHER (INCOME) EXPENSES, NET
 
Other (income) expenses, net is comprised of the following (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Exchange (gains) losses, net
  $ (3 )   $ 36     $ (7 )   $ 56  
(Gain) loss on reversal of accrued legal claim
    —       (26 )     —       (26 )
Gain on disposal of property, plant and equipment, net
    —       (1 )     (1 )     (2 )
Gain on tax litigation settlement in Brazil
    —       —       (6 )     —  
Other, net
    (3 )     1       (5 )     5  
                                 
Other (income) expenses, net
  $ (6 )   $ 10     $ (19 )   $ 33  
                                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
13.   INCOME TAXES
 
A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions, except percentages).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Pre-tax income before equity in net loss of non-consolidated affiliates and noncontrolling interests
  $ 311     $ (274 )   $ 594     $ (211 )
                                 
Canadian statutory tax rate
    30 %     31 %     30 %     31 %
                                 
Provision at the Canadian statutory rate
    93       (85 )     178       (65 )
Increase (decrease) for taxes on income (loss) resulting from:
                               
Exchange translation items
    8       (22 )     20       (13 )
Exchange remeasurement of deferred income taxes
    13       (41 )     36       (21 )
Change in valuation allowances
    2       15       3       18  
Expense (income) items not subject to tax
    (5 )     10       (4 )     6  
Enacted statutory tax rate changes
    —       2       —       2  
Tax rate differences on foreign earnings
    2       (54 )     (9 )     (68 )
Uncertain tax positions, net
    (26 )     —       (25 )     1  
Other — net
    —       7       —       7  
                                 
Provision
  $ 87     $ (168 )   $ 199     $ (133 )
                                 
Effective tax rate
    28 %     61 %     34 %     63 %
                                 
 
As of September 30, 2009, we had a net deferred tax liability of $488 million, including deferred tax assets of approximately $403 million for net operating loss and tax credit carryforwards. The carryforwards begin expiring in 2010 with some amounts being carried forward indefinitely. As of September 30, 2009, valuation allowances of $111 million had been recorded against net operating loss carryforwards and tax credit carryforwards, where it appeared more likely than not that such benefits will not be realized. Realization is dependent on generating sufficient taxable income prior to expiration of the tax attribute carryforwards. Although realization is not assured, management believes it is more likely than not that all the remaining net deferred tax assets will be realized. In the near term, the amount of deferred tax assets considered realizable could be reduced if we do not generate sufficient taxable income in certain jurisdictions.
 
During the three months ended September 30, 2009, the statute of limitations lapsed with respect to unrecognized tax benefits related to potential withholding taxes and cross-border intercompany pricing of services. As a result, we recognized a reduction in unrecognized tax benefits of $28 million, including a decrease in accrued interest of $5 million, recorded as a reduction to the income tax provision in the condensed consolidated statement of operations.
 
14.   COMMITMENTS AND CONTINGENCIES
 
Legal Proceedings
 
Coca-Cola Lawsuit.  A lawsuit was commenced against Novelis Corporation on February 15, 2007 by Coca-Cola Bottler’s Sales and Services Company LLC (CCBSS) in Georgia state court. CCBSS is a


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
consortium of Coca-Cola bottlers across the United States, including Coca-Cola Enterprises Inc. CCBSS alleges that Novelis Corporation breached a soft toll agreement between the parties relating to the supply of aluminum can stock, 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 court’s 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. However, we have concluded that a loss from the CCBSS litigation is not probable and therefore have not recorded an accrual. In addition, we do not believe that there is a reasonable possibility of a loss from the lawsuit based on information available at this time. Novelis Corporation has filed its answer and the parties are proceeding with discovery.
 
Environmental Matters
 
The following describes certain environmental matters relating to our business.
 
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 September 30, 2009 will be approximately $49 million. Of this amount, $31 million is included in Other long-term liabilities, with the remaining $18 million included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2009. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Rio Tinto 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 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.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Brazil Tax Matters
 
Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of September 30, 2009 and March 31, 2009, we had cash deposits aggregating approximately $44 million and $30 million, respectively, in judicial depository accounts pending finalization of the related cases. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included in Other long-term assets — third parties in our accompanying condensed consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Ministry of Treasury about various forms of manufacturing taxes and social security contributions, for which we have made no judicial deposits but for which we have established reserves ranging from $8 million to $121 million as of September 30, 2009. In total, these reserves approximate $142 million as of September 30, 2009 and are included in Other long-term liabilities in our accompanying condensed consolidated balance sheet.
 
On May 28, 2009, the Brazilian government passed a law allowing taxpayers to settle certain federal tax disputes with the Brazilian tax authorities, including disputes relating to a Brazilian national tax on manufactured products, through an installment program. Pursuant to the installment plan, companies can elect to (a) pay the principal amount of the disputed tax amounts over a near-term period (e.g., 1-60 monthly installments) and receive a 35-45% discount on the interest and 80-100% discount on the penalties owed, (b) pay the principal and interest over a medium-term period (e.g., 60-120 monthly installments) and receive a 30-35% discount on the interest and 70-80% discount on the penalties owed, or (c) pay the full amount of the disputed tax amounts, including interest and penalties, over a longer-term period (e.g., 120-180 monthly installments) and receive a 25-30% discount on the interest and 60-70% discount on the penalties owed. Novelis joined the installment plan and now has until November 30, 2009 to choose, in addition to IPI repayment terms, the tax disputes that it will elect to settle.
 
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.
 
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 condensed consolidated financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our condensed consolidated balance sheets.
 
The following table discloses information about our obligations under guarantees of indebtedness of others as of September 30, 2009 (in millions). We did not have any obligations under guarantees of indebtedness related to our majority-owned subsidiaries as of September 30, 2009.
 
                 
    Maximum
    Liability
 
    Potential
    Carrying
 
Type of Entity
  Future Payment     Value  
 
Wholly-owned subsidiaries
  $ 43     $ 5  
Aluminium Norf GmbH
  $ 15     $ —  
 
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.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
15.   SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION
 
Segment Information
 
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.
 
Adjustment to Eliminate Proportional Consolidation.  The financial information for our segments 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 the financial information for the segments shown in the tables below to the relevant GAAP-based measures, we must remove our proportional share of each line item that we included in the segment amounts. See Note 5 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
 
We measure the profitability and financial performance of our operating segments based on Segment income. Segment income provides a measure of our underlying segment results that is in line with our portfolio approach to risk management. We define Segment income as earnings before (a) depreciation and amortization; (b) interest expense and amortization of debt issuance costs; (c) interest income; (d) unrealized gains (losses) on change in fair value of derivative instruments, net; (e) impairment of goodwill; (f) impairment charges on long-lived assets (other than goodwill); (g) gain on extinguishment of debt; (h) noncontrolling interests’ share; (i) adjustments to reconcile our proportional share of Segment income from non-consolidated affiliates to income as determined on the equity method of accounting; (k) restructuring charges, net; (k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o) provision or benefit for taxes on income (loss) and (p) cumulative effect of accounting change, net of tax.
 
The tables below show selected segment financial information (in millions).
 
Selected Segment Financial Information
 
                                                         
                                  Adjustment to
       
                                  Eliminate
       
    North
                South
    Corporate
    Proportional
       
Total Assets
  America     Europe     Asia     America     and Other     Consolidation     Total  
 
September 30, 2009
  $ 2,714     $ 2,997     $ 881     $ 1,422     $ 39     $ (308 )   $ 7,745  
March 31, 2009
  $ 2,973     $ 2,750     $ 732     $ 1,296     $ 50     $ (234 )   $ 7,567  
 
Comparison of Three Month Data:
 
                                                         
                                  Adjustment to
       
                                  Eliminate
       
Selected Operating Results
  North
                South
    Corporate
    Proportional
       
Three Months Ended September 30, 2009
  America     Europe     Asia     America     and Other     Consolidation     Total  
 
Net sales
  $ 822     $ 735     $ 382     $ 252     $ —     $ (10 )   $ 2,181  
Depreciation and amortization
    39       46       12       15       1       (21 )     92  
Capital expenditures
    7       11       2       5       —       (3 )     22  
 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                                         
                                  Adjustment to
       
                                  Eliminate
       
Selected Operating Results
  North
                South
    Corporate
    Proportional
       
Three Months Ended September 30, 2008
  America     Europe     Asia     America     and Other     Consolidation     Total  
 
Net sales
  $ 1,111     $ 1,097     $ 458     $ 300     $ —     $ (7 )   $ 2,959  
Depreciation and amortization
    41       54       13       19       —       (20 )     107  
Capital expenditures
    10       17       6       9       1       (6 )     37  
 
Comparison of Six Month Data:
 
                                                         
                                  Adjustment to
       
                                  Eliminate
       
Selected Operating Results
  North
                South
    Corporate
    Proportional
       
Six Months Ended September 30, 2009
  America     Europe     Asia     America     and Other     Consolidation     Total  
 
Net sales
  $ 1,589     $ 1,400     $ 708     $ 456     $ —     $ (12 )   $ 4,141  
Depreciation and amortization
    80       94       23       33       2       (40 )     192  
Capital expenditures
    13       22       5       12       —       (6 )     46  
 
                                                         
                                  Adjustment to
       
                                  Eliminate
       
Selected Operating Results
  North
                South
    Corporate
    Proportional
       
Six Months Ended September 30, 2008
  America     Europe     Asia     America     and Other     Consolidation     Total  
 
Net sales
  $ 2,194     $ 2,315     $ 968     $ 595     $ —     $ (10 )   $ 6,062  
Depreciation and amortization
    83       117       28       36       1       (42 )     223  
Capital expenditures
    17       36       11       15       1       (10 )     70  

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table shows the reconciliation from income from reportable segments to Net income attributable to our common shareholder (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
North America
  $ 75     $ 2     $ 132     $ 44  
Europe
    60       62       93       173  
Asia
    48       (3 )     86       28  
South America
    36       48       47       95  
Corporate and other(A)
    (19 )     (20 )     (34 )     (33 )
Depreciation and amortization
    (92 )     (107 )     (192 )     (223 )
Interest expense and amortization of debt issuance costs
    (44 )     (46 )     (87 )     (91 )
Interest income
    3       5       6       10  
Unrealized gains (losses) on change in fair value of derivative instruments, net(B)
    254       (221 )     553       (201 )
Adjustment to eliminate proportional consolidation
    (17 )     (18 )     (33 )     (36 )
Restructuring recoveries (charges), net
    (3 )     —       (6 )     1  
Other costs, net
    —       26       9       22  
                                 
Income (loss) before income taxes
    301       (272 )     574       (211 )
Income tax provision (benefit)
    87       (168 )     199       (133 )
                                 
Net income (loss)
    214       (104 )     375       (78 )
Net income attributable to noncontrolling interests
    19       —       37       2  
                                 
Net income (loss) attributable to our common shareholder
  $ 195     $ (104 )   $ 338     $ (80 )
                                 
 
 
(A) Corporate and other includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. These expenses have not been allocated to the regions. It also includes realized gains (losses) on corporate derivative instruments.
 
(B) Unrealized gains (losses) on change in fair value of derivative instruments, net represents the portion of gains (losses) that were not settled in cash during the period. Total realized and unrealized gains (losses) are shown in the table below and are included in the aggregate each period in (Gain) loss on change in fair value of derivative instruments, net on our condensed consolidated statements of operations.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Gain (loss) on change in fair value of derivative instruments, net is as follows (in millions):
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Realized gains (losses) included in segment income
  $ (174 )   $ 36     $ (402 )   $ 81  
Realized gains (losses) on corporate derivative instruments
    —       —       1       —  
Unrealized gains (losses)
    254       (221 )     553       (201 )
                                 
Gains (losses) on change in fair value of derivative instruments, net
  $ 80     $ (185 )   $ 152     $ (120 )
                                 
 
Information about Major Customers and Primary Supplier
 
The table below shows our net sales to Rexam Plc (Rexam) and Anheuser-Busch Companies (Anheuser-Busch), our two largest customers, as a percentage of total Net sales.
 
                                 
    Three Months Ended
  Six Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
 
Rexam
    16 %     17 %     18 %     16 %
Anheuser-Busch
    11 %     7 %     11 %     7 %
 
Rio Tinto Alcan is our primary supplier of metal inputs, including prime and sheet ingot. The table shows our purchases from Rio Tinto Alcan as a percentage of our total combined primary metal purchases.
 
                                 
    Three Months Ended
  Six Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
 
Purchases from Rio Tinto Alcan as a percentage of total
    45 %     36 %     41 %     35 %
 
16.   SUPPLEMENTAL INFORMATION
 
Accumulated other comprehensive income (loss) consists of the following (in millions).
 
                 
    September 30,
    March 31,
 
    2009     2009  
 
Currency translation adjustment
  $ 62     $ (62 )
Fair value of effective portion of hedges
    (21 )     (19 )
Pension and other benefits
    (63 )     (67 )
                 
Accumulated other comprehensive income (loss)
  $ (22 )   $ (148 )
                 
 
Supplemental cash flow information (in millions):
 
                 
    Six Months Ended
    September 30,
    2009   2008
 
Interest paid
  $ 78     $ 82  
Income taxes paid
  $ 13     $ 67  


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
17.   SUPPLEMENTAL GUARANTOR INFORMATION
 
In connection with the issuance of our 7.25% Senior Notes and our 11.5% Senior Notes, certain of our wholly-owned subsidiaries, which are 100% owned within the meaning of Rule 3-10(h)(1) of Regulation S-X, provided guarantees. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil, Portugal, Luxembourg and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.
 
The following information presents condensed consolidating statements of operations, balance sheets and statements of cash flows of the Parent, the Guarantors, and the Non-Guarantors. Investments include investment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
 
                                         
    Three Months Ended September 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 218     $ 1,743     $ 606     $ (386 )   $ 2,181  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    193       1,408       513       (386 )     1,728  
Selling, general and administrative expenses
    9       59       15       —       83  
Depreciation and amortization
    1       67       24       —       92  
Research and development expenses
    6       2       1       —       9  
Interest expense and amortization of debt issuance costs
    29       29       2       (16 )     44  
Interest income
    (17 )     (2 )     —       16       (3 )
(Gain) loss on change in fair value of derivative instruments, net
    (1 )     (71 )     (8 )     —       (80 )
Restructuring charges, net
    —       1       2       —       3  
Equity in net (income) loss of non-consolidated affiliates
    (158 )     10       —       158       10  
Other (income) expenses, net
    (8 )     17       (15 )     —       (6 )
                                         
      54       1,520       534       (228 )     1,880  
                                         
Income (loss) before income taxes
    164       223       72       (158 )     301  
Income tax provision (benefit)
    (31 )     103       15       —       87  
                                         
Net income (loss)
    195       120       57       (158 )     214  
Less: Net income (loss) attributable to noncontrolling interests
    —       —       19       —       19  
                                         
Net income (loss) attributable to our common shareholder
  $ 195     $ 120     $ 38     $ (158 )   $ 195  
                                         
 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    Three Months Ended September 30, 2008  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 389     $ 2,482     $ 767     $ (679 )   $ 2,959  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    384       2,364       722       (679 )     2,791  
Selling, general and administrative expenses
    6       62       21       —       89  
Depreciation and amortization
    6       77       24       —       107  
Research and development expenses
    7       3       —       —       10  
Interest expense and amortization of debt issuance costs
    29       37       7       (27 )     46  
Interest income
    (22 )     (6 )     (4 )     27       (5 )
(Gain) loss on change in fair value of derivative instruments, net
    3       194       (12 )     —       185  
Restructuring charges, net
    (1 )     1       —       —       —  
Equity in net (income) loss of non-consolidated affiliates
    81       (2 )     —       (81 )     (2 )
Other (income) expenses, net
    (1 )     (22 )     33       —       10  
                                         
      492       2,708       791       (760 )     3,231  
                                         
Income (loss) before income taxes
    (103 )     (226 )     (24 )     81       (272 )
Income tax provision (benefit)
    1       (164 )     (5 )     —       (168 )
                                         
Net income (loss)
    (104 )     (62 )     (19 )     81       (104 )
Less: Net income (loss) attributable to noncontrolling interests
    —       —       —       —       —  
                                         
Net income (loss) attributable to our common shareholder
  $ (104 )   $ (62 )   $ (19 )   $ 81     $ (104 )
                                         

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
 
                                         
    Six Months Ended September 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 386     $ 3,277     $ 1,157     $ (679 )   $ 4,141  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    349       2,622       969       (679 )     3,261  
Selling, general and administrative expenses
    19       115       27       —       161  
Depreciation and amortization
    2       145       45       —       192  
Research and development expenses
    11       5       1       —       17  
Interest expense and amortization of debt issuance costs
    55       59       5       (32 )     87  
Interest income
    (32 )     (5 )     (1 )     32       (6 )
(Gain) loss on change in fair value of derivative instruments, net
    (3 )     (132 )     (17 )     —       (152 )
Restructuring charges, net
    —       4       2       —       6  
Equity in net (income) loss of non-consolidated affiliates
    (305 )     20       —       305       20  
Other (income) expenses, net
    (15 )     24       (28 )     —       (19 )
                                         
      81       2,857       1,003       (374 )     3,567  
                                         
Income (loss) before income taxes
    305       420       154       (305 )     574  
Income tax provision (benefit)
    (33 )     204       28       —       199  
                                         
Net income (loss)
    338       216       126       (305 )     375  
Net income (loss) attributable to noncontrolling interests
    —       —       37       —       37  
                                         
Net income (loss) attributable to our common shareholder
  $ 338     $ 216     $ 89     $ (305 )   $ 338  
                                         
 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    Six Months Ended September 30, 2008  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 784     $ 5,064     $ 1,603     $ (1,389 )   $ 6,062  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    771       4,741       1,499       (1,389 )     5,622  
Selling, general and administrative expenses
    6       124       43       —       173  
Depreciation and amortization
    12       166       45       —       223  
Research and development expenses
    15       6       1       —       22  
Interest expense and amortization of debt issuance costs
    57       71       15       (52 )     91  
Interest income
    (43 )     (11 )     (8 )     52       (10 )
(Gain) loss on change in fair value of derivative instruments, net
    3       133       (16 )     —       120  
Restructuring charges, net
    (1 )     —       —       —       (1 )
Equity in net (income) loss of non-consolidated affiliates
    50       —       —       (50 )     —  
Other (income) expenses, net
    (8 )     (7 )     48       —       33  
                                         
      862       5,223       1,627       (1,439 )     6,273  
                                         
Income (loss) before income taxes
    (78 )     (159 )     (24 )     50       (211 )
Income tax provision (benefit)
    2       (131 )     (4 )     —       (133 )
                                         
Net income (loss)
    (80 )     (28 )     (20 )     50       (78 )
Net income (loss) attributable to noncontrolling interests
    —       —       2       —       2  
                                         
Net income (loss) attributable to our common shareholder
  $ (80 )   $ (28 )   $ (22 )   $ 50     $ (80 )
                                         

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
                                         
    As of September 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 11     $ 157     $ 78     $ —     $ 246  
Accounts receivable, net of allowances
                                       
— third parties
    25       843       338       —       1,206  
— related parties
    666       202       36       (891 )     13  
Inventories
    45       608       276       —       929  
Prepaid expenses and other current assets
    4       29       17       —       50  
Fair value of derivative instruments
    4       168       15       (16 )     171  
Deferred income tax assets
    —       30       7       —       37  
                                         
Total current assets
    755       2,037       767       (907 )     2,652  
Property, plant and equipment, net
    144       2,097       528       —       2,769  
Goodwill
    —       600       11       —       611  
Intangible assets, net
    —       778       8       —       786  
Investments in and advances to non-consolidated affiliates
    1,993       763       1       (1,993 )     764  
Fair value of derivative instruments, net of current portion
    1       24       25       (2 )     48  
Deferred income tax assets
    —       4       1       —       5  
Other long-term assets
    1,047       213       79       (1,220 )     119  
                                         
Total assets
  $ 3,940     $ 6,516     $ 1,420     $ (4,122 )   $ 7,754  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 4     $ 42     $ —     $ 49  
Short-term borrowings
                                       
— third parties
    50       116       11       —       177  
— related parties
    8       474       19       (501 )     —  
Accounts payable
                                       
— third parties
    56       479       346       —       881  
— related parties
    59       275       109       (388 )     55  
Fair value of derivative instruments
    9       113       39       (16 )     145  
Accrued expenses and other current liabilities
    40       304       86       (2 )     428  
Deferred income tax liabilities
    —       12       —       —       12  
                                         
Total current liabilities
    225       1,777       652       (907 )     1,747  
Long-term debt, net of current portion
                                       
— third parties
    1,640       855       101       —       2,596  
— related parties
    122       994       104       (1,220 )     —  
Deferred income tax liabilities
    —       506       12       —       518  
Accrued postretirement benefits
    30       370       128       —       528  
Other long-term liabilities
    40       311       5       (2 )     354  
                                         
Total liabilities
    2,057       4,813       1,002       (2,129 )     5,743  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    3,497       —       —       —       3,497  
Retained earnings/(accumulated deficit)/owner’s net investment
    (1,592 )     1,730       392       (2,122 )     (1,592 )
Accumulated other comprehensive income (loss)
    (22 )     (27 )     (102 )     129       (22 )
                                         
Total Novelis shareholder’s equity
    1,883       1,703       290       (1,993 )     1,883  
                                         
Noncontrolling interests
    —       —       128       —       128  
                                         
Total liabilities and shareholder’s equity
  $ 3,940     $ 6,516     $ 1,420     $ (4,122 )   $ 7,754  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
 
                                         
    As of March 31, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 3     $ 175     $ 70     $ —     $ 248  
Accounts receivable, net of allowances
                                       
— third parties
    21       761       267       —       1,049  
— related parties
    411       183       32       (601 )     25  
Inventories
    31       523       239       —       793  
Prepaid expenses and other current assets
    4       31       16       —       51  
Fair value of derivative instruments
    —       145       7       (33 )     119  
Deferred income tax assets
    —       192       24       —       216  
                                         
Total current assets
    470       2,010       655       (634 )     2,501  
Property, plant and equipment, net
    162       2,146       491       —       2,799  
Goodwill
    —       570       12       —       582  
Intangible assets, net
    —       787       —       —       787  
Investments in and advances to non-consolidated affiliates
    1,647       719       —       (1,647 )     719  
Fair value of derivative instruments, net of current portion
    —       46       28       (2 )     72  
Deferred income tax assets
    1       3       —       —       4  
Other long-term assets
    1,028       207       96       (1,228 )     103  
                                         
Total assets
  $ 3,308     $ 6,488     $ 1,282     $ (3,511 )   $ 7,567  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 4     $ 44     $ —     $ 51  
Short-term borrowings
                                       
— third parties
    —       231       33       —       264  
— related parties
    7       330       22       (359 )     —  
Accounts payable
                                       
— third parties
    33       458       234       —       725  
— related parties
    41       157       90       (240 )     48  
Fair value of derivative instruments
    7       540       126       (33 )     640  
Accrued expenses and other current liabilities
    34       395       90       (3 )     516  
Deferred income tax liabilities
    —       —       —       —       —  
                                         
Total current liabilities
    125       2,115       639       (635 )     2,244  
Long-term debt, net of current portion
                                       
— third parties
    1,464       852       101       —       2,417  
— related parties
    223       976       120       (1,228 )     91  
Deferred income tax liabilities
    —       459       10       —       469  
Accrued postretirement benefits
    27       346       122       —       495  
Other long-term liabilities
    50       288       5       (1 )     342  
                                         
Total liabilities
    1,889       5,036       997       (1,864 )     6,058  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    3,497       —       —       —       3,497  
Retained earnings/(accumulated deficit)/owner’s net investment
    (1,930 )     1,533       325       (1,858 )     (1,930 )
Accumulated other comprehensive income (loss)
    (148 )     (81 )     (130 )     211       (148 )
                                         
Total Novelis shareholder’s equity
    1,419       1,452       195       (1,647 )     1,419  
                                         
Noncontrolling interests
    —       —       90       —       90  
                                         
Total liabilities and shareholder’s equity
  $ 3,308     $ 6,488     $ 1,282     $ (3,511 )   $ 7,567  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
                                         
    Six Months Ended September 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
  $ 37     $ 353     $ 152     $ (78 )   $ 464  
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (1 )     (34 )     (11 )     —       (46 )
Proceeds from sales of property, plant and equipment
    —       —       4       —       4  
Changes to investment in and advances to non-consolidated affiliates
    —       2       —       —       2  
Proceeds from loans receivable, net — related parties
    —       14       —       —       14  
Net proceeds from settlement of derivative instruments
    (2 )     (332 )     (82 )     —       (416 )
                                         
Net cash provided by (used in) investing activities
    (3 )     (350 )     (89 )     —       (442 )
                                         
FINANCING ACTIVITIES
                                       
Proceeds from issuance of debt — third party
    177       —       —       —       177  
Proceeds from issuance of debt — related party
    3       —       —       —       3  
Principal payments
                                       
— third parties
    (1 )     (6 )     (9 )     —       (16 )
— related parties
    (256 )     (41 )     (13 )     216       (94 )
Short-term borrowings, net
                                       
— third parties
    50       (121 )     (25 )     —       (96 )
— related parties
    1       142       (5 )     (138 )     —  
Dividends — noncontrolling interests
    —       —       (13 )     —       (13 )
                                         
Net cash provided by (used in) financing activities
    (26 )     (26 )     (65 )     78       (39 )
                                         
Net increase (decrease) in cash and cash equivalents
    8       (23 )     (2 )     —       (17 )
Effect of exchange rate changes on cash balances held in foreign currencies
    —       5       10       —       15  
Cash and cash equivalents — beginning of period
    3       175       70       —       248  
                                         
Cash and cash equivalents — end of period
  $ 11     $ 157     $ 78     $ —     $ 246  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
                                         
    Six Months Ended September 30, 2008  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
  $ 15     $ (272 )   $ (24 )   $ (109 )   $ (390 )
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (3 )     (50 )     (17 )     —       (70 )
Proceeds from sales of property, plant and equipment
    —       1       1       —       2  
Changes to investment in and advances to non-consolidated affiliates
    —       13       —       —       13  
Proceeds from loans receivable, net — related parties
    —       13       —       —       13  
Net proceeds from settlement of derivative instruments
    —       66       28       —       94  
                                         
Net cash provided by (used in) investing activities
    (3 )     43       12       —       52  
                                         
FINANCING ACTIVITIES
                                       
Principal payments
                                       
— third parties
    (1 )     (5 )     (1 )     —       (7 )
— related parties
    —       (89 )     (140 )     229       —  
Short-term borrowings, net
                                       
— third parties
    —       279       (16 )     —       263  
— related parties
    6       (10 )     124       (120 )     —  
Dividends — noncontrolling interests
    —       —       (5 )     —       (5 )
                                         
Net cash provided by (used in) financing activities
    5       175       (38 )     109       251  
                                         
Net increase (decrease) in cash and cash equivalents
    17       (54 )     (50 )     —       (87 )
Effect of exchange rate changes on cash balances held in foreign currencies
    —       (6 )     (14 )     —       (20 )
Cash and cash equivalents — beginning of period
    12       177       137       —       326  
                                         
Cash and cash equivalents — end of period
  $ 29     $ 117     $ 73     $ —     $ 219  
                                         


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
The following information should be read together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report for a more complete understanding of our financial condition and results of operations. 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, particularly in “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA.”
 
OVERVIEW AND REFERENCES
 
Novelis is the world’s 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 September 30, 2009, we had operations on four continents: North America; South America; Asia and Europe, through 31 operating plants, one research facility and several market-focused innovation centers in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities that supply 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.
 
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 “Rio Tinto Alcan” refer to Rio Tinto Alcan Inc.
 
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. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
 
References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the United States Securities and Exchange Commission (SEC) on June 29, 2009. We also filed a Form 8-K on August 5, 2009 to conform our historical consolidated financial statements to reflect our adoption as of April 1, 2009 of new accounting guidance related to the presentation of noncontrolling interests.
 
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 Company’s 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.
 
HIGHLIGHTS
 
Significant factors that impacted our business for each of the three and six months ended September 30, 2009 and 2008 are presented briefly below. Each is discussed in further detail throughout the Management’s Discussion and Analysis and Segment Review.
 
  •  We reported pre-tax income of $301 million for the three months ended September 30, 2009, as compared to pre-tax loss of $272 million for the three months ended September 30, 2008. Current quarter results include $254 million of unrealized gains on derivatives as compared to $221 million of losses in the prior year. The $254 million of unrealized gains includes a $169 million reversal of previously recognized losses upon settlement of derivatives and $85 million of unrealized gains relating


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  to mark to market adjustments on metal and currency derivatives. The results for the three months ended September 30, 2008 also include a $26 million gain on the reversal of a legal claim.
 
  •  We reported pre-tax income of $574 million for the six months ended September 30, 2009, as compared to pre-tax loss of $211 million for the six months ended September 30, 2008. Current results include $553 million of unrealized gains on derivatives as compared to $201 million of losses in the prior year. The $553 million of unrealized gains includes a $410 million reversal of previously recognized losses upon settlement of derivatives and $143 million of unrealized gains relating to mark to market adjustments on metal and currency derivatives. The results for the six months ended September 30, 2008 also include a $26 million gain on the reversal of a legal claim.
 
  •  Shipments of flat rolled products were 8% and 12% less than the comparable three and six month periods a year ago, which was before the global economic slowdown. However, flat rolled shipments for the second quarter of fiscal 2009 were up in all regions over the first quarter of fiscal 2010, with the most significant increases in South America and Europe. Shipments of flat rolled products were 14% higher than the low levels experienced in the fourth quarter of fiscal 2009.
 
  •  We continue to effectively manage inventory levels. Metal inventories as of September 30, 2009 totaled 325 kt, up 9% from an inventory level of 299 kt as of March 31, 2009.
 
BUSINESS AND INDUSTRY CLIMATE
 
The global economic slowdown has negatively impacted our sales and shipment levels as well as our profitability, operating cash flows and liquidity. During the last six months of fiscal 2009, we experienced rapidly declining aluminum prices and sharply lower end customer demand. However, beverage and food can shipments, which represent between 50% and 60% of our rolled products business, stabilized during the first quarter of fiscal 2010 at levels which are only moderately below historical levels. The impacts were more severe in the construction, automotive and industrial markets, although conditions have now also stabilized in those product categories. On a regional basis, the impacts were most severe in Europe, Asia and North America.


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Key Sales and Shipment Trends
 
                                                         
    Three Months Ended     Year Ended
    Three Months Ended  
    June 30,
    September 30,
    December 31,
    March 31,
    March 31,
    June 30,
    September 30,
 
    2008     2008     2008     2009     2009     2009     2009  
          (In millions, except shipments which are in kt)  
 
Net sales
  $ 3,103     $ 2,959     $ 2,176     $ 1,939