Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 10, 2010

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, 2010
    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
  98-0442987
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
3560 Lenox Road, Suite 2000
Atlanta, Georgia
(Address of principal executive offices)
  30326
(Zip Code)
 
Telephone: (404) 760-4000
(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, 2010, the registrant had 1,000 shares of common stock, no par value, 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     2  
        Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2010 and 2009 (unaudited)     2  
        Condensed Consolidated Balance Sheets as of September 30, 2010 and March 31, 2010 (unaudited)     3  
        Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2010 and 2009 (unaudited)     4  
        Condensed Consolidated Statement of Shareholder’s Equity for the Six Months Ended September 30, 2010 (unaudited)     5  
        Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2010 and 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     39  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk     57  
  Item 4.     Controls and Procedures     59  
 
PART II. OTHER INFORMATION
  Item 1.     Legal Proceedings     61  
  Item 1A.     Risk Factors     61  
  Item 6.     Exhibits     61  
 EX-3.1
 EX-4.1
 EX-4.2
 EX-4.3
 EX-4.4
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


1


Table of Contents

 
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,  
    2010     2009     2010     2009  
 
Net sales
  $ 2,524     $ 2,181     $ 5,057     $ 4,141  
                                 
Cost of goods sold (exclusive of depreciation and amortization)
    2,188       1,734       4,396       3,271  
Selling, general and administrative expenses
    97       77       178       151  
Depreciation and amortization
    104       92       207       192  
Research and development expenses
    9       9       18       17  
Interest expense and amortization of debt issuance costs
    40       44       79       87  
Interest income
    (3 )     (3 )     (6 )     (6 )
Gain on change in fair value of derivative instruments, net
    (34 )     (80 )     (28 )     (152 )
Restructuring charges, net
    9       3       15       6  
Equity in net loss of non-consolidated affiliates
    3       10       6       20  
Other (income) expense, net
    (18 )     (6 )     (11 )     (19 )
                                 
      2,395       1,880       4,854       3,567  
                                 
Income before income taxes
    129       301       203       574  
Income tax provision
    56       87       71       199  
                                 
Net income
    73       214       132       375  
Net income attributable to noncontrolling interests
    11       19       20       37  
                                 
Net income attributable to our common shareholder
  $ 62     $ 195     $ 112     $ 338  
                                 
 
See accompanying notes to the condensed consolidated financial statements.


2


Table of Contents

 
Novelis Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)
 
                 
    September 30,
    March 31,
 
    2010     2010  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 512     $ 437  
Accounts receivable (net of allowances of $5 and $4 as of September 30, 2010 and March 31, 2010)
               
— third parties
    1,244       1,143  
— related parties
    12       24  
Inventories
    1,177       1,083  
Prepaid expenses and other current assets
    44       39  
Fair value of derivative instruments
    182       197  
Deferred income tax assets
    21       12  
                 
Total current assets
    3,192       2,935  
Property, plant and equipment, net
    2,526       2,632  
Goodwill
    611       611  
Intangible assets, net
    724       749  
Investment in and advances to non-consolidated affiliates
    707       709  
Fair value of derivative instruments, net of current portion
    17       7  
Long-term deferred income tax assets
    14       5  
Other long-term assets
               
— third parties
    98       93  
— related parties
    20       21  
                 
Total assets
  $ 7,909     $ 7,762  
                 
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
               
Current portion of long-term debt
  $ 117     $ 116  
Short-term borrowings
    23       75  
Accounts payable
               
— third parties
    1,045       1,076  
— related parties
    47       53  
Fair value of derivative instruments
    145       110  
Accrued expenses and other current liabilities
    441       436  
Deferred income tax liabilities
    33       34  
                 
Total current liabilities
    1,851       1,900  
Long-term debt, net of current portion
    2,477       2,480  
Long-term deferred income tax liabilities
    537       497  
Accrued postretirement benefits
    507       499  
Other long-term liabilities
    354       376  
                 
Total liabilities
    5,726       5,752  
                 
Commitments and contingencies
               
Shareholder’s equity
               
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of September 30, 2010 and March 31, 2010
    —       —  
Additional paid-in capital
    3,530       3,530  
Accumulated deficit
    (1,446 )     (1,558 )
Accumulated other comprehensive loss
    (62 )     (103 )
                 
Total Novelis shareholder’s equity
    2,022       1,869  
Noncontrolling interests
    161       141  
                 
Total equity
    2,183       2,010  
                 
Total liabilities and shareholder’s equity
  $ 7,909     $ 7,762  
                 
 
See accompanying notes to the condensed consolidated financial statements.


3


Table of Contents

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
 
                 
    Six Months
 
    Ended
 
    September 30,  
    2010     2009  
 
OPERATING ACTIVITIES
               
Net income
  $ 132     $ 375  
Adjustments to determine net cash provided by (used in) operating activities:
               
Depreciation and amortization
    207       192  
Gain on change in fair value of derivative instruments, net
    (28 )     (152 )
Deferred income taxes
    18       196  
Write-off and amortization of fair value adjustments, net
    8       (98 )
Equity in net loss of non-consolidated affiliates
    6       20  
Foreign exchange remeasurement of debt
    1       (15 )
Gain on sale of assets
    (13 )     (1 )
Other, net
    5       6  
Changes in assets and liabilities:
               
Accounts receivable
    (91 )     (98 )
Inventories
    (84 )     (84 )
Accounts payable
    (45 )     97  
Other current assets
    (4 )     4  
Other current liabilities
    16       (4 )
Other noncurrent assets
    (8 )     (14 )
Other noncurrent liabilities
    4       27  
                 
Net cash provided by operating activities
    124       451  
                 
INVESTING ACTIVITIES
               
Capital expenditures
    (71 )     (46 )
Proceeds from sales of assets
    18       4  
Changes to investment in and advances to non-consolidated affiliates
    —       2  
Proceeds from related party loans receivable, net
    11       14  
Net proceeds (outflow) from settlement of derivative instruments
    67       (403 )
                 
Net cash provided by (used in) investing activities
    25       (429 )
                 
FINANCING ACTIVITIES
               
Proceeds from issuance of debt, third parties
    —       177  
Proceeds from issuance of debt, related parties
    —       3  
Principal payments, third parties
    (8 )     (16 )
Principal payments, related parties
    —       (94 )
Short-term borrowings, net
    (50 )     (96 )
Dividends, noncontrolling interest
    (18 )     (13 )
                 
Net cash used in financing activities
    (76 )     (39 )
                 
Net increase (decrease) in cash and cash equivalents
    73       (17 )
Effect of exchange rate changes on cash balances held in foreign currencies
    2       15  
Cash and cash equivalents — beginning of period
    437       248  
                 
Cash and cash equivalents — end of period
  $ 512     $ 246  
                 
 
See accompanying notes to the condensed consolidated financial statements.


4


Table of Contents

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(In millions, except number of shares)
 
                                                         
    Novelis Inc. Shareholder              
                            Accumulated
             
                            Other
             
                Additional
          Comprehensive
    Non-
       
    Common Stock     Paid-in
    Accumulated
    Loss
    controlling
    Total
 
    Shares     Amount     Capital     Deficit     (AOCI)     Interests     Equity  
 
Balance as of March 31, 2010
    1,000     $ —     $ 3,530     $ (1,558 )   $ (103 )   $ 141     $ 2,010  
Net income attributable to our
common shareholder
    —       —       —       112       —       —       112  
Net income attributable to
noncontrolling interests
    —       —       —       —       —       20       20  
Currency translation adjustment, net of tax provision of $3 million included in AOCI
    —       —       —       —       35       1       36  
Change in fair value of effective portion of cash flow hedges, net of tax provision of $3 included in AOCI
    —       —       —       —       7       —       7  
Postretirement benefit plans:
                                                       
Change in pension and other benefits, net of tax provision of $1 included in AOCI
    —       —       —       —       (1 )     —       (1 )
Noncontrolling interests dividends
    —       —       —       —       —       (1 )     (1 )
                                                         
Balance as of September 30, 2010
    1,000     $ —     $ 3,530     $ (1,446 )   $ (62 )   $ 161     $ 2,183  
                                                         
 
See accompanying notes to the condensed consolidated financial statements.


5


Table of Contents

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In millions)
 
                                                 
    Three Months Ended
    Three Months Ended
 
    September 30, 2010     September 30, 2009  
    Attributable to
    Attributable to
          Attributable to
    Attributable to
       
    Our Common
    Noncontrolling
          Our Common
    Noncontrolling
       
    Shareholder     Interests     Total     Shareholder     Interests     Total  
 
Net income
  $ 62     $ 11     $ 73     $ 195     $ 19     $ 214  
                                                 
Other comprehensive income (loss):
                                               
Currency translation adjustment
    154       9       163       74       7       81  
Net change in fair value of effective portion of cash flow hedges
    1       —       1       (15 )     —       (15 )
Postretirement benefit plans:
                                               
Change in pension and other benefits
    —       —       —       3       —       3  
                                                 
Other comprehensive income before income tax effect
    155       9       164       62       7       69  
Income tax provision related to
items of other comprehensive income (loss)
    4       —       4       (2 )     —       (2 )
                                                 
Other comprehensive income, net of tax
    151       9       160       64       7       71  
                                                 
Comprehensive income
  $ 213     $ 20     $ 233     $ 259     $ 26     $ 285  
                                                 
 
                                                 
    Six Months Ended
    Six Months Ended
 
    September 30, 2010     September 30, 2009  
    Attributable to
    Attributable to
          Attributable to
    Attributable to
       
    Our Common
    Noncontrolling
          Our Common
    Noncontrolling
       
    Shareholder     Interests     Total     Shareholder     Interests     Total  
 
Net income
  $ 112     $ 20     $ 132     $ 338     $ 37     $ 375  
                                                 
Other comprehensive income (loss):
                                               
Currency translation adjustment
    38       1       39       130       14       144  
Net change in fair value of effective portion of cash flow hedges
    10       —       10       (4 )     —       (4 )
Postretirement benefit plans:
                                               
Change in pension and other benefits
    —       —       —       6       —       6  
                                                 
Other comprehensive income before income tax effect
    48       1       49       132       14       146  
Income tax provision related to
items of other comprehensive
income (loss)
    7       —       7       6       —       6  
                                                 
Other comprehensive income, net of tax
    41       1       42       126       14       140  
                                                 
Comprehensive income
  $ 153     $ 21     $ 174     $ 464     $ 51     $ 515  
                                                 
 
See accompanying notes to the condensed consolidated financial statements.


6


Table of Contents

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. and became Rio Tinto 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, 2010, 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.
 
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, 2010 filed with the United States Securities and Exchange Commission (SEC) on May 27, 2010. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US 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, litigation and other tax 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.
 
Amalgamation of AV Aluminum Inc. and Novelis Inc.
 
Effective September 29, 2010, in connection with an internal restructuring transaction, pursuant to articles of amalgamation under the Canadian Business Corporations Act, we were amalgamated (the “Amalgamation”) with our direct parent AV Aluminum Inc., a Canadian corporation (AV Aluminum), to form an amalgamated corporation named Novelis Inc., also a Canadian corporation.
 
As a result of the Amalgamation, we and AV Aluminum continue our corporate existence, and the amalgamated Novelis Inc. remains liable for all of our and AV Aluminum’s obligations and we continue to own all of our respective property. Since AV Aluminum was a holding company whose sole asset was the shares of the pre-amalgamated Novelis, our business, management, board of directors and corporate governance procedures following the Amalgamation are identical to those of Novelis immediately prior to the


7


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Amalgamation. Novelis Inc., like AV Aluminum, remains an indirect, wholly-owned subsidiary of Hindalco. We have retrospectively recast all periods presented to reflect the amalgamated companies.
 
As of September 30, 2010, the Amalgamation increased the Company’s previously reported Additional paid-in capital by $32 million, increased Accumulated deficit by $33 million and increased Accrued expenses and other current liabilities by $1 million. As of March 31, 2010, the Amalgamation increased the Company’s previously reported Additional paid-in capital by $33 million, and reduced Accumulated deficit by $33 million. The Amalgamation had no impact on our condensed consolidated statements of operations for the three and six months ended September 30, 2010 and 2009 or our condensed consolidated statements of cash flows for the six months ended September 30, 2010 and 2009.
 
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 consolidated financial statements.
 
Reclassifications and Adjustment
 
Certain reclassifications of prior period amounts and presentation have been made to conform to the presentation adopted for the current period.
 
For the three and six months ended September 30, 2009, we reclassified $6 million and $10 million, respectively, from Selling, general and administrative expenses to Costs of goods sold (exclusive of depreciation and amortization) to conform with the current year presentation.
 
In the condensed consolidated balance sheet as of March 31, 2010, we reclassified $3 million of capitalized software from Property, plant and equipment, net to Intangible assets. The reclassification had no impact on total assets, total liabilities, total equity, net income (loss) or cash flows as previously reported.
 
In order to present the impact of all customer-directed derivatives and associated trading activities as operating activities on the consolidated statement of cash flows, we corrected our presentation by reclassifying this activity from investing activities to operating activities. This resulted in a reduction to operating cash flow of $13 million and an increase to investing cash flow of $13 million for the six months ended September 30, 2009. This reclassification did not have any impact on total cash or on the balance sheet, statement of operations or related disclosures.
 
Recently Adopted Accounting Standards
 
Effective April 1, 2010, we adopted authoritative guidance in the Accounting Standards Update (ASU) No. 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU No. 2009-17 was 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 ASU No. 2009-16, Transfers and Servicing: 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. This standard had no impact on our consolidated financial position, results of operations and cash flow, but did require certain additional footnote disclosures. These disclosures are included in Note 4 — Consolidation of Variable Interest Entities.
 
Recently Issued Accounting Standards
 
We have determined that recently issued accounting standards will not have a material impact on our consolidated financial position, results of operations and cash flow.


8


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
2.   RESTRUCTURING PROGRAMS
 
Restructuring charges, net of $15 million on the condensed consolidated statement of operations for the six months ended September 30, 2010 includes a $1 million non-cash credit as described below. 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, 2010
  $ 28     $ 10     $ —     $ —     $ —     $ 38  
Provisions, net
    2       9       —       —       5       16  
Cash payments
    (5 )     (11 )     —       —       —       (16 )
                                                 
Balance as of September 30, 2010
  $ 25     $ 8     $ —     $ —     $ 5     $ 38  
                                                 
 
Europe
 
Restructuring charges for the six months ended September 30, 2010 consisted of a net $2 million in additional severance and other environmental costs at three European plants related to restructuring actions initiated in prior years. For the six months ended September 30, 2010, we made $3 million in severance payments and $2 million in payments for environmental remediation.
 
North America
 
We recorded $9 million of restructuring expense for the six months ended September 30, 2010, related to the relocation of our North American headquarters from Cleveland to Atlanta, and made $8 million in payments related to this move. We also made $3 million in payments related to previously announced separation programs.
 
Corporate
 
We recorded $4 million of restructuring expense for the six months ended September 30, 2010, related to lease termination costs incurred in the relocation of our Corporate headquarters in Atlanta to a new facility, which includes a $1 million deferred credit on the former facility.
 
3.   INVENTORIES
 
Inventories consisted of the following (in millions).
 
                 
    September 30,
    March 31,
 
    2010     2010  
 
Finished goods
  $ 238     $ 270  
Work in process
    451       431  
Raw materials
    391       295  
Supplies
    103       93  
                 
      1,183       1,089  
Allowances
    (6 )     (6 )
                 
Inventories
  $ 1,177     $ 1,083  
                 
 
4.   CONSOLIDATION OF VARIABLE INTEREST ENTITIES (VIE)
 
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. Prior to March 31, 2010, the primary beneficiary was the entity that would absorb a


9


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
majority of the economic risks and rewards of the VIE based on an analysis of projected probability-weighted cash flows. In accordance with the new accounting guidance on consolidation of VIEs effective April 1, 2010 (see Note 1), an entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
 
We have a joint interest in Logan Aluminum Inc. (Logan) with ARCO Aluminum, Inc. (ARCO). Logan processes metal received from Novelis and ARCO and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and ARCO to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logan’s creditors do not have recourse to our general credit.
 
Novelis has a majority voting right on Logan’s board of directors and has the ability to direct the majority of Logan’s production operations. We also have the ability to take the majority share of production and associated 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.
 
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, as they are directly owned and consolidated by Novelis or ARCO.
 
                 
    September 30,
    March 31,
 
    2010     2010  
 
Assets
Current assets
               
Cash and cash equivalents
  $ 1     $ 3  
Accounts receivable
    31       29  
Inventories, net
    33       31  
Prepaid expenses and other current assets
    1       1  
                 
Total current assets
    66       64  
Property, plant and equipment, net
    9       10  
Goodwill
    12       12  
Deferred income taxes
    44       41  
Other long-term assets
    3       3  
                 
Total assets
  $ 134     $ 130  
                 
Liabilities
Current liabilities
               
Accounts payable
  $ 22     $ 23  
Accrued expenses and other current liabilities
    15       12  
                 
Total current liabilities
    37       35  
Accrued postretirement benefits
    99       97  
Other long-term liabilities
    3       3  
                 
Total liabilities
  $ 139     $ 135  
                 


10


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
5.   INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
 
The following table summarizes our share of the condensed results of operations of our equity method affiliates. These results include the incremental depreciation and amortization expense that we record in our equity method accounting as a result of fair value adjustments made to our investments in non-consolidated affiliates due to the Arrangement.
 
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. The following table also describes the nature and amounts of significant transactions that we had with our non-consolidated affiliates (in millions).
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Net sales
  $ 59     $ 64     $ 115     $ 121  
Costs, expenses and provisions for taxes on income
    62       74       121       141  
                                 
Net income (loss)
  $ (3 )   $ (10 )   $ (6 )   $ (20 )
                                 
Purchase of tolling services from Aluminium Norf GmbH (Norf)
  $ 59     $ 64     $ 115     $ 120  
                                 
 
We earned less than $1 million of interest income on a loan due from Norf during each of the periods presented in the table above.
 
The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances.
 
                 
    September 30,
  March 31,
    2010   2010
 
Accounts receivable
  $ 12     $ 24  
Other long-term receivables
  $ 20     $ 21  
Accounts payable
  $ 47     $ 53  


11


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
6.   DEBT
 
Debt consists of the following (in millions).
 
                                                         
    September 30, 2010     March 31, 2010  
                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
    2.37 %   $ 23     $ —     $ 23     $ 75     $ —     $ 75  
Novelis Inc.
                                                       
Floating rate Term Loan Facility, due July 2014
    2.27 %(C)     290       —       290       292       —       292  
11.5% Senior Notes, due February 2015
    11.50 %     185       (3 )     182       185       (3 )     182  
7.25% Senior Notes, due February 2015
    7.25 %     1,124       37       1,161       1,124       41       1,165  
Novelis Corporation
                                                       
Floating rate Term Loan Facility, due July 2014
    2.40 %(C)     855       (41 )     814       859       (46 )     813  
Novelis Switzerland S.A.
                                                       
Capital lease obligation, due December 2019 (Swiss francs (CHF) 46 million)
    7.50 %     47       (3 )     44       45       (3 )     42  
Capital lease obligation, due August 2011 (CHF 1 million)
    2.49 %     1       —       1       1       —       1  
Novelis Korea Limited
                                                       
Bank loan, due October 2010
    2.00 %(C)     100       —       100       100       —       100  
Other
                                                       
Other debt, due December 2011 through June 2015
    4.12 %     2       —       2       1       —       1  
                                                         
Total debt — third parties
            2,627       (10 )     2,617       2,682       (11 )     2,671  
Less: Short term borrowings
            (23 )     —       (23 )     (75 )     —       (75 )
Current portion of long term debt
            (117 )     —       (117 )     (116 )     —       (116 )
                                                         
Long-term debt, net of current portion — third parties:
          $ 2,487     $ (10 )   $ 2,477     $ 2,491     $ (11 )   $ 2,480  
                                                         
 
 
(A) Interest rates are as of September 30, 2010 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement and the debt exchange completed in 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. 11.5% Senior Notes with a face value of $185 million issued in August 2009 were recorded at a fair value of $181 million.
 
(C) Excludes the effect of related interest rate swaps and the effect of accretion of fair value.


12


Table of Contents

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, 2010 for our debt denominated in foreign currencies) are as follows (in millions).
 
         
As of September 30, 2010
  Amount  
 
Within one year
  $ 140  
2 years
    16  
3 years
    17  
4 years
    1,114  
5 years
    1,314  
Thereafter
    26  
         
Total
  $ 2,627  
         
 
We repaid the $100 million bank loan in Korea included in the table above when it came due on October 25, 2010.
 
Senior Secured Credit Facilities
 
Our senior secured credit facilities consist of (1) a $1.15 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. 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, 2010, our short-term borrowings were $23 million consisting of bank overdrafts. As of September 30, 2010, $33 million of the ABL Facility was utilized for letters of credit and we had $694 million in remaining availability under this revolving credit facility. The weighted average interest rate on our total short-term borrowings was 2.37% and 1.71% as of September 30, 2010 and March 31, 2010, respectively.
 
As of September 30, 2010, we had $101 million of outstanding letters of credit in Korea which are not related to the ABL Facility.
 
Interest Rate Swaps
 
As of September 30, 2010, we have interest rate swaps to fix the variable LIBOR interest rate on $520 million of our floating rate Term Loan facility, of which $510 million are designated as cash flow hedges. We are still obligated to pay any applicable margin, as defined in our senior secured credit facilities. Interest rate swaps related to $300 million at an effective weighted average interest rate of 1.49% expire March 31, 2011. Interest rate swaps related to the remaining $220 million at an effective weighted average interest rate of 1.97% expire 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%. In October 2010, at maturity, we repaid this loan. The swap expired concurrent with the maturity of the loan.
 
As of September 30, 2010 approximately 76% of our debt was fixed rate and approximately 24% was variable rate, after the effect of interest rate swaps.


13


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
7.   SHARE-BASED COMPENSATION
 
The board of directors has authorized three long term incentive plans as follows:
 
  •  The Novelis Long-Term Incentive Plan FY 2009 — FY 2012 (2009 LTIP) was authorized in June 2008. Under the 2009 LTIP, phantom stock appreciation rights (SARs) were granted to certain of our executive officers and key employees.
 
  •  The Novelis Long-Term Incentive Plan FY 2010 — FY 2013 (2010 LTIP) was authorized in June 2009. Under the 2010 LTIP, SARs were granted to certain of our executive officers and key employees.
 
  •  The Novelis Long-Term Incentive Plan FY 2011- FY 2014 (2011 LTIP) was authorized in May 2010. The 2011 LTIP plan provides for SARs and phantom restricted stock units (RSUs).
 
Under all three plans, SARs vest at the rate of 25% per year, subject to performance criteria 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, subject to a maximum payout as defined by the plan. The RSUs under the 2011 LTIP vest in full three years from the grant date and are not subject to performance criteria. The payout on the RSUs is limited to three times the grant price.
 
Total compensation expense related to the long term incentive plans 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. As the performance criteria for fiscal years 2012, 2013 and 2014 have not yet been established, measurement periods for SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year SARs has been recorded for the three and six months ended September 30, 2010.
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
2009 LTIP
  $ 2     $ 1     $ 3     $ 1  
2010 LTIP
    5       1       6       1  
2011 LTIP
    1       —       1       —  
                                 
Total compensation expense
  $ 8     $ 2     $ 10     $ 2  
                                 
 
The tables below show the RSUs activity under our 2011 LTIP and the SARs activity under our 2011 LTIP, 2010 LTIP and 2009 LTIP.
 
                         
                Aggregate
 
          Grant Date Fair
    Intrinsic
 
    Number of
    Value
    Value (USD
 
2011 LTIP
  RSUs     (in Indian Rupees)     in millions)  
 
RSUs outstanding as of March 31, 2010
    —       —     $ —  
Granted
    890,077       147.10       3  
Forfeited/Cancelled
    (1,755 )     147.10          
                         
RSUs outstanding as of September 30, 2010
    888,322       147.10     $ 4  
                         
 


14


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                 
                      Aggregate
 
                Remaining
    Intrinsic
 
    Number of
    Exercise Price
    Contractual Term
    Value (USD
 
2011 LTIP
  SARs     (in Indian Rupees)     (In years)     in millions)  
 
SARs outstanding as of March 31, 2010
    —       —       —     $ —  
Granted
    6,992,123       147.10                  
Forfeited/Cancelled
    (13,784 )     147.10                  
                                 
SARs outstanding as of September 30, 2010
    6,978,339       147.10       6.70     $ 8  
                                 
 
                                 
          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, 2010
    13,680,431       87.68       6.24     $ 29  
Exercised
    (1,930,290 )     85.88                  
Forfeited/Cancelled
    (433,777 )     85.79                  
                                 
SARs outstanding as of September 30, 2010
    11,316,364       88.34       5.70     $ 26  
                                 
 
                                 
                      Aggregate
 
                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, 2010
    11,371,399       60.50       5.25     $ 18  
Exercised
    (1,508,527 )     60.50                  
Forfeited/Cancelled
    (459,464 )     60.50                  
                                 
SARs outstanding as of September 30, 2010
    9,403,408       60.50       4.70     $ 15  
                                 
 
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 Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The fair value of each SAR under the 2011 LTIP, 2010 LTIP and 2009 LTIP was estimated as of September 30, 2010 using the following assumptions:
 
             
    2011 LTIP   2010 LTIP   2009 LTIP
 
Risk-free interest rate
  7.57 — 7.86%   7.52 — 7.81%   7.38% — 7.65%
Dividend yield
  0.69%   0.69%   0.69%
Volatility
  48.12%   50.05%   53.6%
Time interval (in years)
  0.004   0.004   0.004
 
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. As of September 30, 2010, 3,729,342 SARs were exercisable.
 
Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $31 million which is expected to be realized over a weighted average period of 2.19 years.

15


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Unrecognized compensation expense related to the RSU’s is $4 million and will be recognized over the vesting period of three 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; unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. 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,  
    2010     2009     2010     2009  
 
Service cost
  $ 9     $ 8     $ 18     $ 16  
Interest cost
    16       14       32       28  
Expected return on assets
    (14 )     (10 )     (28 )     (20 )
Amortization — losses
    3       3       6       6  
                                 
Net periodic benefit cost
  $ 14     $ 15     $ 28     $ 30  
                                 
 
                                 
    Other Benefits  
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Service cost
  $ 2     $ 1     $ 4     $ 3  
Interest cost
    2       3       4       6  
                                 
Net periodic benefit cost
  $ 4     $ 4     $ 8     $ 9  
                                 
 
The expected long-term rate of return on plan assets is 6.8% in fiscal 2011.
 
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,  
    2010     2009     2010     2009  
 
Funded pension plans
  $ 8     $ 9     $ 17     $ 12  
Unfunded pension plans
    3       4       6       8  
Savings and defined contribution pension plans
    4       4       9       7  
                                 
Total contributions
  $ 15     $ 17     $ 32     $ 27  
                                 


16


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
During the remainder of fiscal 2011, we expect to contribute an additional $23 million to our funded pension plans, $6 million to our unfunded pension plans and $8 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,  
    2010     2009     2010     2009  
 
Net (gain) loss on change in fair value of currency derivative instruments(A)
  $ 13     $ (29 )   $ (11 )   $ (51 )
Net gain on remeasurement and transaction gains or losses(B)
    (22 )     (3 )     (1 )     (7 )
                                 
Net currency gain
  $ (9 )   $ (32 )   $ (12 )   $ (58 )
                                 
 
 
(A) Included in (Gain) loss on change in fair value of derivative instruments, net.
 
(B) Included in Other (income) expense, net.
 
The following currency translation gains (losses) are included in Accumulated other comprehensive loss (AOCI), net of tax and Noncontrolling interests (in millions).
 
                 
    Six Months Ended
    Year Ended
 
    September 30, 2010     March 31, 2010  
 
Cumulative currency translation adjustment — beginning of period
  $ (3 )   $ (78 )
Effect of changes in exchange rates
    36       75  
                 
Cumulative currency translation adjustment — end of period
  $ 33     $ (3 )
                 


17


Table of Contents

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, 2010 and March 31, 2010 are as follows (in millions):
 
                                         
    September 30, 2010  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Currency exchange contracts
  $ 3     $ 4     $ —     $ —     $ 7  
Interest rate swaps
    —       —       (6 )     (2 )     (8 )
Electricity swap
    —       —       (7 )     (23 )     (30 )
                                         
Total derivatives designated as hedging instruments
    3       4       (13 )     (25 )     (31 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    124       7       (98 )     —       33  
Currency exchange contracts
    55       6       (28 )     (2 )     31  
Energy contracts
    —       —       (6 )     (1 )     (7 )
                                         
Total derivatives not designated as hedging instruments
    179       13       (132 )     (3 )     57  
                                         
Total derivative fair value
  $ 182     $ 17     $ (145 )   $ (28 )   $ 26  
                                         
 
                                         
    March 31, 2010  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Currency exchange contracts
  $ —     $ —     $ —     $ (21 )   $ (21 )
Interest rate swaps
    —       —       (6 )     (1 )     (7 )
Electricity swap
    —       —       (8 )     (27 )     (35 )
                                         
Total derivatives designated as hedging instruments
    —       —       (14 )     (49 )     (63 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    149       6       (80 )     —       75  
Currency exchange contracts
    48       1       (10 )     (1 )     38  
Energy contracts
    —       —       (6 )     —       (6 )
                                         
Total derivatives not designated as hedging instruments
    197       7       (96 )     (1 )     107  
                                         
Total derivative fair value
  $ 197     $ 7     $ (110 )   $ (50 )   $ 44  
                                         
 
 
(A) The noncurrent portions of derivative liabilities are included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.


18


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Net Investment Hedges
 
The effective portion of the change in fair value of the derivative is included in Other comprehensive income (loss) (OCI), and will be reclassified to the condensed consolidated statement of operations when the related investment is disposed. The ineffective portion of gain or loss on derivatives is included in (Gain) loss on change in fair value of derivative instruments, net. In May 2010, we terminated these hedges early. Prior to termination, we recognized a gain of $18 million in OCI for the six months ended September 30, 2010. A realized net loss of $3 million remains in OCI. We recognized losses of $5 million and $21 million in OCI for the three and six months ended September 30, 2009, respectively.
 
Cash Flow Hedges
 
We use derivatives as cash flow hedges to manage the risk of variability in our cash flows. The effective portion of gain or loss on the derivative is included in OCI and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. We formally assess, at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. 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 and future gains or losses on the derivative will be recognized in (Gain) loss on change in fair value of derivative instruments.
 
We own an interest in an electricity swap which we designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of September 30, 2010, the outstanding portion of this swap includes a total of 1.5 million megawatt hours through 2017.
 
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt. We have designated these as cash flow hedges. We had $510 million of outstanding interest rate swaps designated as cash flow hedges as of September 30, 2010 and March 31, 2010.
 
We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures, generally not exceeding five years. We had $222 million of outstanding foreign currency forwards designated as cash flow hedges as of September 30, 2010. No foreign currency contracts were designated as cash flow hedges as of March 31, 2010.
 
During the next twelve months we expect to reclassify $12 million in effective net losses from our cash flow hedges from other comprehensive income (loss) into net income (loss). The maximum period over which we have hedged our exposure to cash flow variability is through 2017.


19


Table of Contents

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).
 
                                                                                                     
                                                        Amount of Gain or (Loss)
 
                                                        Recognized in
 
    Amount of Gain or (Loss)
        Amount of Gain or (Loss)
    Income/(Expense) on
 
    Recognized in OCI on
        Reclassified from
    Derivative (Ineffective Portion
 
    Derivative
        AOCI into Income/(Expense)
    and Amount Excluded from
 
    (Effective Portion)         (Effective Portion)     Effectiveness Testing)  
    Three Months
    Six Months
    Location of Gain or (Loss)
  Three Months
    Six Months
    Three Months
    Six Months
 
    Ended
    Ended
    Reclassified from
  Ended
    Ended
    Ended
    Ended
 
Derivatives in Cash Flow
  September 30,     September 30,     Accumulated OCI into Earnings
  September 30,     September 30,     September 30,     September 30,  
Hedging Relationships
  2010     2009     2010     2009     (Effective Portion)   2010     2009     2010     2009     2010     2009     2010     2009  
 
Electricity swap
  $ (2 )   $ (14 )   $ 8     $ (3 )   (Gain) loss on
  derivative
  instruments, net
  $ 2     $ 1     $ 3     $ 2     $ —     $ —     $ —     $ 2  
Interest rate swaps
    (1 )     —       (1 )     1     Interest expense and
  amortization of debt
  issuance costs
    —       —       —       —       —       —       —       —  
Currency exchange contracts
    6       —       6       —     Depreciation and
  amortization
    —       —       —       —       —       —       —       —  
                                                                                                     
Total
  $ 3     $ (14 )   $ 13     $ (2 )       $ 2     $ 1     $ 3     $ 2     $ —     $ —     $ —     $ 2  
                                                                                                     
 
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. This includes both the change in fair value of unrealized derivatives and the change in fair value of derivatives that were realized during the period. We recognize realized gains (losses) in Segment income when derivative instruments settle or when the final cash price is determined by reversing the accumulated unrealized change in fair value that was recorded prior to settlement. See Note 15 Segment, Major Customer and Major Supplier Information for more discussion of Segment income.
 
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 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. As of September 30, 2010 and March 31, 2010, we had 89 kilotonnes (kt) and 55 kt, respectively, of outstanding aluminum contracts not designated as hedges. We classify cash settlement amounts associated with these derivatives as part of investing activities in the condensed consolidated statements of cash flows.
 
For certain customers, we enter into contractual relationships that entitle us to pass-through the economic effect of trading positions that we take with other third parties on our customers’ behalf. We recognize a derivative position with both the customer and the third party for these types of contracts and we classify cash settlement amounts associated with these derivatives as part of operating activities in the condensed consolidated statements of cash flows. These derivatives expired in February 2010 with the last cash settlement occurring in October 2010.
 
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, 2010 and March 31, 2010, we had outstanding currency exchange contracts with a total notional amount of $1.7 billion and $1.4 billion, respectively, which were not designated as hedges.


20


Table of Contents

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, 2010 and March 31, 2010, we had $10 million of outstanding interest rate swaps that were not designated as hedges in each period.
 
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of September 30, 2010 and March 31, 2010, we had 6.3 million MMBTUs and 4.2 million MMBTUs, respectively, of natural gas swaps 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) associated with the change in fair value of derivative instruments recognized in earnings (in millions).
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Derivative Instruments Not Designated as Hedges
                               
Aluminum contracts
  $ 50     $ 49     $ 17     $ 97  
Currency exchange contracts
    (13 )     29       11       51  
Energy contracts
    (5 )     —       (4 )     —  
                                 
Gain (loss) recognized
    32       78       24       148  
Derivative Instruments Designated as Cash Flow Hedges
                               
Interest Rate swaps
    —       —       —       —  
Electricity swap
    2       2       4       4  
                                 
Gain (loss) on change in fair value of derivative instruments, net
  $ 34     $ 80     $ 28     $ 152  
                                 
 
The following table summarizes realized and unrealized gains (losses) associated with the change in fair value of derivative instruments recognized in earnings.
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Realized gains (losses) included in segment income
  $ 33     $ (174 )   $ 74     $ (402 )
Realized gains (losses) on corporate derivative instruments
    —       —       —       1  
Unrealized gains (losses)
    1       254       (46 )     553  
                                 
Gain (loss) on change in fair value of derivative instruments, net
  $ 34     $ 80     $ 28     $ 152  
                                 
 
11.   FAIR VALUE MEASUREMENTS
 
We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate the price that would be received to sell an asset or paid to transfer a liability 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


21


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
measurements will reflect the assumptions we use. We grade the level of our fair value measures 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 — Assets and liabilities valued based on inputs other than quoted prices included within Level 1 that are observable for similar instruments, either directly or indirectly.
 
Level 3 — Assets and liabilities valued based on significant 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.
 
The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:
 
Derivative Contracts
 
The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. 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, aluminum forward contracts and options, and certain energy-related forward contracts (e.g., natural gas).
 
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include certain of our energy-related forward contracts (e.g., electricity) and commodity location premium contracts. Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.
 
For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk).
 
As of September 30, 2010 and March 31, 2010, we did not have any Level 1 derivative contracts.


22


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following tables present our derivative assets and liabilities which are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2010 and March 31, 2010 (in millions).
 
                                 
    September 30, 2010     March 31, 2010  
    Assets     Liabilities     Assets     Liabilities  
 
Level 2
                               
Aluminum contracts
  $ 127     $ (94 )   $ 151     $ (76 )
Currency exchange contracts
    68       (30 )     49       (32 )
Energy contracts
    —       (7 )     —       (6 )
Interest rate swaps
    —       (8 )     —       (7 )
                                 
Total Level 2 Instruments
    195       (139 )     200       (121 )
                                 
Level 3
                               
Aluminum contracts
    4       (4 )     4       (4 )
Electricity swap
    —       (30 )     —       (35 )
                                 
Total Level 3 Instruments
    4       (34 )     4       (39 )
                                 
Total
  $ 199     $ (173 )   $ 204     $ (160 )
                                 
 
We recognized unrealized losses of $1 million related to Level 3 financial instruments that were still held as of September 30, 2010. 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, 2010
  $ (35 )
Net realized/unrealized (losses) included in earnings(B)
    4  
Net realized/unrealized (losses) included in Other comprehensive income (loss)(C)
    5  
Net purchases, issuances and settlements
    (4 )
Net transfers from Level 3 to Level 2
    —  
         
Balance as of September 30, 2010
  $ (30 )
         
 
 
(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.


23


Table of Contents

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. We value long-term debt using market and/or broker ask prices when available. When not available, we use a standard credit adjusted discounted cash flow model.
 
                                 
    September 30, 2010   March 31, 2010
    Carrying
  Fair
  Carrying
  Fair
    Value   Value   Value   Value
 
Assets
                               
Long-term receivables from related parties
  $ 20     $ 20     $ 21     $ 21  
Liabilities
                               
Total debt — third parties (excluding short term borrowings)
  $ 2,594     $ 2,525     $ 2,596     $ 2,432  
 
12.   OTHER (INCOME) EXPENSE, NET
 
Other (income) expense, net is comprised of the following (in millions).
 
                                 
    Three Months Ended
    Six Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Net gain on currency remeasurement and transaction gains or losses
  $ (22 )   $ (3 )   $ (1 )   $ (7 )
Gain on sale of assets
    —       —       (13 )     (1 )
Gain on tax litigation settlement in Brazil
    —       —       —       (6 )
Other, net
    4       (3 )     3       (5 )
                                 
Other (income) expense, net
  $ (18 )   $ (6 )   $ (11 )   $ (19 )
                                 


24


Table of Contents

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,  
    2010     2009     2010     2009  
 
Pre-tax income before equity in net income of non-consolidated affiliates and noncontrolling interests
  $ 132     $ 311     $ 209     $ 594  
                                 
Canadian statutory tax rate
    29 %     30 %     29 %     30 %
                                 
Provision at the Canadian statutory rate
    38       93       61       178  
Increase (decrease) for taxes on income resulting from:
                               
Exchange translation items
    2       8       —       20  
Exchange remeasurement of deferred income taxes
    13       13       11       36  
Change in valuation allowances
    12       2       15       3  
Expense (income) items not subject to tax
    3       (5 )     2       (4 )
Tax rate differences on foreign earnings
    (9 )     2       (14 )     (9 )
Uncertain tax positions, net
    (4 )     (26 )     (3 )     (25 )
Other — net
    1       —       (1 )     —  
                                 
Income tax provision
  $ 56     $ 87     $ 71     $ 199  
                                 
Effective tax rate
    42 %     28 %     34 %     34 %
                                 
 
As of September 30, 2010, we had a net deferred tax liability of $535 million. This amount includes gross deferred tax assets of approximately $691 million and a valuation allowance of $236 million.
 
Our income tax provision for the three months ended September 30, 2010 reflects a reduction in unrecognized tax benefits of $5 million, including accrued interest of $2 million, as the statue of limitations lapsed on a net operating loss issue.
 
14.   COMMITMENTS AND CONTINGENCIES
 
In connection with our spin-off from Alcan Inc., we assumed a number of liabilities, commitments and contingencies mainly related to our historical rolled products operations, including liabilities in respect of legal claims and environmental matters. As a result, we may be required to indemnify Rio Tinto Alcan for claims successfully brought against Alcan or for the defense of legal actions that arise from time to time in the normal course of our rolled products business including commercial and contract disputes, employee-related claims and tax disputes (including several disputes with Brazil’s Ministry of Treasury regarding various forms of manufacturing taxes and social security contributions). In addition to these assumed liabilities and contingencies, we may, in the future, be involved in, or subject to, other disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. Where appropriate, we have established reserves in respect of these matters (or, if required, we have posted cash guarantees). While the ultimate resolution of, and liability and costs related to, these matters cannot be determined with certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially affect our financial condition or liquidity. The following describes certain legal proceedings relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.


25


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Legal Proceedings
 
Coca-Cola Lawsuit.  On July 8, 2010, a Georgia state court granted Novelis Corporation’s motion for summary judgment, effectively dismissing a lawsuit brought by Coca-Cola Bottler’s Sales and Services Company LLC (CCBSS) against Novelis Corporation. In the lawsuit, which was filed on February 15, 2007, CCBSS alleged that Novelis Corporation breached the “most favored nations” provision regarding certain pricing matters under an aluminum can stock supply agreement between the parties, and sought monetary damages and other relief. On August 6, 2010, CCBSS filed a notice of appeal with the court, and on August 20, 2010, we filed a cross notice of appeal. The appellate process could extend for several months. We have concluded that a loss from the litigation is not probable and therefore have not recorded an accrual. In addition, we do not believe there is a reasonable possibility of a loss from the lawsuit.
 
Environmental Matters
 
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may be expected to impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
 
We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions regarding 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.
 
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.
 
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,


26


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
2010 will be approximately $54 million. Of this amount, $30 million is included in Other long-term liabilities, with the remaining $24 million included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2010. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Alcan Inc. 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 impact our operations or materially adversely affect our financial condition, results of operations or liquidity.
 
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, 2010 and March 31, 2010, we had cash deposits aggregating approximately $50 million and $45 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 $6 million to $132 million as of September 30, 2010. In total, these reserves approximate $153 million and $149 million as of September 30 and March 31, 2010, respectively, and are included in Other long-term liabilities in our accompanying condensed consolidated balance sheets.
 
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. Under the program, if a company elects to settle a tax dispute and pay the principal amount due over a specified payment period, the company will receive a discount on the interest and penalties owed on the disputed tax amount. Novelis joined the installment program in November of 2009. In August 2010, we identified to the Brazilian government the tax disputes we plan to settle pursuant to the installment program.
 
Guarantees of Indebtedness
 
We have issued guarantees on behalf of certain 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 hold any assets of any third parties as collateral to offset the potential settlement of these guarantees.
 
Since we consolidate wholly-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables for these entities are already included in our consolidated balance sheets.
 
The following table discloses information about our obligations under guarantees of indebtedness related to our wholly-owned subsidiaries as of September 30, 2010 (in millions).
 
                 
    Maximum
  Liability
    Potential
  Carrying
Type of Entity
  Future Payment   Value
 
Wholly-owned subsidiaries
  $ 141     $ 44  
 
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.


27


Table of Contents

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.
 
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; (j) 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.
 
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 US 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 US 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.
 
The tables below show selected segment financial information (in millions).
 
Selected Segment Financial Information
 
                                                         
    North
          South
  Corporate
       
Total Assets
  America   Europe   Asia   America   and Other   Eliminations   Total
 
September 30, 2010
  $ 2,822     $ 2,930     $ 946     $ 1,370     $ 35     $ (194 )   $ 7,909  
March 31, 2010
  $ 2,726     $ 2,870     $ 965     $ 1,344     $ 49     $ (192 )   $ 7,762  
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Three Months Ended September 30, 2010
  America   Europe   Asia   America   and Other   Eliminations   Total
 
Net sales
  $ 965     $ 874     $ 413     $ 278     $ —     $ (6 )   $ 2,524  
Depreciation and amortization
    41       36       14       23       2       (12 )     104  
Capital expenditures
    10       10       7       16       10       (5 )     48  
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Three Months Ended September 30, 2009
  America   Europe   Asia   America   and Other   Eliminations   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  
 


28


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Six Months Ended September 30, 2010
  America   Europe   Asia   America   and Other   Eliminations   Total
 
Net sales
  $ 1,924     $ 1,716     $ 870     $ 555     $ —     $ (8 )   $ 5,057  
Depreciation and amortization
    83       69       29       46       4       (24 )     207  
Capital expenditures
    17       18       13       21       13       (11 )     71  
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Six Months Ended September 30, 2009
  America   Europe   Asia   America   and Other   Eliminations   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  
 
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,  
    2010     2009     2010     2009  
 
North America
  $ 116     $ 75     $ 217     $ 132  
Europe
    102       60       190       93  
Asia
    67       48       111       86  
South America
    38       36       87       47  
Corporate and other(A)
    (33 )     (19 )     (52 )     (34 )
Depreciation and amortization
    (104 )     (92 )     (207 )     (192 )
Interest expense and amortization of debt issuance costs
    (40 )     (44 )     (79 )     (87 )
Interest income
    3       3       6       6  
Unrealized gains (losses) on change in fair value of derivative instruments, net(B)
    1       254       (46 )     553  
Adjustment to eliminate proportional consolidation
    (11 )     (17 )     (21 )     (33 )
Restructuring charges, net
    (9 )     (3 )     (15 )     (6 )
Other income, net
    (1 )     —       12       9  
                                 
Income before income taxes
    129       301       203       574  
Income tax provision
    56       87       71       199  
                                 
Net income
    73       214       132       375  
Net income attributable to noncontrolling interests
    11       19       20       37  
                                 
Net income attributable to our common shareholder
  $ 62     $ 195     $ 112     $ 338  
                                 
 
 
(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 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. See Note 10 — Financial Instruments and Commodity Contracts for additional discussion.

29


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Information about Major Customers and Primary Supplier
 
The table below shows our net sales to Rexam Plc (Rexam) and Anheuser-Busch InBev (Anheuser-Busch), our two largest customers, as a percentage of total Net sales.
 
                                 
    Three Months Ended
  Six Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
Rexam
    20 %     16 %     18 %     18 %
Anheuser-Busch
    9 %     11 %     11 %     11 %
 
Rio Tinto Alcan is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from Rio Tinto Alcan as a percentage of total combined metal purchases.
 
                                 
    Three Months Ended
  Six Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
Purchases from Rio Tinto Alcan as a percentage of total
    32 %     45 %     33 %     41 %
 
16.   SUPPLEMENTAL INFORMATION
 
Accumulated other comprehensive loss consists of the following (in millions).
 
                 
    September 30,
    March 31,
 
    2010     2010  
 
Currency translation adjustment
  $ 27     $ (8 )
Fair value of effective portion of cash flow hedges
    (20 )     (27 )
Pension and other benefits
    (69 )     (68 )
                 
Accumulated other comprehensive loss
  $ (62 )   $ (103 )
                 
 
Supplemental cash flow information (in millions).
 
                 
    Six Months Ended
    September 30,
    2010   2009
 
Interest paid
  $ 70     $ 78  
Income taxes paid, net
  $ 36     $ 13  
 
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.


30


Table of Contents

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, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 261     $ 2,067     $ 698     $ (502 )   $ 2,524  
                                         
Cost of goods sold (exclusive of depreciation and amortization)
    250       1,809       631       (502 )     2,188  
Selling, general and administrative expenses
    23       60       14       —       97  
Depreciation and amortization
    1       80       23       —       104  
Research and development expenses
    7       2       —       —       9  
Interest expense and amortization of debt issuance costs
    29       25       1       (15 )     40  
Interest income
    (15 )     (2 )     (1 )     15       (3 )
Gain on change in fair value of derivative instruments, net
    —       (33 )     (1 )     —       (34 )
Restructuring charges, net
    5       4       —       —       9  
Equity in net (income) loss of non-consolidated affiliates
    (97 )     3       —       97       3  
Other income, net
    (4 )     —       (14 )     —       (18 )
                                         
      199       1,948       653       (405 )     2,395  
                                         
Income before income taxes
    62       119       45       (97 )     129  
Income tax provision
    —       48       8       —       56  
                                         
Net income
    62       71       37       (97 )     73  
Net income attributable to noncontrolling interests
    —       —       11       —       11  
                                         
Net income attributable to our common shareholder
  $ 62     $ 71     $ 26     $ (97 )   $ 62  
                                         
 


31


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    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)
    193       1,414       513       (386 )     1,734  
Selling, general and administrative expenses
    9       53       15       —       77  
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 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) expense, net
    (8 )     17       (15 )     —       (6 )
                                         
      54       1,520       534       (228 )     1,880  
                                         
Income before income taxes
    164       223       72       (158 )     301  
Income tax provision (benefit)
    (31 )     103       15       —       87  
                                         
Net income
    195       120       57       (158 )     214  
Net income attributable to noncontrolling interests
    —       —       19       —       19  
                                         
Net income attributable to our common shareholder
  $ 195     $ 120     $ 38     $ (158 )   $ 195  
                                         

32


Table of Contents

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, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 521     $ 4,099     $ 1,447     $ (1,010 )   $ 5,057  
                                         
Cost of goods sold (exclusive of depreciation and amortization)
    492       3,613       1,301       (1,010 )     4,396  
Selling, general and administrative expenses
    20       129       29       —       178  
Depreciation and amortization
    3       157       47       —       207  
Research and development expenses
    13       5       —       —       18  
Interest expense and amortization of debt issuance costs
    58       48       2       (29 )     79  
Interest income
    (29 )     (5 )     (1 )     29       (6 )
(Gain) loss on change in fair value of derivative instruments, net
    1       (33 )     4       —       (28 )
Restructuring charges, net
    5       9       1       —       15  
Equity in net (income) loss of non-consolidated affiliates
    (144 )     6       —       144       6  
Other (income) expense, net
    (8 )     —       (3 )     —       (11 )
                                         
      411       3,929       1,380       (866 )     4,854  
                                         
Income before income taxes
    110       170       67       (144 )     203  
Income tax provision (benefit)
    (2 )     61       12       —       71  
                                         
Net income
    112       109       55       (144 )     132  
Net income attributable to noncontrolling interests
    —       —       20       —       20  
                                         
Net income attributable to our common shareholder
  $ 112     $ 109     $ 35     $ (144 )   $ 112  
                                         
 


33


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    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)
    349       2,632       969       (679 )     3,271  
Selling, general and administrative expenses
    19       105       27       —       151  
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 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) expense, net
    (15 )     24       (28 )     —       (19 )
                                         
      81       2,857       1,003       (374 )     3,567  
                                         
Income before income taxes
    305       420       154       (305 )     574  
Income tax provision (benefit)
    (33 )     204       28       —       199  
                                         
Net income
    338       216       126       (305 )     375  
Net income attributable to noncontrolling interests
    —       —       37       —       37  
                                         
Net income attributable to our common shareholder
  $ 338     $ 216     $ 89     $ (305 )   $ 338  
                                         

34


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
                                         
    September 30, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 7     $ 397     $ 108     $ —     $ 512  
Accounts receivable, net of allowances
                                       
— third parties
    31       829       384       —       1,244  
— related parties
    710       282       58       (1,038 )     12  
Inventories
    52       825       300       —       1,177  
Prepaid expenses and other current assets
    3       33       8       —       44  
Fair value of derivative instruments
    4       143       46       (11 )     182  
Deferred income tax assets
    —       20       1       —       21  
                                         
Total current assets
    807       2,529       905       (1,049 )     3,192  
Property, plant and equipment, net
    140       1,892       494       —       2,526  
Goodwill
    —       600       11       —       611  
Intangible assets, net
    5       716       3       —       724  
Investments in and advances to non-consolidated affiliates
    2,120       706       1       (2,120 )     707  
Fair value of derivative instruments, net of current portion
    2       15       3       (3 )     17  
Deferred income tax assets
    1       5       8       —       14  
Other long-term assets
    977       200       69       (1,128 )     118  
                                         
Total assets
  $ 4,052     $ 6,663     $ 1,494     $ (4,300 )   $ 7,909  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 14     $ 100     $ —     $ 117  
Short-term borrowings
                                       
— third parties
    —       2       21       —       23  
— related parties
    42       461       20       (523 )     —  
Accounts payable
                                       
— third parties
    61       614       370       —       1,045  
— related parties
    73       357       130       (513 )     47  
Fair value of derivative instruments
    6       121       29       (11 )     145  
Accrued expenses and other current liabilities
    53       298       92       (2 )     441  
Deferred income tax liabilities
    —       32       1       —       33  
                                         
Total current liabilities
    238       1,899       763       (1,049 )     1,851  
Long-term debt, net of current portion
                                       
— third parties
    1,631       846       —       —       2,477  
— related parties
    106       935       87       (1,128 )     —  
Deferred income tax liabilities
    —       525       12       —       537  
Accrued postretirement benefits
    34       351       122       —       507  
Other long-term liabilities
    21       329       7       (3 )     354  
                                         
Total liabilities
    2,030       4,885       991       (2,180 )     5,726  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    3,530       —       —       —       3,530  
Retained earnings/(accumulated deficit)/owner’s net investment
    (1,446 )     1,884       383       (2,267 )     (1,446 )
Accumulated other comprehensive income (loss)
    (62 )     (106 )     (41 )     147       (62 )
                                         
Total Novelis shareholder’s equity
    2,022       1,778       342       (2,120 )     2,022  
Noncontrolling interests
    —       —       161       —       161  
                                         
Total equity
    2,022       1,778       503       (2,120 )     2,183  
                                         
Total liabilities and shareholder’s equity
  $ 4,052     $ 6,663     $ 1,494     $ (4,300 )   $ 7,909  
                                         


35


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
                                         
    As of March 31, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 22     $ 266     $ 149     $ —     $ 437  
Accounts receivable, net of allowances
                                       
— third parties
    24       747       372       —       1,143  
— related parties
    695       312       62       (1,045 )     24  
Inventories
    47       770       266       —       1,083  
Prepaid expenses and other current assets
    2       28       9       —       39  
Fair value of derivative instruments
    5       161       43       (12 )     197  
Deferred income tax assets
    —       7       5       —       12  
                                         
Total current assets
    795       2,291       906       (1,057 )     2,935  
Property, plant and equipment, net
    138       1,976       518       —       2,632  
Goodwill
    —       600       11       —       611  
Intangible assets, net
    6       740       3       —       749  
Investments in and advances to non-consolidated affiliates
    1,998       708       1       (1,998 )     709  
Fair value of derivative instruments, net of current portion
    —       7       2       (2 )     7  
Deferred income tax assets
    1       3       1       —       5  
Other long-term assets
    976       199       78       (1,139 )     114  
                                         
Total assets
  $ 3,914     $ 6,524     $ 1,520     $ (4,196 )   $ 7,762  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 13     $ 100     $ —     $ 116  
Short-term borrowings
                                       
— third parties
    —       61       14       —       75  
— related parties
    41       457       21       (519 )     —  
Accounts payable
                                       
— third parties
    58       600       418       —       1,076  
— related parties
    62       350       166       (525 )     53  
Fair value of derivative instruments
    7       102       13       (12 )     110  
Accrued expenses and other current liabilities
    52       279       106       (1 )     436  
Deferred income tax liabilities
    —       33       1       —       34  
                                         
Total current liabilities
    223       1,895       839       (1,057 )     1,900  
Long-term debt, net of current portion
                                       
— third parties
    1,635       844       1       —       2,480  
— related parties
    115       929       94       (1,138 )     —  
Deferred income tax liabilities
    —       485       12       —       497  
Accrued postretirement benefits
    31       349       119       —       499  
Other long-term liabilities
    41       333       5       (3 )     376  
                                         
      2,045       4,835       1,070       (2,198 )     5,752  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    3,530       —       —       —       3,530  
Retained earnings (accumulated deficit)
    (1,558 )     1,818       349       (2,167 )     (1,558 )
Accumulated other comprehensive income (loss)
    (103 )     (129 )     (40 )     169       (103 )
                                         
Total equity of our common shareholder
    1,869       1,689       309       (1,998 )     1,869  
Noncontrolling interests
    —       —       141       —       141  
                                         
Total equity
    1,869       1,689       450       (1,998 )     2,010  
                                         
Total liabilities and equity
  $ 3,914     $ 6,524     $ 1,520     $ (4,196 )   $ 7,762  
                                         


36


Table of Contents

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, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
  $ 5     $ 133     $ (14 )   $ —     $ 124  
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (14 )     (41 )     (16 )     —       (71 )
Proceeds from sales of assets
    —       17       1       —       18  
Proceeds from loans receivable, net — related parties
    —       11       —       —       11  
Net proceeds from settlement of derivative instruments
    (5 )     64       8       —       67  
                                         
Net cash provided by (used in) investing activities
    (19 )     51       (7 )     —       25  
                                         
FINANCING ACTIVITIES
                                       
Principal payments
                                       
— third parties
    (2 )     (6 )     —       —       (8 )
— related parties
    —       8       (11 )     3       —  
Short-term borrowings, net
                                       
— third parties
    —       (57 )     7       —       (50 )
— related parties
    1       3       (1 )     (3 )     —  
Dividends — noncontrolling interests
    —       —       (18 )     —       (18 )
                                         
Net cash provided by (used in) financing activities
    (1 )     (52 )     (23 )     —       (76 )
                                         
Net increase (decrease) in cash and cash equivalents
    (15 )     132       (44 )     —       73  
Effect of exchange rate changes on cash balances held in foreign currencies
    —       (1 )     3       —       2  
Cash and cash equivalents — beginning of period
    22       266       149       —       437  
                                         
Cash and cash equivalents — end of period
  $ 7     $ 397     $ 108     $ —     $ 512  
                                         


37


Table of Contents

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     $ 340     $ 152     $ (78 )   $ 451  
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (1 )     (34 )     (11 )     —       (46 )
Proceeds from sales of assets
    —       —       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 )     (319 )     (82 )     —       (403 )
                                         
Net cash provided by (used in) investing activities
    (3 )     (337 )     (89 )     —       (429 )
                                         
FINANCING ACTIVITIES
                                       
Proceeds from issuance of debt
                                       
— third parties
    177       —       —       —       177  
— related parties
    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  
                                         


38


Table of Contents

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, 2010, 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. 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. and became Rio Tinto 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, 2010, filed with the United States Securities and Exchange Commission (SEC) on May 27, 2010.
 
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, 2010 and 2009 are presented briefly below. Each is discussed in further detail throughout the Management’s Discussion and Analysis and Segment Review.
 
  •  Net sales for the three months ended September 30, 2010 were $2.5 billion, an increase of 16% compared to the $2.2 billion reported in the same period a year ago. Shipments of aluminum rolled products totaled 737 kt for the second quarter of fiscal 2011, an increase of 6% compared to shipments of 693 kt in the second quarter of the previous year, driven by strong end-market demand across all our regions
 
  •  Operating cash flow was strong and we ended the period with $1.2 billion of liquidity and $512 million of cash on hand at September 30, 2010.


39


Table of Contents

 
  •  We reported net sales of $5.1 billion for the six months ended September 30, 2010, which is an increase of 22% as compared to the same period last year when we reported net sales of $4.1 billion
 
BUSINESS AND INDUSTRY CLIMATE
 
Global economic trends affect our business, and the economic slowdown of the preceding two years had a negative effect on the demand for our products. During the fourth quarter of fiscal 2010, we began to see recovery in all our regions. Strong demand has continued in the second quarter of fiscal 2011 in all our end-markets.
 
Key Sales and Shipment Trends
 
                                                 
                            Three Months
    Three Months
 
    Three Months Ended     Ended
    Ended  
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
 
    2009     2009     2009     2010     2010     2010  
    (In millions, excepts shipments which are in kt)  
 
Net sales
  $ 1,960     $ 2,181     $ 2,112     $ 2,420     $ 2,533     $ 2,524  
Percentage increase (decrease) in net
sales versus comparable previous
year period
    (37 )%     (26 )%     (3 )%     25 %     29 %     16 %
Rolled product shipments:
                                               
North America
    254       258       243       274       278       285  
Europe
    185       203       188       227       232       227  
Asia
    130       139       134       129       146       134  
South America
    81       93       84       86       90       91  
                                                 
Total
    650       693       649       716       746       737  
                                                 
Beverage and food cans
    396       407       371       406       425       429  
All other rolled products
    254       286       278       310       321       308  
                                                 
Total
    650       693       649       716       746       737  
                                                 
Percentage increase (decrease) in
rolled products shipments versus
comparable previous year period:
                                               
North America
    (11 )%     (12 )%     — %     11 %     9 %     10 %
Europe
    (32 )%     (20 )%     (5 )%     21 %     25 %     12 %
Asia
    (2 )%     14 %     26 %     50 %     12 %     (4 )%
South America
    (7 )%     7 %     (3 )%     1 %     11 %     (3 )%
                                                 
Total
    (16 )%     (8 )%     3 %     18 %     15 %     6 %
                                                 
Beverage and food cans
    (5 )%     (2 )%     2 %     12 %     7 %     5 %
All other rolled products
    (29 )%     (16 )%     3 %     27 %     6 %     8 %
                                                 
Total
    (16 )%     (8 )%     3 %     18 %     15 %     6 %
                                                 
 
Business Model and Key Concepts
 
Conversion Business Model
 
Most of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our products have a price structure with two components: (i) a pass-through aluminum price based on the London Metal Exchange (LME) plus local market premiums and (ii) a “conversion premium” price on the conversion cost to produce the rolled product which reflects, among other factors, the competitive market conditions for that product.


40


Table of Contents

Increases or decreases in the LME price directly impact net sales, cost of goods sold (exclusive of depreciation and amortization) and working capital, albeit on a lag basis. The timing of these impacts on sales and metal purchase costs vary based on contractual arrangements with customers and metal suppliers in each region. Certain of our sales contracts contain fixed metal prices for sales in future periods of time, which exposes us to the risk of changes in LME prices. In addition, we are exposed to fluctuating metal prices on our purchases of inventory associated with the period of time between the pricing of our purchases of inventory and the shipment of that inventory to our customers. Timing differences also occur in the flow of metal costs through moving average inventory cost values and cost of goods sold (exclusive of depreciation and amortization). We refer to these timing differences collectively as metal price lag.
 
We also have exposure to foreign currency risk associated with sales made in currencies that differ from those in which we are paying our conversion costs. For example, sales in Brazil are generally priced in US dollars, but the majority of our conversion costs are paid in Brazilian real. We discuss this foreign currency risk further below.
 
Metal Derivative Instruments
 
We use derivative instruments to preserve our conversion margin and manage the timing differences associated with metal price lag.
 
We enter into forward metal purchases simultaneous with the sales contracts that contain fixed metal prices. These forward metal purchases directly hedge the economic risk of future metal price fluctuation associated with these contracts. The recognition of unrealized gains and losses on metal derivative positions typically precedes customer delivery and revenue recognition under the related fixed forward priced contracts. The timing difference between the recognition of unrealized gains and losses on metal derivatives and revenue recognition impacts income before income taxes and net income. Gains and losses on metal derivative contracts are not recognized in segment income until realized.
 
Additionally, we sell short-term LME futures contracts to reduce our exposure to fluctuating LME prices during the period of time for which we physically hold the inventory and to manage the metal price lag. The majority of our metal purchases are based on average prices for a period of time prior to the period at which we order the metal. Additionally, there is a period of time between when we place an order for metal, when we receive the metal and when we ship the metal to our customers. The fluctuations in LME futures during that time period directly hedge the economic risk of metal price fluctuations on our inventory.
 
We settle derivative contracts in advance of billing and collecting from our customers, which temporarily impacts our liquidity position. The lag between derivative settlement and customer collection typically ranges from 30 to 60 days. </