10-K: Annual report pursuant to Section 13 and 15(d)
Published on May 26, 2011
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2011
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-32312
Novelis Inc.
(Exact name of registrant as specified in its charter)
Canada (State or other jurisdiction of incorporation or organization) |
98-0442987 (I.R.S. Employer Identification Number) |
|
3560 Lenox Road, Suite 2000, Atlanta, GA (Address of principal executive offices) |
30326 (Zip Code) |
(404) 814-4200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of
1933. Yes o No þ
1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 (the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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 May 26, 2011, the registrant had 1,000 common shares outstanding. All of the
Registrants outstanding shares were held indirectly by Hindalco Industries Ltd., the Registrants
parent company.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
This document contains forward-looking statements that are based on current expectations,
estimates, forecasts and projections about the industry in which we operate, and beliefs and
assumptions made by our management. Such statements include, in particular, statements about our
plans, strategies and prospects under the headings Item 1. Business, Item 1A. Risk Factors and
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Words such as expect, anticipate, intend, plan, believe, seek, estimate and
variations of such words and similar expressions are intended to identify such forward-looking
statements. Examples of forward-looking statements in this Annual Report on Form 10-K include, but
are not limited to, our expectations with respect to the impact of metal price movements on our
financial performance; the effectiveness of our hedging programs and controls; and our future
borrowing availability. These statements are based on beliefs and assumptions of Novelis
management, which in turn are based on currently available information. These statements are not
guarantees of future performance and involve assumptions and risks and uncertainties that are
difficult to predict. Therefore, actual outcomes and results may differ materially from what is
expressed, implied or forecasted in such forward-looking statements. We do not intend, and we
disclaim any obligation, to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
This document also contains information concerning our markets and products generally, which
is forward-looking in nature and is based on a variety of assumptions regarding the ways in which
these markets and product categories will develop. These assumptions have been derived from
information currently available to us and to the third party industry analysts quoted herein. This
information includes, but is not limited to, product shipments and share of production. Actual
market results may differ from those predicted. We do not know what impact any of these differences
may have on our business, our results of operations, financial condition, and cash flow. Factors
that could cause actual results or outcomes to differ from the results expressed or implied by
forward-looking statements include, among other things:
| relationships with, and financial and operating conditions of, our customers, suppliers and other stakeholders; | ||
| changes in the prices and availability of aluminum (or premiums associated with aluminum prices) or other materials and raw materials we use; | ||
| fluctuations in the supply of, and prices for, energy in the areas in which we maintain production facilities; | ||
| our ability to access financing to fund current operations and for future capital requirements; | ||
| the level of our indebtedness and our ability to generate cash; | ||
| deterioration of our ratings by a credit rating agency; | ||
| changes in the relative values of various currencies and the effectiveness of our currency hedging activities; | ||
| union disputes and other employee relations issues; | ||
| factors affecting our operations, such as litigation (including product liability claims), environmental remediation and clean-up costs, labor relations and negotiations, breakdown of equipment and other events; | ||
| changes in general economic conditions, including deterioration in the global economy; | ||
| changes in the fair value of derivative instruments or the failure of counterparties to our derivative instruments to honor their agreements; | ||
| the capacity and effectiveness of our metal hedging activities; | ||
| availability of production capacity; | ||
| impairment of our goodwill and other intangible assets; |
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| loss of key management and other personnel, or an inability to attract such management and other personnel; | ||
| risks relating to future acquisitions or divestitures; | ||
| our inability to successfully implement our growth initiatives; | ||
| changes in interest rates that have the effect of increasing the amounts we pay under our new senior secured credit facilities, other financing agreements and our defined benefit pension plans; | ||
| risks relating to certain joint ventures and subsidiaries that we do not entirely control; | ||
| the effect of new derivatives legislation on our ability to hedge risks associated with our business; | ||
| competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials; | ||
| cyclical demand and pricing within the principal markets for our products as well as seasonality in certain of our customers industries; | ||
| economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; and | ||
| changes in government regulations, particularly those affecting taxes and tax rates, health care reform, climate change, environmental, health or safety compliance. |
The above list of factors is not exhaustive. These and other factors are discussed in more
detail under Item 1A. Risk Factors and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
In this Annual Report on Form 10-K, unless otherwise specified, the terms we, our, us,
Company, Novelis and Novelis Group refer to Novelis Inc., a company incorporated in Canada
under the Canadian Business Corporations Act (CBCA) and its subsidiaries. References herein to
Hindalco refer to Hindalco Industries Limited. In October 2007, Rio Tinto Group purchased all of
the outstanding shares of Alcan Inc. References herein to Alcan refer to Rio Tinto Alcan Inc.
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Exchange Rate Data
We prepare our financial statements in United States (U.S.) dollars. As of December 31, 2008,
the Federal Reserve Bank of New York ceased the practice of maintaining and publishing historical
exchange rates. From December 31, 2008 onward, we have used the CitiFX Benchmark, published by
Citibank, for exchange rate information published daily as of 16:00 Greenwich Mean Time (GMT)
(11:00 A.M. Eastern Standard Time).
The following table sets forth exchange rate information expressed in terms of Canadian
dollars per U.S. dollar at the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New York. As noted
above, the years ended March 31, 2011, 2010 and 2009 include exchange data from Citibank as of
16:00 GMT. The rates set forth below may differ from the actual rates used in our accounting
processes and in the preparation of our consolidated financial statements.
Period |
At Period End | Average Rate(A) | High | Low | ||||||||||||
Year Ended December 31, 2006 |
1.1652 | 1.1310 | 1.1726 | 1.0955 | ||||||||||||
Three Months Ended March 31, 2007(B) |
1.1530 | 1.1674 | 1.1852 | 1.1530 | ||||||||||||
April 1, 2007 Through May 15, 2007(B) |
1.0976 | 1.1022 | 1.1583 | 1.0976 | ||||||||||||
May 16, 2007 Through March 31, 2008(B) |
1.0275 | 1.0180 | 1.1028 | 0.9168 | ||||||||||||
Year Ended March 31, 2009 |
1.2579 | 1.1247 | 1.2694 | 0.9938 | ||||||||||||
Year Ended March 31, 2010 |
1.0144 | 1.0848 | 1.1881 | 1.0144 | ||||||||||||
Year Ended March 31, 2011 |
0.9709 | 1.0206 | 1.0663 | 0.9709 |
(A) | For periods after December 31, 2008, this represents the average of the 16:00 GMT buying rates on the last day of each month during the period. For periods before December 31, 2008, we used the average of the 17:00 Greenwich Mean Time (GMT) (12:00 P.M. Eastern Standard Time) on the last day of each month during the period. | |
(B) | See Note 1 Business and Summary of Significant Accounting Policies (Acquisition of Novelis Common Stock) to our accompanying audited consolidated financial statements. |
All dollar figures herein are in U.S. dollars unless otherwise indicated.
Commonly Referenced Data
As used in this Annual Report, aluminum rolled products shipments or flat rolled product
shipments refers to aluminum rolled products shipments to third parties. References to total
shipments or shipments include aluminum rolled products as well as certain other non-rolled
product shipments, primarily ingot, scrap and primary remelt. The term aluminum rolled products
is synonymous with the terms flat rolled products and FRP commonly used by manufacturers and
third party analysts in our industry. 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.
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PART I
Item 1. Business
Overview
We are the worlds leading aluminum rolled products producer based on shipment volume in
fiscal 2011, with total shipments during that period of approximately 3,097 kt. We are the only
company of our size and scope focused solely on aluminum rolled products markets and capable of
local supply of technologically sophisticated aluminum products in all of the regions in which we
operate. We are also the global leader in the recycling of used aluminum beverage cans. We had net
sales of approximately $10.6 billion for the year ended March 31, 2011.
Our History
Organization and Description of Business
Novelis Inc. was formed in Canada on September 21, 2004. We produce aluminum sheet and light
gauge products for use in the beverage and food can, transportation, construction and industrial,
and foil product markets. As of March 31, 2011, we had operations in eleven countries on four
continents: North America, Europe, Asia and South America, through 30 operating plants, seven
research and development facilities and three recycling facilities. In addition to aluminum rolled
products plants, our South American businesses include bauxite mining, primary aluminum smelting
and power generation facilities.
Acquisition of Novelis Common Stock
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned
subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The
aggregate purchase price for all of the Companys common shares was $3.4 billion and Hindalco also
assumed $2.8 billion of Novelis debt for a total transaction value of $6.2 billion. Subsequent to
completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by
Hindalco.
Amalgamation of AV Aluminum Inc. and Novelis Inc.
Effective September 29, 2010, in connection with an internal restructuring transaction and
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, the
amalgamated Novelis Inc. remains liable for all of our and AV Aluminums 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 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.
Our Industry
The aluminum rolled products market represents the global supply of and demand for aluminum
sheet, plate and foil produced either from sheet ingot or continuously cast roll-stock in rolling
mills operated by independent aluminum rolled products producers and integrated aluminum companies
alike.
Aluminum rolled products are semi-finished aluminum products that constitute the raw material
for the manufacture of finished goods ranging from automotive body panels to food and beverage
cans. There are two major types of manufacturing processes for aluminum rolled products differing
mainly in the process used to achieve the initial stage of processing:
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| hot mills that require sheet ingot, a rectangular slab of aluminum, as starter material; and | ||
| continuous casting mills that can convert molten metal directly into semi-finished sheet. |
Both processes require subsequent rolling, which we call cold rolling, and finishing steps
such as annealing, coating, leveling or slitting to achieve the desired thicknesses, width and
metal properties. Most customers receive shipments in the form of aluminum coil, a large roll of
metal, which can be fed into their fabrication processes.
There are two sources of input material: (1) primary aluminum, such as molten metal, re-melt
ingot and sheet ingot; and (2) recycled aluminum, such as recyclable material from fabrication
processes, which we refer to as recycled process material, used beverage cans (UBCs) and other
post-consumer aluminum.
Primary aluminum and sheet ingot can generally be purchased at prices set on the London Metal
Exchange (LME), plus a premium that varies by geographic region of delivery, alloying material,
form (ingot or molten metal) and purity.
Recycled aluminum is also an important and growing source of input material. Aluminum is
infinitely recyclable and recycling it requires approximately 5% of the energy needed to produce
primary aluminum. As a result, in regions where aluminum is widely used, manufacturers and
customers are active in setting up collection processes in which UBCs and other recyclable aluminum
are collected for re-melting at purpose-built plants. Manufacturers may also enter into agreements
with customers who return recycled process material and pay to have it re-melted and rolled into
the same product again.
End-use Markets
Aluminum rolled products companies produce and sell a wide range of aluminum rolled products,
which can be grouped into four end-use markets based upon similarities in end-use: (1) packaging;
(2) transportation; (3) electronics and (4) architectural. Within each end-use market, aluminum
rolled products are manufactured with a variety of alloy mixtures; a range of tempers (hardness),
gauges (thickness) and widths; and various coatings and finishes. Large customers typically have
customized needs resulting in the development of close relationships with their supplying mills and
close technical development relationships.
Packaging. Aluminum, because of its relatively light weight, recyclability and formability,
has a wide variety of uses in packaging.
Beverage cans are the second largest aluminum rolled products application, accounting for
approximately 23% of total worldwide shipments in the calendar year ended December 31, 2010,
according to market data from Commodity Research Unit International Limited (CRU), an independent
business analysis and consultancy group focused on the mining, metals, power, cables, fertilizer
and chemical sectors. Beverage and food cans is also our largest end-use market, making up 58% of
our total flat rolled product shipments in each of the years ended March 31, 2011 and 2010. The
recyclability of aluminum cans enables them to be used, collected, melted and returned to the
original product form an unlimited number of times, unlike steel, paper or PET plastic, which
deteriorate with every iteration of recycling. Aluminum beverage cans also offer advantages in
fabricating efficiency and product shelf life. Fabricators are able to produce and fill beverage
cans at very high speeds, and non-porous aluminum cans provide longer shelf life than PET plastic
containers. Aluminum cans are light, stackable and use space efficiently, making them convenient
and cost efficient to ship.
Beverage can sheet is sold in coil form for the production of can bodies, ends and tabs. The
material can be ordered as rolled, degreased, pre-lubricated, pre-treated and/or lacquered.
Typically, can makers define their own specifications for material to be delivered in terms of
alloy, gauge, width and surface finish.
Converter foil is very thin aluminum foil, plain or printed, that is typically laminated to
plastic or paper to form an internal seal for a variety of packaging applications, including juice
boxes, pharmaceuticals, food pouches, cigarette packaging and lid stock. Customers order coils of
converter foil in a range of thicknesses from 6 microns to 60 microns.
Household foil includes home and institutional aluminum foil wrap sold as a branded or generic
product. Known in the industry as packaging foil, it is manufactured in thicknesses ranging from 11
microns to 23 microns. Container foil is used to produce semi-rigid containers such as pie plates
and take-out food trays and is usually ordered in a range of thicknesses ranging from 60 microns to
200 microns.
Other applications in this end-use market include food cans and screw caps for the beverage
industry.
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Transportation. Heat exchangers, such as radiators and air conditioners, are an important
application for aluminum rolled products in the truck and automobile categories of the
transportation end-use market. Original equipment manufacturers also use aluminum sheet with
specially treated surfaces and other specific properties for interior and exterior applications.
Newly developed alloys are being used in transportation tanks and rigid containers that allow for
safer and more economical transportation of hazardous and corrosive materials.
There has been recent growth in certain geographic markets in the use of aluminum rolled
products in automotive body panel applications, including hoods, deck lids, fenders and lift gates.
These uses typically result from co-operative efforts between aluminum rolled products
manufacturers and their customers that yield tailor-made solutions for specific requirements in
alloy selection, fabrication procedure, surface quality and joining. We believe the recent growth
in automotive body panel applications is due in part to the lighter weight, better fuel economy and
improved emissions performance associated with these applications and we expect increased growth in
this end-use market as automotive companies continue to explore opportunities for ways to reduce
the weight (lightweighting) of automobiles as a result of environmental regulations around
emissions and competition related to fuel economy.
Aluminum rolled products are also used in aerospace applications, a segment of the
transportation market in which we were not allowed to compete until January 6, 2010, pursuant to a
non-competition agreement we entered into with Alcan in connection with the spin-off. However,
aerospace-related consumption of aluminum rolled products has historically represented a relatively
small portion of total aluminum rolled products market shipments.
Aluminum is also used in the construction of ships hulls and superstructures and passenger
rail cars because of its strength, light weight, formability and corrosion resistance.
Electronics. Aluminums ability to conduct electricity and heat and to offer corrosion
resistance makes it useful in a wide variety of electronic and industrial applications. Industrial
applications include electronics and communications equipment, process and electrical machinery and
lighting fixtures. Uses of aluminum rolled products in consumer durables include microwaves, coffee
makers, flat screen televisions, personal computers, mobile phones, air conditioners, pleasure
boats and cooking utensils.
Architectural. Construction is the largest application within this end-use market. Aluminum
rolled products developed for the construction industry are often decorative and non-flammable,
offer insulating properties, are durable and corrosion resistant, and have a high
strength-to-weight ratio. Aluminum siding, gutters, and downspouts comprise a significant amount of
construction volume. Other applications include doors, windows, awnings, canopies, facades, roofing
and ceilings.
Market Structure
The aluminum rolled products industry is characterized by economies of scale, significant
capital investments required to achieve and maintain technological capabilities and demanding
customer qualification standards. The service and efficiency demands of large customers have
encouraged consolidation among suppliers of aluminum rolled products.
While our customers tend to be increasingly global, many aluminum rolled products tend to be
produced and sold on a regional basis. The regional nature of the markets is influenced in part by
the fact that not all mills are equipped to produce all types of aluminum rolled products. For
instance, only a few mills in North America, Europe and Asia, and only one mill in South America
produce beverage can body and end stock. In addition, individual aluminum rolling mills generally
supply a limited range of products for end-use markets, and seek to maximize profits by producing
high volumes of the highest margin mix per mill hour given available capacity and equipment
capabilities.
Certain multi-purpose, common alloy and plate rolled products are imported into Europe and
North America from producers in emerging markets, such as Brazil, South Africa, Russia and China.
However, at this time we believe that most of these producers are generally unable to produce flat
rolled products that meet the quality requirements, lead times and specifications of customers with
more demanding applications. In addition, high freight costs, import duties, inability to take back
recycled aluminum, lack of technical service capabilities and long lead-times mean that many
developing market exporters are viewed as second-tier suppliers. Therefore,
many of our customers in the Americas, Europe and Asia do not look to suppliers in these
emerging markets for a significant portion of their requirements.
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Competition
The aluminum rolled products market is highly competitive. We face competition from a number
of companies in all of the geographic regions and end-use markets in which we operate. Our primary
competitors are as follows:
North America |
Asia |
|
Alcoa, Inc. (Alcoa)
|
Alcoa | |
Aleris International, Inc. (Aleris)
|
Furukawa-Sky Aluminum Corp. | |
Arco Aluminium, Inc.
|
Kobe Steel Ltd. | |
Norandal Aluminum
|
Nanshan Aluminum | |
Rio Tinto Alcan Inc.
|
Sumitomo Light Metal Company, Ltd. | |
Wise Metal Group LLC
|
Southwest Aluminum Co. Ltd. |
Europe |
South America |
|
Alcoa
|
Alcoa | |
Aleris
|
Companhia Brasileira de Alumínio | |
Hydro A.S.A. |
||
Rio Tinto Alcan Inc. |
The factors influencing competition vary by region and end-use market, but generally we
compete on the basis of our value proposition, including price, product quality, the ability to
meet customers specifications, range of products offered, lead times, technical support and
customer service. In some end-use markets, competition is also affected by fabricators
requirements that suppliers complete a qualification process to supply their plants. This process
can be rigorous and may take many months to complete. As a result, obtaining business from these
customers can be a lengthy and expensive process. However, the ability to obtain and maintain these
qualifications can represent a competitive advantage.
In addition to competition from others within the aluminum rolled products industry, we, as
well as the other aluminum rolled products manufacturers, face competition from non-aluminum
material producers, as fabricators and end-users have, in the past, demonstrated a willingness to
substitute other materials for aluminum. In the beverage and food cans end-use market, aluminum
rolled products primary competitors are glass, PET plastic, and in some regions, steel. In the
transportation end-use market, aluminum rolled products compete mainly with steel and composites.
Aluminum competes with wood, plastic, cement and steel in building products applications. Factors
affecting competition with substitute materials include price, ease of manufacture, consumer
preference and performance characteristics.
Key Factors Affecting Supply and Demand
The following factors have historically affected the supply of aluminum rolled products:
Production Capacity. As in most manufacturing industries with high fixed costs, production
capacity has the largest impact on supply in the aluminum rolled products industry. In the
aluminum rolled products industry, the addition of production capacity requires large capital
investments and significant plant construction or expansion, and typically requires long
lead-time equipment orders.
Alternative Technology. Advances in technological capabilities allow aluminum rolled
products producers to better align product portfolio and supply with industry demand. As an
example, continuous casting offers the ability to increase capacity in smaller increments than
is possible with hot mill additions. This enables production capacity to better adjust to small
year-over-year increases in demand. However, the continuous casting process results in the
production of a more limited range of products.
Trade. Some trade flows do occur between regions despite shipping costs, import duties and
the need for localized customer support. Higher value-added, specialty products such as
lithographic sheet and some foils are more likely to be traded internationally, especially if
demand in certain markets exceeds local supply. With respect to less technically demanding
applications, emerging markets with low cost inputs may export commodity aluminum rolled
products to larger, more mature markets. Accordingly, regional changes in supply, such as plant
expansions, may have some effect on the worldwide supply of commodity aluminum rolled products.
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The following factors have historically affected the demand for aluminum rolled products:
Economic Growth. We believe that economic growth is currently the single largest driver of
aluminum rolled products demand. In mature markets, growth in demand has typically correlated
closely with growth in industrial production.
In emerging markets such as China, growth in demand typically exceeds industrial production
growth largely because of expanding infrastructures, capital investments and rising incomes that
often accompany economic growth in these markets.
Substitution Trends. Manufacturers willingness to substitute other materials for
aluminum in their products and competition from substitution materials suppliers also affect
demand. For example, in North America, competition from PET plastic containers and glass
bottles, and changes in marketing channels and consumer preferences in beverage containers,
have, in recent years, reduced the growth rate of aluminum can sheet in North America from the
high rates experienced in the 1970s and 1980s. Historically, despite changes in consumer
preferences, North American aluminum beverage can shipments have remained at approximately 100
billion cans per year since 1994 according to the Can Manufacturers Institute. For the calendar
year ended December 31, 2010, North American aluminum beverage can shipments have increased by
approximately 0.2% to 99.3 billion cans mainly due to an increase in demand for carbonated soft
drinks.
Environmental regulations and competition among automobile manufacturers has resulted in
efforts to reduce the weight of vehicles. As automobile manufacturers substitute aluminum for
other heavier alternatives, demand for flat rolled aluminum products has increased.
Downgauging. Increasing technological and asset sophistication has enabled aluminum
rolling companies to offer consistent or even improved product strength using lighter gauge
(thinner) aluminum products, providing customers with a more cost-effective product as compared
to alternatives to aluminum. This reduces raw material requirements, but also effectively
increases rolled products plant utilization rates and reduces available capacity, because to
produce the same number of units requires more rolling hours to achieve thinner gauges. As
utilization rates increase, revenues rise as our pricing tends to be based on machine hours used
rather than on the volume of material rolled. On balance, we believe that downgauging has
maintained or enhanced overall market economics for both users and producers of aluminum rolled
products.
Seasonality. Demand for certain aluminum rolled products is affected by seasonal factors,
such as increases in consumption of beer and soft drinks packaged in aluminum cans and the use
of aluminum sheet used in the construction and industrial end-use market during summer months.
We typically experience seasonal slowdowns during our third fiscal quarter resulting in lower
shipment volumes as a result of lower end-product sales of beverages in the northern hemisphere,
declines in overall production output due primarily to the holidays in North America and Europe,
and the seasonal downturn in construction due to weather.
Our Business Strategy
Our primary objective is to deliver shareholder and customer value by being the most
innovative and profitable aluminum rolled products company in the world. We intend to achieve this
objective through the following areas of focus:
Operate as One Novelis a Fully-integrated Global Company
We intend to continue to build on our focused business model to operate as One Novelis. The
term One Novelis refers to our goal of becoming a truly integrated, global company driven by a
singular focus. An important part of the One Novelis concept is our highly-focused, pass-through
business model that utilizes our manufacturing excellence, our risk management expertise, our
value-added conversion premium-based pricing, and, importantly, our growing ability to leverage our
global assets according to a single, corporate-wide vision. We believe this integrated approach is
the foundation for the effective execution of our strategy across the Novelis system.
We strive to service our customers in a consistent, global manner through seamless alignment
of goals, methods and metrics across
the organization to improve communication and by implementation of strategic initiatives.
These initiatives have resulted in enhanced operating margins and performance and we believe we
will continue to make aggressive steps to operate globally. During fiscal 2011, we have taken
steps to realign globally by creating a global commercial organization and a global recycling
organization. Additionally, we have aligned our organization globally in our key end-use markets.
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Focus on Our Core Premium Products to Drive Enhanced Profitability
We will focus on capturing the growth in the beverage can market worldwide as well as the
automotive and electronic markets. We plan to continue improving our product mix and margins by
leveraging our world-class assets and technical capabilities. Our management approach helps us to
systematically identify opportunities to improve the profitability of our operations through
product portfolio analysis. This ensures that we focus on growing in attractive market segments,
while also taking actions to exit unattractive ones. We will continue to focus on our core
products while investing in emerging growth markets.
Pursue Organic Growth Through Capital Investments in Emerging Growth Markets and
Debottlenecking Initiatives
We are currently operating at or near capacity. We are investing heavily in increasing our
capacity, particularly in high growth emerging markets. Our international presence positions us
well to capture additional growth opportunities in targeted aluminum rolled products. In
particular, we believe Asia and South America have high growth potential in areas such as beverage
cans and electronics. While our existing manufacturing and operating presence positions us well to
capture this growth, we expect to make some incremental capital expenditures or selective
acquisitions to expand our capabilities in these areas.
In response to the growing demand for our products in South America, in May 2010 we announced
a plan to invest nearly $300 million to expand our aluminum rolling operations in Brazil to
increase capacity by more than 50% to approximately 600 kt of aluminum sheet per year. The project
is expected to be completed by late calendar 2012. Additionally, in May 2011, we announced a plan
to invest approximately $400 million to expand our recycling and rolling capabilities in Asia in
response to the growing demand in both Asia and the Middle East. The rolling expansion, which will
include investments in both hot rolling and cold rolling operations, is expected to increase
capacity in Asia by over 50% to 1,000 kt of aluminum sheet per year. The expansion will also
include the construction of a state-of-the-art recycling center for used aluminum beverage cans.
The project is expected to be completed by late fiscal 2013. In response to the lightweighting
trend in the automotive industry, we will be investing in increasing our North American rolling
capacity for the transportation end-use market.
To release additional capacity in facilities, increase efficiency and improve margins, we are
continually evaluating debottlenecking opportunities globally through modifications of and
investments in existing equipment and processes. We believe our debottlenecking initiatives will
release approximately 100 kt of additional production capacity in fiscal 2012, and we anticipate
that we can release additional capacity through these efforts by 3% to 4% annually over the next 2
to 3 years with minimal capital investments.
Sustainability
In May 2011, we announced an aggressive new sustainability platform that aims to increase the
recycled content of our aluminum to 80 percent by 2020. This move will significantly reduce our
carbon footprint and improve the environmental attractiveness of our products as well as those of
our customers. Today, recycled metal accounts for 34 percent of the aluminum Novelis uses.
Increasing that amount to 80 percent will remove an estimated 10 million metric tons of greenhouse
gas emissions from the aluminum product lifecycle each year. We intend to issue an annual
Sustainability Report beginning in July 2011.
Focus on Reducing our Costs
We strive to be the lowest cost producer of world-class aluminum rolled products by pursuing a
standardized focus on our core operations globally and through the implementation of cost-reduction
and restructuring initiatives. To achieve this objective, we have standardized our manufacturing
processes and the associated upstream and downstream production elements where possible while still
allowing the flexibility to respond to local market demands. In addition, we have implemented
numerous restructuring initiatives, including the shutdown of facilities, staff rationalization and
other activities, all of which have led to significant cost savings that we will benefit from for
years to come. We plan to continue to focus on maintaining our low cost base, even as we invest in
expansion of our capacity, and intend to persist in the implementation of ongoing initiatives to
improve operational efficiencies across our plants
globally.
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Our Operating Segments
Due in part to the regional nature of supply and demand of aluminum rolled products and in
order to best serve our customers, we manage our activities on the basis of geographical areas and
are organized under four operating segments: North America; Europe; Asia and South America. The
following is a description of our operating segments:
| North America. Headquartered in Atlanta, GA, this segment manufactures aluminum sheet and light gauge products and operates eleven plants, including two fully dedicated recycling facilities, in two countries. | ||
| Europe. Headquartered in Zurich, Switzerland, this segment manufactures aluminum sheet and light gauge products and operates 13 plants, including one fully dedicated recycling facility, in six countries. | ||
| Asia. Headquartered in Seoul, South Korea, this segment manufactures aluminum sheet and light gauge products and operates three plants in two countries. | ||
| South America. South America operates two rolling plants along with one primary aluminum smelter, a bauxite mine and a hydro-electric power plant as of March 31, 2011, all of which are located in Brazil. South America manufactures aluminum rolled products, including can stock, automotive and industrial sheet and light gauge for the beverage and food can, construction and industrial, foil and other packaging and transportation end-use applications. |
The table below shows Net sales and total shipments by segment. For additional financial
information related to our operating segments, see Note 19 Segment, Geographical Area, Major
Customer and Major Supplier Information to our accompanying audited consolidated financial
statements.
Year Ended | ||||||||||||
Sales in millions | March 31, | |||||||||||
Shipments in kilotonnes |
2011 | 2010 | 2009 | |||||||||
Consolidated |
||||||||||||
Net sales(A) |
$ | 10,577 | $ | 8,673 | $ | 10,177 | ||||||
Total shipments |
3,097 | 2,854 | 2,943 | |||||||||
North America |
||||||||||||
Net sales(B) |
$ | 3,922 | $ | 3,292 | $ | 3,930 | ||||||
Total shipments |
1,121 | 1,063 | 1,109 | |||||||||
Europe |
||||||||||||
Net sales(B) |
$ | 3,589 | $ | 2,975 | $ | 3,718 | ||||||
Total shipments |
976 | 884 | 1,009 | |||||||||
Asia |
||||||||||||
Net sales(B) |
$ | 1,866 | $ | 1,501 | $ | 1,536 | ||||||
Total shipments |
581 | 534 | 460 | |||||||||
South America |
||||||||||||
Net sales(B) |
$ | 1,214 | $ | 948 | $ | 1,007 | ||||||
Total shipments |
419 | 373 | 365 |
(A) | Consolidated Net sales include the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. | |
(B) | Net sales by segment includes intersegment sales. |
North America
As of March 31, 2011, North America operates 11 aluminum rolled products facilities, including
two fully dedicated recycling facilities, and manufactures a broad range of aluminum sheet and
light gauge products. End-use markets for this segment include beverage cans, containers and
packaging, automotive and other transportation applications, building products and other industrial
applications. The majority of North Americas efforts are directed towards the beverage can sheet
market. The beverage can end-use market is technically demanding to supply and pricing is
competitive. We believe we have a competitive advantage in this market due to our low-cost and
technologically advanced manufacturing facilities and technical support capability. Recycling is
important in the manufacturing process and we have five facilities in North America that re-melt
post-consumer aluminum and recycled process
material. Most of the recycled material is from UBCs and the material is cast into sheet ingot
for North Americas two can sheet
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production plants (at Russellville, Kentucky and Oswego, New
York). In August 2009, we entered into a UBC recycling joint venture with Alcoa to create a new
independent company, known as Evermore Recycling LLC (Evermore Recycling). Our investment in
Evermore Recycling is 55.8% and Alcoas equity investment is 44.2%. Evermore Recycling purchases
UBCs from suppliers for recycling by us and Alcoa and is designed to create value by increasing
efficiency, building stronger supplier relationships and increasing recycling.
Europe
As of March 31, 2011, Europe operates 13 operating plants, including one fully dedicated
recycling facility and one integrated recycling facility, and manufactures a broad range of sheet
and foil products. End-use markets for this segment include beverage and food can, automotive,
construction and industrial products, foil and technical products and lithographic. Beverage and
food can represent the largest end-use market in terms of shipment volume by Europe. Europe has
foil and packaging facilities at six locations and, in addition to six rolled product plants, has
distribution centers in Italy and sales offices in several European countries. Operations include
our 50% joint venture interest in Aluminium Norf GmbH (Norf), which is the worlds largest aluminum
rolling and remelt facility. Norf supplies high quality can stock, foilstock and feeder stock for
finishing at our other European operations.
In April 2009, we closed our distribution center in France. In March 2009, we announced the
closure of our aluminum sheet mill in Rogerstone, South Wales, U.K. The facility ceased operations
in April 2009. On March 1, 2011, we announced the sale of our printed confectionery foil packaging
business at Bridgnorth, UK. The operation is associated with the previously announced closure of
the Bridgnorth aluminum foil rolling and laminating activities, which ceased operations at the end
of April 2011. In February 2011, we announced plans to invest $18 million in the construction of a
new recycling center at Norf.
Asia
As of March 31, 2011, Asia operates three manufacturing facilities and manufactures a broad
range of sheet and light gauge products. End-use markets include beverage and food cans,
electronics and construction and industrial products and foil. The beverage can market represents
the largest end-use market in terms of volume. Recycling is an important part of our Korean
operations with recycling facilities at both the Ulsan and Yeongju facilities. Metal from recycled
aluminum purchases represented 31% of Asias total shipments in fiscal 2011. We believe that Asia
is well-positioned to benefit from further economic development in China as well as other parts of
Asia.
In May 2011, we announced plans to invest approximately $400 million to expand our aluminum rolling
and recycling operations in South Korea in response to the growing demand in Asia and the Middle
East. The rolling expansion, which will include investments in both hot rolling and cold rolling
operations, will increase our aluminum sheet capacity in Asia to 1000 kt annually. A response to
projected market growth in the region, the move is designed to rapidly bring to market high-quality
aluminum rolling capacity aligned with the projected needs of a growing customer base. The new
capacity is expected to come on stream in late fiscal 2013. The expansion will increase Novelis
aluminum sheet capacity in Asia by more than 50 percent, and will also include the construction of
a state-of-the-art recycling center for used aluminum beverage cans and a casting operation.
South America
As of March 31, 2011, South America operates two rolling plants along with one primary
aluminum smelter and a hydro-electric power plant, all of which are located in Brazil. South
America manufactures aluminum rolled products, including can stock, automotive and industrial sheet
and light gauge for the beverage and food can, construction and industrial, foil and other
packaging and transportation end-use applications. Beverage and food can represent the largest
end-use application in terms of shipment volume. Our operations in South America include a
smelters used by our Brazilian aluminum rolled products operations, with any excess production
being sold on the market in the form of aluminum billets, and a hydro-electric power plant which we
use to generate a portion of our own power requirements. Additionally, we own bauxite mines and
reserves which are not currently operational.
In May 2009, we ceased the production of alumina at our Ouro Preto facility in Brazil as the
sustained decline in alumina prices made alumina production economically unfeasible. In light of
the alumina and aluminum pricing environment, we closed our Aratu
facility in Candeias, Brazil in December 2010. In response to the growing demand for our
products in South America, in May 2010 we
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announced a plan to invest nearly $300 million to expand
our aluminum rolling operations in Brazil to increase the plants capacity by more than 50% to
approximately 600 kt of aluminum sheet per year. The project is expected to be completed by late
fiscal 2012.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 19 Segment,
Geographical Area, Major Customer and Major Supplier Information to our accompanying audited
consolidated financial statements.
Raw Materials and Suppliers
The raw materials that we use in manufacturing include primary aluminum, recycled aluminum,
sheet ingot, alloying elements and grain refiners. Our smelters also use alumina, caustic soda and
calcined petroleum coke and resin. These raw materials are generally available from several sources
and are not generally subject to supply constraints under normal market conditions. We also consume
considerable amounts of energy in the operation of our facilities.
Aluminum
We obtain aluminum from a number of sources, including the following:
Primary Aluminum Sourcing. We purchased or tolled approximately 1,900 kt of primary
aluminum in fiscal 2011 in the form of sheet ingot, standard ingot and molten metal,
approximately 50% of which we purchased from Alcan. Following our spin-off from Alcan, we have
continued to purchase aluminum from Alcan pursuant to metal supply agreements. Our primary
aluminum contracts with Alcan were renegotiated and the amended agreements took effect on
January 1, 2008.
Primary Aluminum Production. We produced approximately 78 kt of our own primary aluminum
requirements in fiscal 2011 through our smelter and related facilities in Brazil.
Recycled Aluminum Products. We operate facilities in several plants to recycle
post-consumer aluminum, such as UBCs collected through recycling programs. In addition, we have
agreements with several of our large customers where we take recycled processed material from
their fabricating activity and re-melt, cast and roll it to re-supply them with aluminum sheet.
Other sources of recycled material include lithographic plates, where over 90% of aluminum used
is recycled, and products with longer lifespans, like cars and buildings, which are starting to
become high volume sources of recycled material. We purchased or tolled approximately 1,000 kt
of recycled material inputs in fiscal 2011 and are making recycling investments in Europe, Korea
and South America to increase the amount of recycled material we use as raw materials.
The majority of recycled material we re-melt is directed back through can-stock plants. The
net effect of all recycling activities in terms of total shipments of rolled products is that
approximately 33% of our aluminum rolled products production for fiscal 2011 was made with
recycled material.
Energy
We use several sources of energy in the manufacture and delivery of our aluminum rolled
products. In fiscal 2011, natural gas and electricity represented approximately 83% of our energy
consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs
at our casting centers, at our smelter in South America and during the hot rolling of aluminum. Our
cold rolling facilities require relatively less energy. We purchase our natural gas on the open
market, which subjects us to market pricing fluctuations. We have in the past and may continue to
seek to stabilize our future exposure to natural gas prices through the purchase of derivative
instruments. Natural gas prices in Europe, Asia and South America have historically been more
stable than in the United States.
A portion of our electricity requirements are purchased pursuant to long-term contracts in the
local regions in which we operate. A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs. We have fixed pricing on some of our energy supply
arrangements. When the market price of energy is above the fixed price within the contract, we are
subject
to the credit risk of the counterparty in terms of fulfilling the contract to its term,
including those favorable contracts which were existent at the date of the Arrangement and for
which an intangible asset was recorded in purchase accounting.
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Our South America segment has its own hydroelectric facility that meets approximately 45% of
its total electricity requirements. We have a mixture of self-generated electricity, long term and
shorter term contracts. We may continue to face challenges renewing our South American energy
supply contracts at rates which enable profitable operation of our full smelter capacity.
Others
We also have bauxite and alumina requirements. We will satisfy some of our alumina
requirements for the near term pursuant to an alumina supply agreement we have entered into with
Alcan.
Our Customers
Although we provide products to a wide variety of customers in each of the markets that we
serve, we have experienced consolidation trends among our customers in many of our key end-use
markets. In fiscal 2011, approximately 50% of our total net sales were to our ten largest
customers, most of whom we have been supplying for more than 20 years. To address consolidation
trends, we focus significant efforts at developing and maintaining close working relationships with
our customers and end-users. Our major customers include:
Beverage and Food Cans |
Transportation |
|
Anheuser-Busch InBev
|
Audi Worldwide Company | |
Affiliates of Ball Corporation
|
BMW Group International | |
Can-Pack S.A.
|
Daimler AG | |
Various bottlers of the Coca-Cola System
|
Ford Motor Company | |
Crown Cork & Seal Company
|
General Motors | |
Rexam plc
|
Hyundai Motor Company | |
Jaguar Land Rover | ||
Volvo Group |
Construction, Industrial and Other |
Electronics |
|
Agfa-Gevaert N.V.
|
LG | |
Amcor Limited
|
Samsung | |
Kodak Polychrome Graphics GmbH |
||
Lotte Aluminum Co. Ltd. |
||
Pactiv Corporation |
||
Ryerson Inc. |
||
Tetra Pak Ltd. |
In our single largest end-use market, beverage can sheet, we sell directly to beverage makers
and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain
cases, we also operate under umbrella agreements with beverage makers and bottlers under which they
direct their can fabricators to source their requirements for beverage can body, end and tab stock
from us. Among these umbrella agreements is an agreement with several North American bottlers of
Coca-Cola branded products, including Coca-Cola Bottlers Sales and Services. Under this agreement,
we shipped approximately 349 kt of beverage can sheet (including tolled metal) during fiscal 2011.
These shipments were made to, and we received payment from, our direct customers, who are the
beverage can fabricators that sell beverage cans to the Coca-Cola associated bottlers. Under the
agreement, bottlers in the Coca-Cola system may join this agreement by committing a specified
percentage of the can sheet required by their can fabricators to us.
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.
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Rexam |
15 | % | 16 | % | 17 | % | ||||||
Anheuser-Busch |
13 | % | 11 | % | 7 | % |
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Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate:
direct sales to our customers and distributors.
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Direct sales as a percentage of total net sales |
92 | % | 93 | % | 93 | % | ||||||
Distributor sales as a percentage of total net sales |
8 | % | 7 | % | 7 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force that
operates from individual plants or sales offices, as well as from regional sales offices in 21
countries. The direct sales channel typically involves very large, sophisticated fabricators and
original equipment manufacturers. Longstanding relationships are maintained with leading companies
in industries that use aluminum rolled products. Supply contracts for large global customers
generally range from one to five years in length and historically there has been a high degree of
renewal business with these customers. Given the customized nature of products and in some cases,
large order sizes, switching costs are significant, thus adding to the overall consistency of the
customer base.
We also use third party agents or traders in some regions to complement our own sales force.
They provide service to our customers in countries where we do not have local expertise. We tend to
use third party agents in Asia more frequently than in other regions.
Distributors
We also sell our products through aluminum distributors, particularly in North America and
Europe. Customers of distributors are widely dispersed, and sales through this channel are highly
fragmented. Distributors sell mostly commodity or less specialized products into many end-use
markets in small quantities, including the construction and industrial and transportation markets.
We collaborate with our distributors to develop new end-use markets and improve the supply chain
and order efficiencies.
Backlog
We believe that order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our research and development expense in our plants and modern
research facilities, which included mini-scale production lines equipped with hot mills, can lines
and continuous casters (in millions).
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Research and development expenses |
$ | 40 | $ | 38 | $ | 41 |
We conduct research and development activities at our plants in order to satisfy current
and future customer requirements, improve our products and reduce our conversion costs. Our
customers work closely with our research and development professionals to improve their production
processes and market options. We have approximately 210 employees dedicated to research and
development, located in many of our plants and research center.
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Our Employees
The table below summarizes our approximate number of employees by region.
North | South | |||||||||||||||||||
Employees |
America | Europe | Asia | America | Total | |||||||||||||||
March 31, 2011 |
3,100 | 4,650 | 1,500 | 1,600 | 10,850 | |||||||||||||||
March 31, 2010 |
2,900 | 4,750 | 1,500 | 1,900 | 11,050 |
Approximately 63% of our employees are represented by labor unions and their employment
conditions are governed by collective bargaining agreements. Collective bargaining agreements are
negotiated on a site, regional or national level, and are of different durations.
We experienced a work stoppage at our Korean facilities for 12 days in August 2010. While this
work stoppage resulted in a wage increase of approximately 15% for the workers at our Korean
facilities, it did not have a material impact on our results of operations. We have not experienced
a prolonged labor stoppage in any of our principal facilities during the last decade.
Intellectual Property
In connection with our spin-off, Alcan has assigned or licensed to Novelis a number of
important patents, trademarks and other intellectual property rights owned or previously owned by
Alcan and required for our business. Ownership of certain intellectual property that is used by
both us and Alcan is owned by one of us, and licensed to the other. Certain specific intellectual
property rights, which have been determined to be exclusively useful to us or which were required
to be transferred to us for regulatory reasons, have been assigned to us with no license back to
Alcan.
We actively review intellectual property arising from our operations and our research and
development activities and, when appropriate, we apply for patents in the appropriate
jurisdictions, including the United States and Canada. We currently hold patents and patent
applications on approximately 175 different items of intellectual property. While these patents and
patent applications are important to our business on an aggregate basis, no single patent or patent
application is deemed to be material to our business.
We have applied for or received registrations for the Novelis word trademark and the Novelis
logo trademark in approximately 50 countries where we have significant sales or operations. Novelis
uses the Aditya Birla Rising Sun logo under license from Aditya Birla Management Corporation
Private Limited.
We have also registered the word Novelis and several derivations thereof as domain names in
numerous top level domains around the world to protect our presence on the World Wide Web.
Environment, Health and Safety
We own and operate numerous manufacturing and other facilities in various countries around the
world. Our operations are subject to environmental laws and regulations from various jurisdictions,
which govern, among other things, air emissions, wastewater discharges, the handling, storage and
disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining
reclamation and restoration of natural resources, and employee health and safety. Future
environmental regulations may be expected to impose stricter compliance requirements on the
industries in which we operate. Additional equipment or process changes at some of our facilities
may be needed to meet future requirements. The cost of meeting these requirements may be
significant. Failure to comply with such laws and regulations could subject us to administrative,
civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other
orders, including orders to cease operations.
We are involved in proceedings under the U.S. Comprehensive Environmental Response,
Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions
regarding our liability arising from the usage, storage, treatment or disposal of hazardous
substances and wastes at a number of sites in the United States, as well as similar proceedings
under the laws and regulations of the other jurisdictions in which we have operations, including
Brazil and certain countries in the European Union.
Many of these jurisdictions have laws that impose joint and several liability, without regard
to fault or the legality of the original
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conduct, for the costs of environmental remediation,
natural resource damages, third party claims, and other expenses. In addition, we are, from time to
time, subject to environmental reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating environmental loss contingencies,
including those arising from environmental reviews and investigations and any other environmental
remediation or compliance matters. We believe we have a reasonable basis for evaluating these
environmental loss contingencies, and we also believe we have made reasonable estimates for the
costs that are likely to be ultimately borne by us for these environmental loss contingencies.
Accordingly, we have established reserves based on our reasonable estimates for the currently
anticipated costs associated with these environmental matters. Management has determined that the
currently anticipated costs associated with these environmental matters will not, individually or
in the aggregate, materially impair our operations or materially adversely affect our financial
condition.
Our capital expenditures for environmental protection and the betterment of working conditions
in our facilities were $1 million in fiscal 2011. We expect these capital expenditures will be
approximately $5 million and $2 million in fiscal 2012 and 2013, respectively. In addition,
expenses for environmental protection (including estimated and probable environmental remediation
costs as well as general environmental protection costs at our facilities) were $18 million in
fiscal 2011, and are expected to be $34 million and $27 million in fiscal 2012 and 2013,
respectively. Generally, expenses for environmental protection are recorded in Cost of goods sold.
However, significant remediation costs that are not associated with on-going operations are
recorded in Other (income) expenses, net.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of
1934, as amended (Exchange Act) and, as a result, we file periodic reports and other information
with the SEC. We make these filings available on our website free of charge, the URL of which is
http://www.novelis.com, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that
contains our annual, quarterly and current reports and other information we file electronically
with the SEC. You can read and copy any materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our
website does not constitute part of this Annual Report on Form 10-K.
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Item 1A. Risk Factors
In addition to the factors discussed elsewhere in this report, you should consider the
following factors, which could materially affect our business, financial condition or results of
operations in the future. The following factors, among others, could cause our actual results to
differ from those projected in any forward looking statements we make.
Certain of our customers are significant to our revenues, and we could be adversely affected by
changes in the business or financial condition of these significant customers or by the loss of
their business.
Our ten largest customers accounted for approximately 50%, 48% and 45% of our total net sales
for the year ended March 31, 2011, 2010 and 2009, respectively, with Rexam Plc, a leading global
beverage can maker, and its affiliates representing approximately 13%, 16% and 17% of our total net
sales in the respective periods. A significant downturn in the business or financial condition of
our significant customers could materially adversely affect our results of operations and cash
flows. In addition, if our existing relationships with significant customers materially deteriorate
or are terminated in the future, and we are not successful in replacing business lost from such
customers, our results of operations and cash flows could be adversely affected. Some of the longer
term contracts under which we supply our customers, including under umbrella agreements such as
those described under Business Our Customers, are subject to renewal, renegotiation or
re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to
successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in
customer purchase volume or revenue, and if we are not successful in replacing business lost from
such customers, our results of operations and cash flows could be adversely affected. The markets
in which we operate are competitive and customers may seek to consolidate supplier relationships or
change suppliers to obtain cost savings and other benefits.
Our results and short term liquidity can be negatively impacted by timing differences between the
prices we pay under purchase contracts and metal prices we charge our customers.
Most of our purchase and sales contracts are based on the LME price for high grade aluminum,
and there are typically timing differences between the pricing periods for purchases and sales
where purchase prices tend to be fixed earlier than sales prices. This creates a price exposure
that we call metal price lag. To mitigate this exposure, we sell short-term LME futures contracts
to protect the value of priced metal purchases and inventory until the sale price is established.
We settle these derivative contracts in advance of collecting from our customers, which impacts our
short-term liquidity position.
In addition, from time to time, customers request fixed prices for longer term sales
commitments, and we in turn enter into futures purchase contracts to hedge against these fixed
forward priced sales to customers. The mismatch between the settlement of these derivative
contracts and the recognition of revenue from shipments hedged with these derivative contracts also
leads to volatility in our GAAP operating results. The lag between derivative settlement and
customer collection typically ranges from 30 to 60 days.
Our operations consume energy and our profitability and cash flows may decline if energy costs
were to rise, or if our energy supplies were interrupted.
We consume substantial amounts of energy in our rolling operations, cast house operations and
a Brazilian smelting operation. The factors that affect our energy costs and supply reliability
tend to be specific to each of our facilities. A number of factors could materially adversely
affect our energy position including:
| increases in costs of natural gas; | ||
| significant increases in costs of supplied electricity or fuel oil related to transportation; | ||
| interruptions in energy supply due to equipment failure or other causes; | ||
| the inability to extend energy supply contracts upon expiration on economical terms; and | ||
| the inability to pass through energy costs in certain sales contracts. |
In addition, global climate change may increase our costs for energy sources, supplies or raw
materials. See We may be
affected by global climate change or by legal, regulatory or market responses to such change.
If energy costs were to rise, or if energy
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supplies or supply arrangements were disrupted, our
profitability and cash flows could decline.
A deterioration of our financial position or a downgrade of our ratings by a credit rating agency
could increase our borrowing costs and our business relationships could be adversely affected.
A deterioration of our financial position or a downgrade of our ratings for any reason could
increase our borrowing costs and have an adverse effect on our business relationships with
customers, suppliers and hedging counterparties. From time to time, we enter into various forms of
hedging activities against currency, interest rate or metal price fluctuations and trade metal
contracts on the LME. Financial strength and credit ratings are important to the availability and
pricing of these hedging and trading activities. As a result, any downgrade of our credit ratings
may make it more costly for us to engage in these activities, and changes to our level of
indebtedness may make it more difficult or costly for us to engage in these activities in the
future.
Adverse changes in currency exchange rates could negatively affect our financial results or cash
flows and the competitiveness of our aluminum rolled products relative to other materials.
Our businesses and operations are exposed to the effects of changes in the exchange rates of
the U.S. dollar, the euro, the British pound, the Brazilian real, the Canadian dollar, the Korean
won and other currencies. We have implemented a hedging policy that attempts to manage currency
exchange rate risks to an acceptable level based on managements judgment of the appropriate
trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or
completely eliminate the effects of currency exchange rate fluctuations which could have a material
adverse effect on our financial results and cash flows.
We prepare our consolidated financial statements in U.S. dollars, but a portion of our
earnings and expenditures are denominated in other currencies, primarily the euro, the Korean won
and the Brazilian real. Changes in exchange rates will result in increases or decreases in our
operating results and may also affect the book value of our assets located outside the U.S.
Most of our facilities are staffed by a unionized workforce, and union disputes and other employee
relations issues could materially adversely affect our financial results.
Approximately 63% of our employees are represented by labor unions under a large number of
collective bargaining agreements with varying durations and expiration dates. We may not be able to
satisfactorily renegotiate our collective bargaining agreements when they expire. In addition,
existing collective bargaining agreements may not prevent a strike or work stoppage at our
facilities in the future. For example, we experienced a work stoppage at our Korean facilities for
12 days in August 2010. While this work stoppage resulted in a wage increase of approximately 15%
for the workers at our Korean facilities, it did not have a material impact on our results of
operations. However, any future extended work stoppages could have a material adverse effect on our
financial results and cash flows.
We could be adversely affected by disruptions of our operations.
Breakdown of equipment or other events, including catastrophic events such as war or natural
disasters, leading to production interruptions at our plants could have a material adverse effect
on our financial results and cash flows. Further, because many of our customers are, to varying
degrees, dependent on planned deliveries from our plants, those customers that have to reschedule
their own production due to our missed deliveries could pursue claims against us and reduce their
future business with us. We may incur costs to correct any of these problems, in addition to facing
claims from customers. Further, our reputation among actual and potential customers may be harmed,
resulting in a loss of business. While we maintain insurance policies covering, among other things,
physical damage, business interruptions and product liability, these policies would not cover all
of our losses.
Our operations have been and will continue to be exposed to various business and other risks,
changes in conditions and events beyond our control in countries where we have operations or sell
products.
We are, and will continue to be, subject to financial, political, economic and business risks
in connection with our global operations. We have made investments and carry on production
activities in various emerging markets, including Brazil, Korea and Malaysia, and we market our
products in these countries, as well as China and certain other countries in Asia, the Middle East
and
emerging markets in South America. While we anticipate higher growth or attractive production
opportunities from these emerging markets, they also present a higher degree of risk than more
developed markets. In addition to the business risks inherent in
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developing and servicing new
markets, economic conditions may be more volatile, legal and regulatory systems less developed and
predictable, and the possibility of various types of adverse governmental action more pronounced.
In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil
unrest and labor problems could affect our revenues, expenses and results of operations. Our
operations could also be adversely affected by acts of war, terrorism or the threat of any of these
events as well as government actions such as controls on imports, exports and prices, tariffs, new
forms of taxation, or changes in fiscal regimes and increased government regulation in the
countries in which we operate or service customers. Unexpected or uncontrollable events or
circumstances in any of these markets could have a material adverse effect on our financial results
and cash flows.
In addition, although relations between the Republic of Korea (which we refer to as Korea) and
the Democratic Peoples Republic of Korea (which we refer to as North Korea) have been tense
throughout Koreas modern history, North Koreas recent artillery attack on Koreas Yeonpyeong
Island has vastly increased such tensions. There can be no assurance that the level of tension on
the Korean peninsula will not escalate in the future. Further attacks may occur on Korea, including
on areas in which we operate, which could have a material adverse affect on our operations. If
military hostilities continue or increase between North Korea and Korea or the United States, the
region could become further destabilized and our operations could be halted, and any such
hostilities could have a material adverse effect on our operations.
Economic conditions could negatively affect our financial condition and results of operations.
Our financial condition and results of operations depend significantly on worldwide economic
conditions. These economic conditions deteriorated significantly in many countries and regions in
which we do business during and after the difficult global capital market conditions in 2008 and
2009, which resulted in a tightening in the credit markets, a low level of liquidity in many
financial markets and extreme volatility in fixed income, currency and equity markets.
We are unable to predict the timing and rate at which industry variables may fully recover or
future adverse changes in worldwide economic conditions. Uncertainty about current or future global
economic conditions poses a risk as our customers may postpone purchases in response to tighter
credit and negative financial news, which could adversely impact demand for our products. In
addition, there can be no assurance that the actions we have taken or may take in response to the
economic conditions will be sufficient to counter any continuation or reoccurrence of the downturn
or disruptions. A significant global economic downturn or disruptions in the financial markets
could have a material adverse effect on our financial condition and results of operations.
Our results of operations, cash flows and liquidity could be adversely affected if we were unable
to purchase derivative instruments or if counterparties to our derivative instruments fail to
honor their agreements.
We use various derivative instruments to manage the risks arising from fluctuations in
aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable
to purchase derivative instruments to manage these risks or were unsuccessful in passing through
the costs of our risk management activities, our results of operations, cash flows and liquidity
could be adversely affected. In addition, we may be exposed to losses in the future if the
counterparties to our derivative instruments fail to honor their agreements. In particular,
deterioration in the financial condition of our counterparties and any resulting failure to pay
amounts owed to us or to perform obligations or services owed to us could have a negative effect on
our business and financial condition. Further, if major financial institutions continue to
consolidate and are forced to operate under more restrictive capital constraints and regulations,
there could be less liquidity in the derivative markets, which could have a negative effect on our
ability to hedge and transact with creditworthy counterparties.
New derivatives legislation could have an adverse impact on our ability to hedge risks associated
with our business and on the cost of our hedging activities.
We use over-the-counter (OTC) derivatives products to hedge our metal commodity risks and, to
a lesser extent, our interest rate and currency risks. Recent legislation has been adopted to
increase the regulatory oversight of the OTC derivatives markets and impose restrictions on certain
derivative transactions, which could affect the use of derivatives in hedging transactions. Final
regulations pursuant to this legislation defining which companies will be subject to the
legislation have not yet been adopted. If future regulations subject us to additional capital or
margin requirements or other restrictions on our trading and commodity positions, they
could have an adverse effect on our ability to hedge risks associated with our business and on
the cost of our hedging activities.
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During many operating periods, we utilize substantially all of our production capacity, which may
put us at a competitive disadvantage since we may be unable to take on additional volumes to meet
our customers needs or acquire new business. Therefore, we may lose future business to
competitors with available capacity.
During fiscal year 2011, we operated at or near capacity across our system of plants
worldwide. We anticipate that we will continue to make capital investments in our facilities to
upgrade our technology and processes and attempt to expand the output capacity of our existing
equipment and facilities, but our capacity expansion may not be sufficient to match the level of
future demand increases. To the extent other rolled aluminum products manufacturers have available
capacity at levels that exceed ours, we may be at a competitive disadvantage in our efforts to
increase volumes from a current customer or to win significant new customer opportunities.
Our goodwill and other intangible assets could become impaired, which could require us to take
non-cash charges against earnings.
We assess, at least annually and potentially more frequently, whether the value of our
goodwill and other intangible assets has been impaired. Any impairment of goodwill or other
intangible assets as a result of such analysis would result in a non-cash charge against earnings,
which charge could materially adversely affect our reported results of operations.
A significant and sustained decline in our future cash flows, a significant adverse change in
the economic environment or slower growth rates could result in the need to perform additional
impairment analysis in future periods. If we were to conclude that a write-down of goodwill or
other intangible assets is necessary, then we would record such additional charges, which could
materially adversely affect our results of operations.
As part of our ongoing evaluation of our operations, we may undertake additional restructuring
efforts in the future which could in some instances result in significant severance-related costs,
environmental remediation expenses and impairment and other restructuring charges.
We recorded restructuring charges of $34 million for the year ended March 31, 2011 and $14
million for the year ended March 31, 2010. During these periods, we announced, among others, the
following restructuring actions and programs:
| the relocation of our North American headquarters from Cleveland, Ohio to Atlanta, Georgia; | ||
| the shutdown of our Aratu facility located in Candeias, Brazil; and | ||
| the cessation of foil rolling activities and part of the packaging business at our facility located in Bridgnorth, U.K. |
We may take additional restructuring actions in the future. Any additional restructuring
efforts could result in significant severance-related costs, environmental remediation expenses,
impairment charges, restructuring charges and related costs and expenses, which could adversely
affect our profitability and cash flows.
We may not be able to successfully develop and implement new technology initiatives in a timely
manner.
We have invested in, and are involved with, a number of technology and process initiatives.
Several technical aspects of these initiatives are still unproven, and the eventual commercial
outcomes cannot be assessed with any certainty. Even if we are successful with these initiatives,
we may not be able to deploy them in a timely fashion. Accordingly, the costs and benefits from our
investments in new technologies and the consequent effects on our financial results may vary from
present expectations.
Loss of our key management and other personnel, or an inability to attract such management and
other personnel, could adversely impact our business.
We depend on our senior executive officers and other key personnel to run our business. The
loss of any of these officers or other key personnel could materially adversely affect our
operations. Competition for qualified employees among companies that rely heavily on engineering
and technology is intense, and the loss of qualified employees or an inability to attract, retain
and motivate
additional highly skilled employees required for the operation and expansion of our business
could hinder our ability to improve
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manufacturing operations, conduct research activities
successfully and develop marketable products.
Future acquisitions or divestitures may adversely affect our financial condition.
As part of our strategy for growth, we may pursue acquisitions, divestitures or strategic
alliances, which may not be completed or, if completed, may not be ultimately beneficial to us.
There are numerous risks commonly encountered in strategic transactions, including the risk that we
may not be able to complete a transaction that has been announced, effectively integrate businesses
acquired or generate the cost savings and synergies anticipated. Failure to do so could have a
material adverse effect on our financial results.
Capital investments in debottlenecking or other organic growth initiatives may not produce the
returns we anticipate.
A significant element of our strategy is to invest in opportunities to increase the production
capacity of our operating facilities through modifications of and investments in existing
facilities and equipment and to evaluate other investments in organic growth in our target markets.
These projects involve numerous risks and uncertainties, including the risk that actual capital
investment requirements exceed projected levels, that our forecasted demand levels prove to be
inaccurate, that we do not realize the production increases or other benefits anticipated, that we
experience scheduling delays in connection with the commencement or completion of the project, that
the project disrupts existing plant operations causing us to temporarily lose a portion of our
available production capacity, or that key management devotes significant time and energy focused
on one or more initiatives that divert attention from other business activities.
We could be required to make unexpected contributions to our defined benefit pension plans as a
result of adverse changes in interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit pension plans for our
employees in the U.S., the U.K. and Canada, unfunded pension benefits in Germany and lump sum
indemnities payable to our employees in France, Italy, Korea and Malaysia upon retirement or
termination. Our pension plan assets consist primarily of funds invested in listed stocks and
bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits
incorporate a number of assumptions, including expected long-term rates of return on plan assets
and interest rates used to discount future benefits. Our results of operations, liquidity or
shareholders equity in a particular period could be adversely affected by capital market returns
that are less than their assumed long-term rate of return or a decline of the rate used to discount
future benefits.
If the assets of our pension plans do not achieve assumed investment returns for any period,
such deficiency could result in one or more charges against our earnings for that period. In
addition, changing economic conditions, poor pension investment returns or other factors may
require us to make unexpected cash contributions to the pension plans in the future, preventing the
use of such cash for other purposes.
We face risks relating to certain joint ventures and subsidiaries that we do not entirely control.
Our ability to access cash from these entities may be more restricted than if these entities were
wholly-owned subsidiaries.
Some of our activities are, and will in the future be, conducted through entities that we do
not entirely control or wholly own. These entities include our Norf, Germany; Logan, Kentucky; and
Evermore Recycling joint ventures, as well as our majority-owned Korean and Malaysian subsidiaries.
Our Malaysian subsidiary is a public company whose shares are listed for trading on the Bursa
Malaysia. Under the governing documents, agreements or securities laws applicable to or stock
exchange listing rules relative to certain of these joint ventures and subsidiaries, our ability to
fully control certain operational matters may be limited. In addition, we do not solely determine
certain key matters, such as the timing and amount of cash distributions from these entities. As a
result, our ability to access cash from these entities may be more restricted than if they were
wholly-owned entities. Further, in some cases we do not have rights to prevent a joint venture
partner from selling its joint venture interests to a third party.
Hindalco and its interests as equity holder may conflict with the interests of the holders of our
senior notes in the future.
Novelis is an indirectly wholly-owned subsidiary of Hindalco. As a result, Hindalco may
exercise control over our decisions to enter into any corporate transaction or capital
restructuring and has the ability to approve or prevent any transaction that requires the
approval of our shareholder. Hindalco may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in its judgment, could enhance its equity
investment, even though such transactions might involve risks to holders of our Senior Notes.
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Additionally, Hindalco operates in the aluminum industry and may from time to time acquire and hold
interests in businesses that compete, directly or indirectly, with us. Hindalco has no obligation
to provide us with financing and is able to sell their equity ownership in us at any time.
If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet
ingot and other raw materials used in the production of our products, our ability to produce and
deliver products or to manufacture products on a timely basis could be adversely affected.
We rely on a limited number of suppliers for our raw materials requirements. Increasing
aluminum demand levels have caused supply constraints in the industry. Further increases in demand
levels could exacerbate these supply issues. If we are unable to obtain sufficient quantities of
primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of
our rolled aluminum products due to supply constraints in the future, our ability to produce and
deliver products or to manufacture products on a timely basis could be adversely affected.
Our sheet ingot requirements have historically been, in part, supplied by Rio Tinto Alcan
pursuant to agreements with us. For the year ended March 31, 2011, we purchased the majority of our
third party sheet ingot requirements from Rio Tinto Alcans primary metal group. If Rio Tinto Alcan
or any other significant supplier of sheet ingot is unable to deliver sufficient quantities of this
material on a timely basis, our production may be disrupted and our net sales, profitability and
cash flows could be materially adversely affected. Although aluminum is traded on the world
markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.
In addition, our continuous casting operations at our Saguenay Works, Canada facility depend
upon a local supply of molten aluminum from Rio Tinto Alcan. For the fiscal year ended March 31,
2011, Rio Tinto Alcans primary metal group supplied most of the molten aluminum used at Saguenay
Works. If this supply were to be disrupted, our Saguenay Works production could be interrupted and
our net sales, profitability and cash flows could be materially adversely affected.
We face significant price and other forms of competition from other aluminum rolled products
producers, which could hurt our results of operations and cash flows.
Generally, the markets in which we operate are highly competitive. We compete primarily on the
basis of our value proposition, including price, product quality, ability to meet customers
specifications, range of products offered, lead times, technical support and customer service. Some
of our competitors may benefit from greater capital resources, have more efficient technologies,
have lower raw material and energy costs and may be able to sustain longer periods of price
competition. In particular, we face increased competition from producers in China, which have
significantly lower production costs and pricing. This lower pricing could erode the market prices
of our products in the Chinese market and elsewhere.
In addition, our competitive position within the global aluminum rolled products industry may
be affected by, among other things, the recent trend toward consolidation among our competitors,
exchange rate fluctuations that may make our products less competitive in relation to the products
of companies based in other countries (despite the U.S. dollar-based input cost and the marginal
costs of shipping) and economies of scale in purchasing, production and sales, which accrue to the
benefit of some of our competitors. For example, the price gap between the Shanghai Futures
Exchange (SHFE) and the LME may make products manufactured in China with SHFE prices for aluminum
more competitive compared to our products manufactured in Asia with LME prices for aluminum.
Increased competition could cause a reduction in our shipment volumes and profitability or
increase our expenditures, either of which could have a material adverse effect on our financial
results and cash flows.
The end-use markets for certain of our products are highly competitive and customers are willing
to accept substitutes for our products.
The end-use markets for certain aluminum rolled products are highly competitive. Aluminum
competes with other materials, such as steel, plastics, composite materials and glass, among
others, for various applications, including in beverage and food cans and automotive end-use
markets. In the past, customers have demonstrated a willingness to substitute other materials for
aluminum. For
example, changes in consumer preferences in beverage containers have increased the use of PET
plastic containers and glass bottles in recent years. These trends may continue. The willingness of
customers to accept substitutes for aluminum products could have a material adverse effect on our
financial results and cash flows.
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The seasonal nature of some of our customers industries could have a negative effect on our
financial results and cash flows.
The construction industry and the consumption of beer and soda are sensitive to weather
conditions and as a result, demand for aluminum rolled products in the construction industry and
for can feedstock can be seasonal. Our quarterly financial results could fluctuate as a result of
climatic changes, and a prolonged series of cool summers in the different regions in which we
conduct our business could have a material adverse effect on our financial results and cash flows.
We are subject to a broad range of environmental, health and safety laws and regulations, and we
may be exposed to substantial environmental, health and safety costs and liabilities.
We are subject to a broad range of environmental, health and safety laws and regulations in
the jurisdictions in which we operate. These laws and regulations impose increasingly stringent
environmental, health and safety protection standards and permitting requirements regarding, among
other things, air emissions, wastewater storage, treatment and discharges, the use and handling of
hazardous or toxic materials, waste disposal practices, the remediation of environmental
contamination, post-mining reclamation and working conditions for our employees. Some environmental
laws, such as Superfund and comparable laws in U.S. states and other jurisdictions worldwide,
impose joint and several liability for the cost of environmental remediation, natural resource
damages, third party claims, and other expenses, without regard to the fault or the legality of the
original conduct.
The costs of complying with these laws and regulations, including participation in assessments
and remediation of contaminated sites and installation of pollution control facilities, have been,
and in the future could be, significant. In addition, these laws and regulations may also result in
substantial environmental liabilities associated with divested assets, third party locations and
past activities. In certain instances, these costs and liabilities, as well as related action to be
taken by us, could be accelerated or increased if we were to close, divest of or change the
principal use of certain facilities with respect to which we may have environmental liabilities or
remediation obligations. Currently, we are involved in a number of compliance efforts, remediation
activities and legal proceedings concerning environmental matters, including certain activities and
proceedings arising under Superfund and comparable laws in U.S. states and other jurisdictions
worldwide in which we have operations.
We have established reserves for environmental remediation activities and liabilities where
appropriate. However, the cost of addressing environmental matters (including the timing of any
charges related thereto) cannot be predicted with certainty, and these reserves may not ultimately
be adequate, especially in light of changing interpretations of laws and regulations by regulators
and courts, the discovery of previously unknown environmental conditions, the risk of governmental
orders to carry out additional compliance on certain sites not initially included in remediation in
progress, our potential liability to remediate sites for which provisions have not been previously
established and the adoption of more stringent environmental laws including, for example, the
possibility of increased regulation of the use of bisphenol-A, a chemical component commonly used
in the coating of aluminum cans. Such future developments could result in increased environmental
costs and liabilities and could require significant capital expenditures, any of which could have a
material adverse effect on our financial condition, results or cash flows. Furthermore, the failure
to comply with our obligations under the environmental laws and regulations could subject us to
administrative, civil or criminal penalties, obligations to pay damages or other costs, and
injunctions or other orders, including orders to cease operations. In addition, the presence of
environmental contamination at our properties could adversely affect our ability to sell property,
receive full value for a property or use a property as collateral for a loan.
Some of our current and potential operations are located or could be located in or near
communities that may regard such operations as having a detrimental effect on their social and
economic circumstances. Environmental laws typically provide for participation in permitting
decisions, site remediation decisions and other matters. Concern about environmental justice issues
also may affect our operations. Should such community objections be presented to government
officials, the consequences of such a development may have a material adverse impact upon the
profitability or, in extreme cases, the viability of an operation. In addition, such developments
may adversely affect our ability to expand or enter into new operations in such location or
elsewhere and may also have an effect on the cost of our environmental remediation projects.
We use a variety of hazardous materials and chemicals in our rolling processes, as well as in
our smelting operations in Brazil and in connection with maintenance work on our manufacturing
facilities. Because of the nature of these substances or related residues, we may be liable for
certain costs, including, among others, costs for health-related claims or removal or re-treatment
of such substances. Certain of our current and former facilities incorporate asbestos-containing
materials, a hazardous substance that has been the subject of health-related claims for
occupational exposure. In addition, although we have developed environmental, health and safety
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programs for our employees, including measures to reduce employee exposure to hazardous
substances, and conduct regular assessments at our facilities, we are currently, and in the future
may be, involved in claims and litigation filed on behalf of persons alleging injury predominantly
as a result of occupational exposure to substances or other hazards at our current or former
facilities. It is not possible to predict the ultimate outcome of these claims and lawsuits due to
the unpredictable nature of personal injury litigation. If these claims and lawsuits, individually
or in the aggregate, were finally resolved against us, our results of operations and cash flows
could be adversely affected.
We may be exposed to significant legal proceedings or investigations.
From time to time, we are involved in, or the subject of, disputes, proceedings and
investigations with respect to a variety of matters, including environmental, health and safety,
product liability, employee, tax, personal injury, contractual and other matters as well as other
disputes and proceedings that arise in the ordinary course of business. Certain of these matters
are discussed in the preceding risk factor. Any claims against us or any investigations involving
us, whether meritorious or not, could be costly to defend or comply with and could divert
managements attention as well as operational resources. Any such dispute, litigation or
investigation, whether currently pending or threatened or in the future, may have a material
adverse effect on our financial results and cash flows.
Product liability claims against us could result in significant costs or negatively impact our
reputation and could adversely affect our business results and financial condition.
We are sometimes exposed to warranty and product liability claims. There can be no assurance
that we will not experience material product liability losses arising from individual suits or
class actions alleging product liability defects or related claims in the future and that these
will not have a negative impact on us. We generally maintain insurance against many product
liability risks, but there can be no assurance that this coverage will be adequate for any
liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to
be available on terms acceptable to us. A successful claim that exceeds our available insurance
coverage could have a material adverse effect on our financial results and cash flows.
We may be affected by global climate change or by legal, regulatory, or market responses to such
change.
There is a growing concern over climate change, which has led to new and proposed legislative
and regulatory initiatives, such as cap-and-trade systems and additional limits on emissions of
greenhouse gases. New laws enacted could directly and indirectly affect our customers and suppliers
(through an increase in the cost of production or their ability to produce satisfactory products)
or our business (through an impact on our inventory availability, cost of sales, operations or
demand for the products we sell), which could result in an adverse effect on our financial
condition, results of operations and cash flows. Compliance with any new or more stringent laws or
regulations, or stricter interpretations of existing laws, could require additional expenditures by
us, our customers or our suppliers. Also, we rely on natural gas, electricity, fuel oil and
transport fuel to operate our facilities. Any increased costs of these energy sources because of
new laws could be passed along to us and our customers and suppliers, which could also have a
negative impact on our profitability.
We may see increased costs arising from health care reform.
In March 2010, the United States government enacted comprehensive health care reform
legislation which, among other things, includes guaranteed coverage requirements, eliminates
pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to
which policies can be rescinded and imposes new and significant taxes on health insurers and health
care benefits. The legislation imposes implementation effective dates beginning in 2010 and
extending through 2020, and many of the changes require additional guidance from government
agencies or federal regulations. Therefore, due to the phased-in nature of the implementation and
the lack of interpretive guidance, it is difficult to determine at this time what impact the health
care reform legislation will have on our financial results. Possible adverse effects of the health
reform legislation include increased costs, exposure to expanded liability and requirements for us
to revise ways in which we provide healthcare and other benefits to our employees. In addition, our
results of operations, financial position and cash flows could be materially adversely affected.
Income tax payments may ultimately differ from amounts currently recorded by the Company. Future
tax law changes may materially increase the Companys prospective income tax expense.
We are subject to income taxation in many jurisdictions in the U.S. as well as numerous
foreign jurisdictions. Judgment is required
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in determining our worldwide income tax provision and accordingly there are many transactions and
computations for which our final income tax determination is uncertain. We are routinely audited by
income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates
are reasonable, the ultimate outcome from any audit (or related litigation) could be materially
different from amounts reflected in our income tax provisions and accruals. Future settlements of
income tax audits may have a material effect on earnings between the period of initial recognition
of tax estimates in the financial statements and the point of ultimate tax audit settlement.
Additionally, it is possible that future income tax legislation in any jurisdiction to which we are
subject may be enacted that could have a material impact on our worldwide income tax provision
beginning with the period that such legislation becomes effective.
If we fail to maintain effective internal control over financial reporting, we may have material
misstatements in our financial statements and we may not be able to report our financial results
in a timely manner.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management
in our Form 10-K on internal control over financial reporting, including managements assessment of
the effectiveness of such control. Internal control over financial reporting may not prevent or
detect misstatements because of its inherent limitations, including the possibility of human error,
the circumvention or overriding of controls or fraud. Therefore, even effective internal controls
can provide only some assurance with respect to the preparation and fair presentation of financial
statements. If we fail to maintain the adequacy of our internal controls, we may be unable to
provide financial information in a timely and reliable manner. Any such difficulties or failure may
have a material adverse effect on our business, financial condition and operating results.
Our substantial indebtedness could adversely affect our business.
We are highly leveraged. As of March 31, 2011, we had $4.1 billion of indebtedness
outstanding. Our substantial indebtedness and interest expense could have important consequences to
our company and holders of notes, including:
| limiting our ability to borrow additional amounts for working capital, capital expenditures or other general corporate purposes; | ||
| increasing our vulnerability to general adverse economic and industry conditions, including volatility in LME prices; | ||
| limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation; and | ||
| limiting our ability or increasing the costs to refinance indebtedness. |
The covenants in our senior secured credit facilities and the indentures governing our Senior
Notes impose operating and financial restrictions on us.
Our senior secured credit facilities and the indentures governing the notes impose certain
operating and financial restrictions on us. These restrictions limit our ability and the ability of
our restricted subsidiaries, among other things, to:
| incur additional debt and provide additional guarantees; | ||
| pay dividends and make other restricted payments, including certain investments; | ||
| create or permit certain liens; | ||
| make certain asset sales; | ||
| use the proceeds from the sales of assets and subsidiary stock; | ||
| create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us; | ||
| engage in certain transactions with affiliates; |
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| enter into sale and leaseback transactions; and | ||
| consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries. |
In addition, under our $800 million five-year multi-currency asset-backed revolving credit
line and letter of credit facility (the 2010 ABL Facility), if (a) our excess availability under
the 2010 ABL Facility is less than the greater of (i) 12.5% of the lesser of (x) the total 2010 ABL
Facility commitment at any time and (y) the then applicable borrowing base and (ii) $90 million, at
any time or (b) any event of default has occurred and is continuing, we are required to maintain a
minimum fixed charge coverage ratio of at least 1.1 to 1 until (1) such excess availability has
subsequently been at least the greater of (i) 12.5% of the lesser of (x) the total ABL Facility
commitments at such time and (y) the then applicable borrowing base for 30 consecutive days and
(ii) $90 million and (2) no default is outstanding during such 30 day period.
Further, under our $1.5 billion six-year term loan facility (the 2010 Term Loan Facility) we
may not permit our total net leverage ratio as of the last day of our four consecutive quarters
ending with any fiscal quarter to exceed ratios expected to begin at 4.75 to 1 and stepping down
periodically at specified levels over the life of the facility. See Note 10 Debt for additional
discussion.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our executive offices are located in Atlanta, Georgia. The following tables provide
information, by operating segment, about the plant locations, processes and major end-use
markets/applications for the aluminum rolled products, recycling and primary metal facilities we
operated during all or part of the year ended March 31, 2011. The total number of operating
facilities, research and development facilities, and recycling facility used by our operating
segments as of March 31, 2011 are shown in the table below:
Operating | Research | |||||||
Facilities | Facilities | |||||||
North America |
11 | 3 | ||||||
Europe |
13 | 3 | ||||||
South America |
3 | | ||||||
Asia |
3 | 1 | ||||||
Total |
30 | 7 | ||||||
Included above are operating facilities that we jointly own and operate with third
parties. Please see detail below:
North America
Location |
Plant Processes |
Major End-Use Markets |
||
Berea, Kentucky
|
Recycling | Recycled ingot | ||
Burnaby, British Columbia
|
Finishing | Foil containers | ||
Fairmont, West Virginia
|
Cold rolling, finishing | Foil, HVAC material | ||
Greensboro, Georgia
|
Recycling | Recycled ingot | ||
Kingston, Ontario
|
Cold rolling, finishing | Automotive, construction/industrial | ||
Russellville, Kentucky(A)
|
Hot rolling, cold rolling, finishing, recycling | Can stock | ||
Oswego, New York
|
Novelis Fusion(tm) casting, hot rolling, cold rolling, recycling, brazing, finishing |
Can stock, construction/industrial, semi-finished coil |
||
Saguenay, Quebec
|
Continuous casting, recycling | Semi-finished coil | ||
Terre Haute, Indiana
|
Cold rolling, finishing | Foil | ||
Toronto, Ontario
|
Finishing | Foil, foil containers | ||
Warren, Ohio
|
Coating | Can end stock |
(A) | We own 40% of the outstanding common shares of Logan Aluminum Inc. (Logan), but we have made subsequent equipment investments such that our portion of Logans total machine hours has provided us approximately 55% of Logans total production. |
Our Oswego, New York facility operates modern equipment used for recycling beverage cans
and other scrap metals, ingot casting, hot rolling, cold rolling and finishing. Oswego produces can
stock as well as building and industrial products. Oswego also provides feedstock to our Kingston,
Ontario facility, which produces heat-treated automotive sheet and products for construction and
industrial applications, and to our Fairmont, West Virginia facility, which produces light gauge
sheet.
Our Russellville, Kentucky facility (referred to herein as Logan) is a processing joint
venture between us and Arco Aluminum Inc. (ARCO), a subsidiary of a consortium of Japanese
companies. Our equity investment in the joint venture is 40%, while ARCO holds the remaining 60%
of common shares, but we have made subsequent equipment investments such that our portion of
Logans total machine hours provide us with approximately 55% of Logans total production. Logan,
which was built in 1985, is the newest and largest rolling mill in North America. Logan operates
modern and high-speed equipment for ingot casting, hot-rolling, cold-rolling and finishing. Logan
is a dedicated manufacturer of aluminum sheet products for the can stock market with modern
equipment, an efficient workforce and product focus. A portion of the can end stock is coated at
North Americas Warren, Ohio facility, in addition to Logans on-site coating assets. Together with
ARCO, we operate Logan as a production cooperative, with each party supplying its own primary metal
inputs for transformation at the facility. The transformed product is then returned to the
supplying party at cost. Logan does not own any of the primary metal inputs or any of the
transformed products. All of the fixed assets at Logan are directly owned by us and ARCO in varying
ownership percentages or solely by each party.
We share control of the management of Logan with ARCO through a board of directors with seven
voting members on which we appoint four members and ARCO appoints three members. Management of
Logan is led jointly by two executive officers who are subject to approval by at least five members
of the board of directors. On April 4, 2011, a consortium of Japanese companies, agreed to
purchase ARCOs share of Logan. The transaction does not impact our interest in Logan.
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Our Saguenay, Quebec facility operates the worlds largest continuous caster, which produces
feedstock for our two foil rolling plants located in Terre Haute, Indiana; and Fairmont, West
Virginia. The continuous caster was developed through internal research and development and we own
the process technology. Our Saguenay facility sources molten metal under long-term supply
arrangements we have with Rio Tinto Alcan.
Our Burnaby, British Columbia and Toronto, Ontario facilities spool and package household foil
products and report to our foil business unit based in Toronto, Ontario.
Along with our recycling center in Oswego, New York, we own two other fully dedicated
recycling facilities in North America, located in Berea, Kentucky and Greensboro, Georgia. Each
offers a modern, cost-efficient process to recycle used beverage cans and other recycled aluminum
into sheet ingot to supply our hot mills in Logan and Oswego. Berea is the largest used beverage
can recycling facility in the world.
Europe
Location |
Plant Processes |
Major End-Use Markets |
||
Berlin, Germany
|
Converting | Packaging | ||
Bresso, Italy
|
Finishing, painting | Painted sheet, architectural | ||
Bridgnorth, U.K.(A)
|
Foil rolling, finishing, converting | Foil, packaging | ||
Dudelange, Luxembourg
|
Continuous casting, foil rolling, finishing | Foil | ||
Göttingen, Germany
|
Cold rolling, finishing, painting | Can end, can tab, food can, lithographic, painted sheet | ||
Latchford, U.K.
|
Recycling | Sheet ingot from recycled metal | ||
Ludenscheid, Germany
|
Foil rolling, finishing, converting | Foil, packaging | ||
Nachterstedt, Germany
|
Cold rolling, finishing, painting | Automotive, can end, industrial, painted sheet, architectural | ||
Norf, Germany(B)
|
Hot rolling, cold rolling | Can stock, foilstock, feeder stock for finishing operations |
||
Ohle, Germany
|
Cold rolling, finishing, converting | Foil, packaging | ||
Pieve, Italy
|
Continuous casting, cold rolling, finishing | Coil for Bresso, industrial | ||
Rugles, France
|
Continuous casting, foil rolling, finishing | Foil | ||
Sierre, Switzerland(C)
|
Novelis Fusion(tm) casting, hot rolling, cold rolling, finishing | Automotive sheet, industrial |
(A) | On March 1, 2011, we announced the sale of our printed confectionery foil packaging business at Bridgnorth, UK. The transaction is associated with the previously announced closure of the Bridgnorth aluminum foil rolling and laminating activities, which ceased operations at the end of April 2011. | |
(B) | Operated as a 50/50 joint venture between us and Hydro Aluminum Deutschland GmbH (Hydro). | |
(C) | We have entered into an agreement with Rio Tinto Alcan pursuant to which Rio Tinto Alcan retains access to the plate production capacity, which represents a significant portion of the total production capacity of the Sierre hot mill. |
Aluminium Norf GmbH (Norf) in Germany, a 50/50 production-sharing joint venture between
us and Hydro, is a large scale, modern manufacturing hub for several of our operations in Europe,
and is the largest aluminum rolling mill and remelting operation in the world. Norf supplies hot
coil for further processing through cold rolling to some of our other plants, including Göttingen
and Nachterstedt in Germany and provides foilstock to our plants in Ohle and Ludenscheid in Germany
and Rugles in France. Together with Hydro, we operate Norf as a production cooperative, with each
party supplying its own primary metal inputs for transformation at the facility. The transformed
product is then transferred back to the supplying party on a pre-determined cost-plus basis. We own
50% of the equity interest in Norf and Hydro owns the other 50%. We share control of the management
of Norf with Hydro through a jointly-controlled shareholders committee. Management of Norf is led
jointly by two managing executives, one nominated by us and one nominated by Hydro.
Our Göttingen plant has a paint line as well as lines for can end, food and lithographic
sheet. Our Nachterstedt plant cold rolls and finishes mainly automotive sheet and can end stock.
The Pieve plant, located near Milan, Italy, mainly produces continuous cast coil that is cold
rolled into paintstock and sent to the Bresso, Italy plant for painting and some specialist
finishing.
The Dudelange and Rugles foil plants in Luxembourg and France, respectively, utilize
continuous twin roll casting equipment and
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are two of the few foil plants in the world capable of
producing 6 micron foil for aseptic packaging applications. The Sierre hot rolling plant in
Switzerland, along with Nachterstedt in Germany, are Europes leading producers of automotive sheet
in terms of shipments. Sierre also supplies plate stock to Rio Tinto Alcan.
Our recycling operation in Latchford, United Kingdom is the only major recycling plant in
Europe dedicated to used beverage cans.
European operations also include Novelis PAE in Voreppe, France, which sells casthouse
technology, including liquid metal treatment devices, such as degassers and filters, chill sheet
ingot casters and twin roll continuous casters, in many parts of the world.
Asia
Location |
Plant Processes |
Major End-Use Markets |
||
Bukit Raja, Malaysia(A)
|
Continuous casting, cold rolling, coating | Construction/industrial, heavy and light gauge foils | ||
Ulsan, Korea(B)
|
Novelis Fusion(tm) casting, hot rolling, cold rolling, recycling, finishing |
Can stock, construction/industrial, electronics, foilstock, and recycled material | ||
Yeongju, Korea(C)
|
Hot rolling, cold rolling, recycling, finishing | Can stock, construction/industrial, electronics, foilstock and recycled material |
(A) | Ownership of the Bukit Raja plant corresponds to our 59% equity interest in Aluminium Company of Malaysia Berhad. | |
(B) | We hold a 68% equity interest in the Ulsan plant. | |
(C) | We hold a 68% equity interest in the Yeongju plant. |
Our Korean subsidiary, in which we hold a 68% interest, was formed through acquisitions
in 1999 and 2000. Since our acquisitions, product capability has been developed to address higher
value and more technically advanced markets such as can sheet.
We hold a 59% equity interest in the Aluminum Company of Malaysia Berhad, a publicly traded
company that operates from Bukit Raja, Selangor, Malaysia.
Unlike our production sharing joint ventures at Norf, Germany and Logan, Kentucky, our Korean
partners are financial partners and we market 100% of the plants output.
Asia also operates recycling furnaces at both its Ulsan and Yeongju facilities in Korea for
the conversion of customer and third party recycled aluminum. The Ulsan and Yeongju facilities
utilized used beverage cans and other recycled scrap material for 31% of their aluminum supply
during fiscal 2011. In response to the growing demand for our products, we announced that we will
invest approximately $400 million to expand our rolling and recycling operations in South Korea.
South America
Location |
Plant Processes |
Major End-Use Markets |
||
Pindamonhangaba, Brazil
|
Hot rolling, cold rolling, recycling, finishing | Construction/industrial, can stock, foilstock, recycled ingot | ||
Utinga, Brazil
|
Foil rolling, finishing | Foil | ||
Ouro Preto, Brazil(A)
|
Smelting | Primary aluminum (sheet ingot and billets) | ||
Aratu, Brazil(B)
|
Smelting | Primary aluminum (sheet ingot) |
(A) | In May 2009, we ceased the production of commercial grade alumina at our Ouro Preto facility in Brazil. | |
(B) | In December 2010, we closed our Aratu facility in Brazil. |
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Our Pindamonhangaba (Pinda) rolling and recycling facility in Brazil has an integrated
process that includes recycling, sheet ingot casting, hot mill and cold mill operations. A leased
coating line produces painted products, including can end stock. Pinda supplies foilstock to our
Utinga foil plant, which produces converter, household and container foil.
Pinda is the largest aluminum rolling and recycling facility in South America in terms of
shipments and the only facility in South America capable of producing can body and end stock. Pinda
recycles primarily used beverage cans, and is engaged in tolling recycled metal for our customers.
In response to the growing demand for our products in South America, in May 2010 we announced a
plan to invest nearly $300 million to expand our aluminum rolling operations in Pinda. The
expansion will increase the plants capacity by more than 50% to approximately 600 kt of aluminum
sheet per year. The project is expected to come on stream in late 2012.
During fiscal 2009, we conducted bauxite mining, alumina refining, primary aluminum smelting
and hydro-electric power generation operations at our Ouro Preto, Brazil facility. Our owned power
generation supplies approximately 65% of our smelter needs. We also own the mining rights to
bauxite reserves in the Ouro Preto, Cataguases and Carangola regions.
In May 2009, we ceased the production of alumina at our Ouro Preto facility in Brazil. The
global economic crisis and the recent dramatic drop in alumina prices have made alumina production
at Ouro Preto economically unfeasible. Going forward, the plant will purchase alumina through
third-parties. Other activities related to the facility, including electric power generation and
the production of primary aluminum metal, will continue unaffected.
In December 2010, we closed our primary aluminum smelting operations at our Aratu facility in
Candeias, Brazil. The closure was in response to high operating costs and lack of a competitively
priced energy supply.
Item 3. Legal Proceedings
We are a party to litigation incidental to our business from time to time. For additional
information regarding litigation to which we are a party, see Note 18 Commitments and
Contingencies to our accompanying audited consolidated financial statements, which are incorporated
by reference into this item.
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PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned
subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The
aggregate purchase price for all of the Companys common shares was $3.4 billion and Hindalco also
assumed $2.8 billion of Novelis debt for a total transaction value of $6.2 billion. Subsequent to
completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by
Hindalco, and we became a foreign private issuer. We continue to file periodic reports under
section 15(d) of the Securities and Exchange Act of 1934 because our Senior Notes are publicly
traded (see Note 10 Debt to our accompanying audited consolidated financial statements).
On December 17, 2010, we paid $1.7 billion to our shareholder as a return of capital.
Dividends are at the discretion of the board of directors and will depend on, among other
things, our financial resources, cash flows generated by our business, our cash requirements,
restrictions under the instruments governing our indebtedness, being in compliance with the
appropriate indentures and covenants under the instruments that govern our indebtedness that would
allow us to legally pay dividends and other relevant factors.
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of and for the years ended March
31, 2011, 2010 and 2009; the periods May 16, 2007 through March 31, 2008 and April 1, 2007 through
May 15, 2007; as of and for the three months ended March 31, 2007 and as of and for the year ended
December 31, 2006 were derived from the audited consolidated financial statements of Novelis Inc.
The selected consolidated financial data should be read in conjunction with our consolidated
financial statements for the respective periods and the related notes included elsewhere in this
Form 10-K.
As of May 15, 2007, all of our common shares were indirectly held by Hindalco; thus, earnings
per share data are not reported. Amounts in the table below are in millions, except per share
amounts.
May 16, | April 1, | Three | |||||||||||||||||||||||||||
2007 | 2007 | Months | |||||||||||||||||||||||||||
Year Ended | Through | Through | Ended | Year Ended | |||||||||||||||||||||||||
March 31, | March 31, | May 15, | March 31, | December 31, | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008(A) | 2007(A) | 2007(B) | 2006 | |||||||||||||||||||||||
Successor | Successor | Successor | Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||||||||||
Net sales |
$ | 10,577 | $ | 8,673 | $ | 10,177 | $ | 9,965 | $ | 1,281 | $ | 2,630 | $ | 9,849 | |||||||||||||||
Net income (loss)
attributable to our
common
shareholder(C) |
$ | 116 | $ | 405 | $ | (1,910 | ) | $ | (53 | ) | $ | (97 | ) | $ | (64 | ) | $ | (275 | ) | ||||||||||
Return of capital
per common share(D) |
$ | 1,700,000 | $ | | $ | | $ | | $ | | $ | | $ | 0.20 |
March 31, | March 31, | March 31, | March 31, | March 31, | December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||
Successor | Successor | Successor | Successor | Predecessor | Predecessor | ||||||||||||||||||||
Total assets(A) |
$ | 8,296 | $ | 7,762 | $ | 7,567 | $ | 10,737 | $ | 5,970 | $ | 5,792 | |||||||||||||
Long-term debt (including
current portion) |
$ | 4,086 | $ | 2,596 | $ | 2,559 | $ | 2,575 | $ | 2,300 | $ | 2,302 | |||||||||||||
Short-term borrowings |
$ | 17 | $ | 75 | $ | 264 | $ | 115 | $ | 245 | $ | 133 | |||||||||||||
Cash and cash equivalents |
$ | 311 | $ | 437 | $ | 248 | $ | 326 | $ | 128 | $ | 73 | |||||||||||||
Shareholders/invested equity |
$ | 445 | $ | 1,869 | $ | 1,419 | $ | 3,490 | $ | 175 | $ | 195 |
(A) | On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary. Our acquisition by Hindalco was recorded in accordance with Staff Accounting Bulletin No. 103, Push Down Basis of Accounting Required in Certain Limited Circumstances (SAB 103). In the accompanying consolidated balance sheets, the consideration and related costs paid by Hindalco in connection with the acquisition have been pushed down to us and have been allocated to the assets acquired and liabilities assumed in accordance with Financial Accounting Standards Board (FASB) Statement No. 141, |
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Business Combinations (FASB 141), the applicable accounting standard at the Arrangement date. Due to the impact of push down accounting, the Companys selected financial data for the year ended March 31, 2008 are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented: (1) the period up to, and including, the acquisition date (April 1, 2007 through May 15, 2007, labeled Predecessor) and (2) the period after that date (May 16, 2007 through March 31, 2008, labeled Successor). The table above includes a black line division which indicates that the Predecessor and Successor reporting entities shown are not comparable. | ||
The consideration paid by Hindalco to acquire Novelis has been pushed down to us and allocated to the assets acquired and liabilities assumed based on our estimates of fair value, using methodologies and assumptions that we believe are reasonable. This allocation of fair value results in additional charges or income to our post-acquisition consolidated statements of operations. | ||
(B) | On June 26, 2007, our board of directors approved the change of our fiscal year end to March 31 from December 31. On June 28, 2007, we filed a Transition Report on Form 10-Q for the three month period ended March 31, 2007 with the United States Securities and Exchange Commission (SEC) pursuant to Rule 13a-10 under the Securities Exchange Act of 1934 for transition period reporting. | |
(C) | Net income (loss) attributable to our common shareholder for the year ended March 31, 2009 includes non-cash pre-tax impairment charges of $1.5 billion, and certain non-recurring expenses that were incurred related to the acquisition by Hindalco. The three months ended March 31, 2007 and the period May 16, 2007 through March 31, 2008 each include $32 million of sales transaction fees. The period May 16, 2007 through March 31, 2008 also includes $45 million of stock compensation expense related to the Arrangement. | |
(D) | On December 17, 2010, we paid $1.7 billion to our shareholder as a return of capital. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW AND REFERENCES
Novelis is the worlds leading aluminum rolled products producer based on shipment volume. We
produce aluminum sheet and light gauge products for the beverage and food can, transportation,
electronics, construction and industrial, and foil products markets. As of March 31, 2011, we had
operations in eleven countries on four continents: 30 operating plants, seven research and
development facilities and 3 recycling facilities. 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.
The following discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to these differences include,
but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in
Special Note Regarding Forward-Looking Statements and Market Data and Risk Factors.
BACKGROUND AND BASIS OF PRESENTATION
Acquisition of Novelis Common Stock
On May 15, 2007, the company was acquired by Hindalco through its indirect wholly-owned
subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The
aggregate purchase price for all of the companys common shares was $3.4 billion, and $2.8 billion
of Novelis debt was also assumed 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.
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Amalgamation of AV Aluminum Inc. and Novelis Inc.
Effective September 29, 2010, in connection with an internal restructuring transaction and
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, the
amalgamated Novelis Inc. remains liable for all of our and AV Aluminums 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 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.
HIGHLIGHTS
Fiscal 2011 was a solid year for Novelis with the efforts of fiscal 2010 and 2011 producing
strong results throughout the organization. Novelis has now recovered from the global economic
downturn, and the results from fiscal 2011 create a baseline for future growth and improvement of
the organization. We operated at or near capacity in all of our regions for most of fiscal 2011,
which reflects the strong demand we experienced in our core end-use markets.
| Net sales for fiscal 2011 were $10.6 billion, an increase of 22% compared to net sales of $8.7 billion reported for fiscal 2010. Shipments of flat rolled products totaled 2,969 kt in fiscal 2011, an increase of 10% compared to shipments of 2,708 kt in fiscal 2010, which reflects strong demand across all our regions in fiscal 2011. Additionally, average London Metal Exchange (LME) aluminum prices for fiscal 2011 increased 21% as compared to fiscal 2010. | ||
| We reported a pre-tax income of $243 million for fiscal 2011, which includes $84 million of loss on extinguishment of our debt and $64 million of unrealized losses on derivatives. Current year results also include $34 million of restructuring expenses. Net income attributable to our common shareholder for fiscal 2011 was $116 million. | ||
| We reported pre-tax income of $727 million for fiscal 2010, which includes $578 million of unrealized gains on derivatives. Prior year results also include $14 million of restructuring expenses. Net income attributable to our common shareholder for fiscal 2010 was $405 million. | ||
| Operating cash flow for fiscal 2011 was strong and we ended the year with $1.1 billion of liquidity and $311 million of cash on hand at March 31, 2011. We had $1.0 billion of liquidity and $437 million of cash on hand as of March 31, 2010. Our relatively stable liquidity and cash position were attained in light of refinancing transactions to raise $4.8 billion in debt funding and returning $1.7 billion in capital to our shareholder. |
BUSINESS AND INDUSTRY CLIMATE
We have experienced strong end customer demand across our regions and core end-use product
categories during fiscal 2011. We operated at or near capacity in all our regions throughout the
year. We have seen volumes return to levels enjoyed before the global economic downturn, and we
now have an asset configuration that is more focused on our core end-use product categories.
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Key Sales and Shipment Trends
(In millions, except Shipments which are in kt)
Year | Year | |||||||||||||||||||||||||||||||||||||||
Three Months Ended | Ended | Three Months Ended | Ended | |||||||||||||||||||||||||||||||||||||
June 30, | Sept 30, | Dec 31, | March 31, | March 31, | June 30, | Sept 30, | Dec 31, | March 31, | March 31, | |||||||||||||||||||||||||||||||
2009 | 2009 | 2009 | 2010 | 2010 | 2010 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||||||||||||||
(Successor) |
||||||||||||||||||||||||||||||||||||||||
Net sales |
$ | 1,960 | $ | 2,181 | $ | 2,112 | $ | 2,420 | $ | 8,673 | $ | 2,533 | $ | 2,524 | $ | 2,560 | $ | 2,960 | $ | 10,577 | ||||||||||||||||||||
% increase (decrease) in
net sales versus
comparable previous year
period |
(37 | )% | (26 | )% | (3 | )% | 25 | % | (15 | )% | 29 | % | 16 | % | 21 | % | 22 | % | 22 | % | ||||||||||||||||||||
Rolled product shipments: |
||||||||||||||||||||||||||||||||||||||||
North America |
254 | 258 | 243 | 274 | 1,029 | 278 | 285 | 262 | 280 | 1,105 | ||||||||||||||||||||||||||||||
Europe |
185 | 203 | 188 | 227 | 803 | 232 | 227 | 208 | 240 | 907 | ||||||||||||||||||||||||||||||
Asia |
130 | 139 | 134 | 129 | 532 | 146 | 134 | 148 | 152 | 580 | ||||||||||||||||||||||||||||||
South America |
81 | 93 | 84 | 86 | 344 | 90 | 91 | 97 | 99 | 377 | ||||||||||||||||||||||||||||||
Total |
650 | 693 | 649 | 716 | 2,708 | 746 | 737 | 715 | 771 | 2,969 | ||||||||||||||||||||||||||||||
Beverage and food cans |
396 | 407 | 371 | 406 | 1,580 | 425 | 429 | 424 | 453 | 1,731 | ||||||||||||||||||||||||||||||
All other rolled products |
254 | 286 | 278 | 310 | 1,128 | 321 | 308 | 291 | 318 | 1,238 | ||||||||||||||||||||||||||||||
Total |
650 | 693 | 649 | 716 | 2,708 | 746 | 737 | 715 | 771 | 2,969 | ||||||||||||||||||||||||||||||
Percentage increase (decrease) in rolled products shipments versus comparable previous year period: | ||||||||||||||||||||||||||||||||||||||||
North America |
(11 | )% | (12 | )% | | % | 11 | % | (4 | )% | 9 | % | 10 | % | 8 | % | 2 | % | 7 | % | ||||||||||||||||||||
Europe |
(32 | )% | (20 | )% | (5 | )% | 21 | % | (12 | )% | 25 | % | 12 | % | 11 | % | 6 | % | 13 | % | ||||||||||||||||||||
Asia |
(2 | )% | 14 | % | 26 | % | 50 | % | 19 | % | 12 | % | (4 | )% | 10 | % | 18 | % | 9 | % | ||||||||||||||||||||
South America |
(7 | )% | 7 | % | (3 | )% | 1 | % | (1 | )% | 11 | % | (2 | )% | 15 | % | 15 | % | 10 | % | ||||||||||||||||||||
Total |
(16 | )% | (8 | )% | 3 | % | 18 | % | (2 | )% | 15 | % | 6 | % | 10 | % | 8 | % | 10 | % | ||||||||||||||||||||
Beverage and food cans |
(5 | )% | (2 | )% | 2 | % | 12 | % | 1 | % | 7 | % | 5 | % | 14 | % | 12 | % | 10 | % | ||||||||||||||||||||
All other rolled products |
(29 | )% | (16 | )% | 3 | % | 27 | % | (7 | )% | 26 | % | 8 | % | 5 | % | 3 | % | 10 | % | ||||||||||||||||||||
Total |
(16 | )% | (8 | )% | 3 | % | 18 | % | (2 | )% | 15 | % | 6 | % | 10 | % | 8 | % | 10 | % | ||||||||||||||||||||
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 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.
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.
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LME
The average and closing aluminum prices based upon the LME for the years ended March 31, 2011,
2010 and 2009 are as follows:
Percent Change | ||||||||||||||||||||
Year Ended | Year Ended | |||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||
Year Ended March 31, | versus | versus | ||||||||||||||||||
London Metal Exchange Prices |
2011 | 2010 | 2009 | March 31, 2010 | March 31, 2009 | |||||||||||||||
Aluminum (per metric tonne, and
presented in U.S. dollars): |
||||||||||||||||||||
Closing cash price as of beginning of
period |
$ | 2,288 | $ | 1,366 | $ | 2,935 | 67 | % | (53 | )% | ||||||||||
Average cash price during period |
$ | 2,257 | $ | 1,866 | $ | 2,227 | 21 | % | (16 | )% | ||||||||||
Closing cash price as of end of period |
$ | 2,600 | $ | 2,288 | $ | 1,366 | 14 | % | 67 | % |
LME prices were fairly steady during the first eight months of fiscal 2011, fluctuating
within a $200 per tonne band, and then increasing steadily after November to $2,600 on March 31,
2011. This compares to the dramatic decreases in LME prices in fiscal 2009 and increases in fiscal
2010. As a result, we recorded $5 million and $123 million of net gains on changes in fair value
of metal derivatives during fiscal 2011 and fiscal 2010, respectively, as compared to $561 million
of net losses on changes in fair value of metal derivatives during fiscal 2009.
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 associated with inventory cost. 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 it and when we
ship finished products to our customers. These forward metal sales directly hedge the economic risk
of future 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.
Metal Price Ceilings
In the past, we had contracts that contained a ceiling over which metal prices could not be
contractually passed through to certain customers. The last of these contracts expired on December
31, 2009, and we entered into a new multi-year agreement to continue supplying similar volumes to
the same customer. This new agreement became effective January 1, 2010, and does not contain a
metal price ceiling.
Contracts with metal price ceilings negatively impacted our margins when the price we paid for
metal was above the ceiling price contained in these contracts. We calculate and report this
difference to be the difference between the quoted purchase price on the LME (adjusted for any
local premiums and for any price lag associated with purchasing or processing time) and the metal
price ceiling in our contracts. Cash flows from operations were also negatively impacted by the
same amounts, adjusted for any timing difference between customer receipts and vendor payments, and
offset partially by reduced income taxes.
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LME prices were below the ceiling price for the first five months of fiscal 2010 but rose
above the ceiling again in September 2009. In fiscal 2010, we were unable to pass through $10
million of metal purchase costs associated with sales under this contract, as compared to fiscal
2009 when we were unable to pass through $176 million of metal purchase costs associated with sales
under this contract.
In connection with the allocation of purchase price (i.e., total consideration) paid by
Hindalco, we established reserves totaling $655 million as of May 15, 2007 to record these sales
contracts with metal price ceilings at fair value. These reserves were accreted into net sales over
the term of the underlying contracts. This accretion had no impact on cash flow. For fiscal 2010
and 2009, we recorded accretion of $152 million and $233 million, respectively. With the expiration
of the last contract with a price ceiling, the balance of the reserve was zero at December 31,
2009, so there was no accretion during the year ended March 31, 2011.
Foreign Exchange Impact
We operate a global business and conduct business in various currencies around the world.
Fluctuations in foreign exchange rates also impact our operating results. We recognize foreign
exchange gains and losses when business transactions are denominated in currencies other than the
functional currency of that operation. The following table presents the exchange rates as of the
end of each period as well as the average of the month-end exchange rates for each of the past
three fiscal years.
Exchange Rate as of | Average Exchange Rate | |||||||||||||||||||||||
March 31, | Year Ended March 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
U.S. dollar per Euro |
1.419 | 1.353 | 1.328 | 1.325 | 1.414 | 1.411 | ||||||||||||||||||
Brazilian real per U.S. dollar |
1.627 | 1.784 | 2.301 | 1.718 | 1.861 | 1.982 | ||||||||||||||||||
South Korean won per U.S. dollar |
1,107 | 1,131 | 1,337 | 1,151 | 1,213 | 1,221 | ||||||||||||||||||
Canadian dollar per U.S. dollar |
0.971 | 1.014 | 1.258 | 1.021 | 1.085 | 1.134 |
During fiscal 2011, the U.S. dollar weakened as compared to the local currency in all our
regions. In Europe and Asia, the weakening of the U.S. dollar resulted in foreign exchange gains
as these operations use the local currency as the functional currency. In North America and
Brazil, where the U.S. dollar is the functional currency due to predominantly U.S. dollar selling
prices and metal costs and local currency operating costs, we incurred foreign exchange losses.
The U.S. dollar weakened as compared to the local currency in all regions during fiscal 2010.
In Europe and Asia, the weakening of the U.S. dollar resulted in foreign exchange gains as these
operations are recorded in local currency. In North America and Brazil, where the U.S. dollar is
the functional currency due to predominantly U.S. dollar selling prices and local currency
operating costs, we incurred foreign exchange losses as the U.S. dollar weakened.
In fiscal 2009, the U.S. dollar strengthened as compared to the local currency in all regions,
resulting in foreign exchange losses in Europe and Asia as these operations are recorded in local
currency, and foreign exchanges gains in Brazil and North America.
See Segment Review below for each of the periods presented for additional discussion of the
impact of foreign exchange on the results of each region.
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, which includes capital expenditures. Additionally, until May 2010, we used
foreign currency contracts to hedge our foreign currency exposure to net investment in foreign
subsidiaries.
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Results of Operations
Year Ended March 31, 2011 Compared with the Year Ended March 31, 2010
We experienced strong demand across all our regions during the year ended March 31, 2011, and
are operating at or near capacity in all regions. Net sales for the year ended March 31, 2011
increased $1.9 billion, or 22%, as compared to the year ended March 31, 2010 primarily as a result
of increases in LME prices and volumes. The prior year sales amount includes $152 million of
non-cash accretion on can price ceiling contracts which did not benefit the current year.
Cost of goods sold (exclusive of depreciation and amortization) for the year ended March 31,
2011 increased $2.0 billion, or 28%, as compared to the year ended March 31, 2010 which reflects
higher LME prices and increased volume. Increased input cost pressures were partially offset by
our prior sustained cost cutting measures.
Additionally, we had $107 million of gains on realized derivatives during the year ended March
31, 2011, $5 million of which were deferred in Other comprehensive income (loss), as compared to
$384 million of losses on realized derivatives during the same period of the prior year. These
amounts are reported in Gain (loss) on change in fair value of derivative instruments, net and
offset year-over-year impacts of changes in metal prices, foreign currency exchange rates and other
input costs on Net sales and Cost of goods sold (exclusive of depreciation and amortization).
Income before income taxes for the year ended March 31, 2011 was $243 million, a decrease of
$484 million, or 67%, compared to the $727 million reported in fiscal 2010. The positive effects
from operations discussed above were more than offset by the following items:
| $64 million of losses on unrealized derivatives for the year ended March 31, 2011 compared to $578 million of gains for the year ended March 31, 2010 | ||
| $84 million of loss on early extinguishment of debt related to the refinancing of our Term Loan facility, our 7.25% Notes and our 11.5% Notes during the year ended March 31, 2011 | ||
| $34 million of net restructuring charges for the year ended March 31, 2011 primarily as a result of the move of our North American headquarters to Atlanta, Georgia and the announced shutdowns of our Bridgnorth, UK and Aratu, Brazil facilities, as compared to $14 million of restructuring charges for the same period in the prior year | ||
| foreign exchange gains of $1 million as compared to gains of $15 million in the same period in the prior year. |
We reported Net income attributable to our common shareholder of $116 million for fiscal 2011
as compared to Net income attributable to our common shareholder of $405 million for fiscal 2010,
primarily as a result of the factors discussed above. We also recorded an income tax provision of
$83 million in the year ended March 31, 2011, as compared to a $262 million income tax provision in
the same period of the prior year.
Segment Review
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 were
at or near capacity in all our regions for the majority of fiscal 2011 as we continue to look at
ways to debottleneck our operations and optimize our product portfolio and footprint.
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;
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(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. Our presentation of Segment income on a consolidated basis is a non-GAAP
financial measure. See Non-GAAP Financial Measures below for additional discussion about our use
of Total Segment Income.
During the fourth quarter of fiscal 2011, we made a decision to change the manner in which we
evaluate and report the Companys business segments, allocating the costs of our corporate center
to our regional businesses in North America, Europe, Asia and South America. Corporate center
costs were allocated to each region based on a blended weighting of scale, capital intensity and
human capital. We have recast all of our historical segment disclosures, including segment income,
for all periods presented in this Form 10-K.
The tables below show selected segment financial information (in millions, except shipments
which are in kt). For additional financial information related to our operating segments, see Note
19 Segment, Major Customer and Major Supplier Information.
Selected Operating Results | North | South | ||||||||||||||||||||||
Year Ended March 31, 2011
|
America | Europe | Asia | America | Eliminations | Total | ||||||||||||||||||
Net sales |
$ | 3,922 | $ | 3,589 | $ | 1,866 | $ | 1,214 | $ | (14 | ) | $ | 10,577 | |||||||||||
Shipments: |
||||||||||||||||||||||||
Rolled products |
1,105 | 907 | 580 | 377 | | 2,969 | ||||||||||||||||||
Ingot products |
16 | 69 | 1 | 42 | | 128 | ||||||||||||||||||
Total shipments |
1,121 | 976 | 581 | 419 | | 3,097 | ||||||||||||||||||
Selected Operating Results | North | South | ||||||||||||||||||||||
Year Ended March 31, 2010
|
America | Europe | Asia | America | Eliminations | Total | ||||||||||||||||||
Net sales |
$ | 3,292 | $ | 2,975 | $ | 1,501 | $ | 948 | $ | (43 | ) | $ | 8,673 | |||||||||||
Shipments: |
||||||||||||||||||||||||
Rolled products |
1,029 | 803 | 532 | 344 | | 2,708 | ||||||||||||||||||
Ingot products |
34 | 81 | 2 | 29 | | 146 | ||||||||||||||||||
Total shipments |
1,063 | 884 | 534 | 373 | | 2,854 | ||||||||||||||||||
The following table reconciles changes in Segment income for the year ended March 31,
2010 to the year ended March 31, 2011 (in millions). Variances include the related realized
derivative gain or loss.
North | South | |||||||||||||||||||
Changes in Segment Income
|
America | Europe | Asia | America | Total | |||||||||||||||
Segment income year ended March 31, 2010 |
$ | 292 | $ | 212 | $ | 154 | $ | 97 | $ | 755 | ||||||||||
Volume |
59 | 64 | 22 | 24 | 169 | |||||||||||||||
Conversion premium and product mix |
26 | 22 | 36 | 36 | 120 | |||||||||||||||
Conversion costs(A) |
51 | (15 | ) | (21 | ) | 8 | 23 | |||||||||||||
Metal price lag |
(7 | ) | 42 | 15 | 11 | 61 | ||||||||||||||
Foreign exchange |
(20 | ) | (16 | ) | 29 | (21 | ) | (28 | ) | |||||||||||
Primary metal production |
| | | 5 | 5 | |||||||||||||||
Other changes(B) |
(19 | ) | 4 | (10 | ) | (8 | ) | (33 | ) | |||||||||||
Segment income year ended March 31, 2011 |
$ | 382 | $ | 313 | $ | 225 | $ | 152 | $ | 1,072 | ||||||||||
(A) | Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the incremental benefit of used beverage cans (UBCs) and other alternative scrap metal costs. Fluctuations in this component reflect cost efficiencies during the period as well as cost inflation (deflation). | |
(B) | Other changes include selling, general & administrative costs and research and development for all segments and certain other items which impact one or more regions, including such items as the impact of purchase accounting and metal price ceiling contracts. Significant fluctuations in these items are discussed below. |
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North America
As of March 31, 2011, our North American operations manufactured aluminum sheet and light
gauge products through eleven plants, including two dedicated recycling facilities. Important
end-use applications include beverage cans, containers and packaging, automotive and other
transportation applications and other industrial applications.
Our North American operations experienced strong demand across all sectors with increased
volumes in can, automotive and other industrial products as compared to the prior year. Shipments
of flat rolled products in fiscal 2011 increased 7% as compared to a year ago, with each quarter
seeing an increase in volumes shipped as compared to the same period last year. Net sales for
fiscal 2011 were up $630 million, or 19%, as compared to fiscal 2010 reflecting the strong demand
previously mentioned as well as higher LME prices. This increase is despite the fact that net sales
for fiscal 2010 included $152 million of accretion on can price ceiling contracts offset by $128
million of derivatives related to those contracts.
Segment income for fiscal 2011 was $382 million, up $90 million as compared to the prior year.
Improved volume, conversion premium and mix and reductions in conversion costs all had a positive
impact on segment income. Conversion cost improvements are driven by reductions in a number of
cost categories including labor, energy, repairs and maintenance and the usage of other aluminum
scrap metal. These improvements are slightly offset by increased costs of alloys and hardeners and
higher melt loss rates associated with melting additional scrap inputs. Other changes include a
$152 million negative impact related to the purchase accounting effect of metal price ceiling
contracts, which increased segment income for fiscal 2010 but did not affect fiscal 2011 offset by
a $128 million positive effect of the expiration of the can price ceiling contracts and related
derivatives on December 31, 2009.
Europe
As of March 31, 2011, our European segment provided European markets with value-added sheet
and light gauge products through 12 aluminum rolled products facilities and one dedicated recycling
facility. Europe serves a broad range of aluminum rolled product end-use markets in various
applications including can, automotive, lithographic, foil products and painted products.
Our European operations have experienced strong demand across our core end-use markets with
the can sector providing particularly strong results and the premium car market remaining firm.
Flat rolled product shipments and net sales were up 13% and 21%, respectively, as compared to
fiscal 2010 which reflects higher average LME prices and volume and mix improvement as a result of
strong demand. Our facilities operated at or near capacity for fiscal 2011.
Segment income for fiscal 2011 was $313 million, up $101 million compared to the prior year.
Improved volume, conversion premiums, product mix and favorable changes in metal price lag more
than offset increases in conversion costs and the negative effect of changes in foreign currency
exchange rates to the U.S. dollar and Euro.
Asia
As of March 31, 2011, Asia operated three manufacturing facilities with production balanced
between beverage and food can, construction and industrial (including electronics) and foil end-use
applications.
In fiscal 2011, the Asian markets experienced strong demand for all product categories. Flat
rolled product shipments are up 9% as compared to the prior year period. Net sales increased $365
million for the year ended March 31, 2011 as compared to the prior year primarily as a result of
higher LME prices and increased volume.
Segment income for fiscal 2011 was $225 million, up $71 million as compared to the prior year
due primarily to improved volume, conversion premiums, favorable changes in metal price lag and
favorable effects of changes in foreign currency exchange rates to the U.S. dollar more than offset
increases in conversion costs. Other changes reflect the negative effects of higher selling,
general and administrative costs as compared to prior year.
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South America
Our operations in South America manufacture various aluminum rolled products for the beverage
and food can, construction and industrial and transportation end-use markets. Our South American
operations included two rolling plants in Brazil along with one smelter, power generation
facilities and bauxite mines as of March 31, 2011.
Our South American operations experienced strong demand across all sectors as compared to the
prior year. Shipments of flat rolled products in fiscal 2011 increased 10% as compared to a year
ago. Net sales for fiscal 2011 were up $266 million, or 28%, as compared to fiscal 2010 reflecting
strong demand as well as higher LME prices.
Segment income for fiscal 2011 was $152 million, up $55 million as compared to the prior year.
Improved volumes, conversion premiums, reductions of conversion costs and favorable metal price lag
more than offset the negative effects of changes in foreign currency exchange rates and higher
selling, general and administrative costs. Increased segment income of the primary business
reflects the higher LME prices, offset by increased energy and alumina costs.
Reconciliation of segment results to Net income attributable to our common shareholder
Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on
changes in the fair value of derivatives are not utilized by our chief operating decision maker in
evaluating segment performance. The table below reconciles income from reportable segments to Net
income attributable to our common shareholder for the year ended March 31, 2011 and 2010 (in
millions).
Year Ended March 31, | ||||||||
2011 | 2010 | |||||||
North America |
$ | 382 | $ | 292 | ||||
Europe |
313 | 212 | ||||||
Asia |
225 | 154 | ||||||
South America |
152 | 97 | ||||||
Total Segment income |
1,072 | 755 | ||||||
Depreciation and amortization |
(404 | ) | (384 | ) | ||||
Interest expense and amortization of debt issuance costs |
(207 | ) | (175 | ) | ||||
Interest income |
13 | 11 | ||||||
Unrealized gains (losses) on change in fair value of derivative instruments, net |
(64 | ) | 578 | |||||
Realized gains on derivative instruments not included in segment income |
5 | | ||||||
Adjustment to eliminate proportional consolidation |
(45 | ) | (52 | ) | ||||
Loss on extinguishment of debt |
(84 | ) | | |||||
Restructuring charges, net |
(34 | ) | (14 | ) | ||||
Other costs, net |
(9 | ) | 8 | |||||
Income (loss) before income taxes |
243 | 727 | ||||||
Income tax provision (benefit) |
83 | 262 | ||||||
Net income (loss) |
160 | 465 | ||||||
Net income (loss) attributable to noncontrolling interests |
44 | 60 | ||||||
Net income (loss) attributable to our common shareholder |
$ | 116 | $ | 405 | ||||
Interest expense and amortization of debt issuance costs increased primarily due to a
higher average principal balance after the refinancing of our debt, offset by lower average
interest rates on our variable rate debt for the majority of the year.
For fiscal 2011, the $64 million of losses consists of unrealized losses on changes in fair
value of metal, foreign currency, interest rate offset by unrealized gains on energy derivatives.
We recorded $578 million of unrealized gains for fiscal 2010.
Realized gains on derivative instruments not included in segment income represents realized
gains on foreign currency derivatives related to capital expenditures for our previously announced
expansion at our Pinda facility in South America.
Adjustment to eliminate proportional consolidation was a $45 million loss for fiscal 2011 as
compared to a $52 million loss in
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fiscal 2010. This adjustment primarily relates to depreciation,
amortization and income taxes at our Aluminium Norf GmbH (Norf) joint venture. The difference from
the prior year relates to the reduction in depreciation and amortization on the step up in our
basis in
the underlying assets of the investees. Income taxes related to our equity method investments
are reflected in the carrying value of the investment and not in our consolidated income tax
provision.
We paid tender premiums, fees and other costs of $193 million associated with the refinancing
transactions in December 2010 and related exchange offer in March 2011, including fees paid to
lenders, arrangers and outside professionals such as attorneys and rating agencies. Approximately
$84 million of these fees, existing unamortized fees, discounts and fair value adjustments
associated with the old debt were expensed and included in the Loss on early extinguishment of
debt. The remaining fees paid and the remaining unamortized fees, discounts and fair value
adjustments associated with the old debt were capitalized and will be amortized as an increase to
interest expense over the term of the related debt, ranging from five to ten years. See Note 10
Debt for a further discussion of the refinancing and related accounting.
Restructuring charges in fiscal 2011 primarily related to the move of our North American
headquarters to Atlanta, Georgia and the announced closure of our Bridgnorth facility in Europe and
our Aratu facility in South America. See Note 2 Restructuring Programs.
We have experienced significant fluctuations in income tax expense and the corresponding
effective tax rate. The primary factors contributing to the effective tax rate differing from the
statutory Canadian rate include:
| Our functional currency in Brazil is the U.S. dollar where the company holds significant U.S. dollar denominated debt. As the value of the local currency strengthens or weakens against the U.S. dollar, unrealized gains or losses are created for tax purposes, while the underlying gains or losses are not recorded in our income statement. | ||
| We have significant net deferred tax liabilities in Brazil that are remeasured to account for currency fluctuations as the taxes are payable in local currency. | ||
| Our income is taxed at various statutory tax rates in varying jurisdictions. Applying the corresponding amounts of income and loss to the various tax rates results in differences when compared to our Canadian statutory tax rate. | ||
| We record increases and decreases to valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses. |
For the year ended March 31, 2011, we recorded an $83 million income tax provision on our
pre-tax income of $255 million, before our equity in net income of non-consolidated affiliates,
which represented an effective tax rate of 33%. Our effective tax rate differs from the expense at
the Canadian statutory rate due to the following factors: (1) a $20 million expense for exchange
remeasurement of deferred income taxes, (2) a $50 million increase in valuation allowances
primarily related to tax losses in certain jurisdictions where we believe it is more likely than
not that we will not be able to utilize those losses, largely offset by a $49 decrease in our
valuation allowance in the U.K. based on expectations of future taxable income, (3) a $15 million
benefit from non-taxable dividends, (4) a $6 million benefit from differences between the Canadian
statutory and foreign effective tax rates applied to entities in different jurisdictions, and (5) a
$6 million expense related to increase in uncertain tax positions.
For fiscal 2010, we recorded a $262 million income tax provision on our pre-tax income of $742
million, before our equity in net (income) loss of non-consolidated affiliates, which represented
an effective tax rate of 35%. Our effective tax rate differs from the expense at the Canadian
statutory rate primarily due to the following factors: (1) $19 million expense for pre-tax foreign
currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect, (2) a $38 million expense for exchange remeasurement of
deferred income taxes, (3) a $7 million expense for the effects of enacted tax rate changes on
cumulative taxable temporary differences, (4) a $9 million benefit from differences between the
Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions
and (5) a $10 million benefit related to a decrease in uncertain tax positions.
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Year Ended March 31, 2010 Compared with the Year Ended March 31, 2009
For the year ended March 31, 2010, we reported net income attributable to our common
shareholder of $405 million on net sales of $8.7 billion, compared to the year ended March 31, 2009
when we reported net loss attributable to our common shareholder of $1.9 billion on net sales of
$10.2 billion. The prior year results include pre-tax impairment charges totaling $1.5 billion,
which reflected the deterioration in the global economic environment and resulting decreases in the
market capitalization of our parent company, valuation of our publicly traded debt and related
increase in our cost of capital.
While shipments were flat, Cost of goods sold (exclusive of depreciation and amortization)
decreased $2.1 billion, or 22%, on a sales reduction of 15%. The decrease in average metal prices
impacted both sales and costs of goods sold. The reduction in cost of goods sold also reflects the
benefit of our previously announced restructuring actions and cost reduction initiatives. Selling,
general and administrative expenses increased $43 million, or 15%, primarily due to the increase
in accrued incentive compensation in the current year as compared to the prior year when business
conditions were declining.
The fiscal year ended March 31, 2010 also includes $578 million in unrealized gains on
derivative instruments, as compared to unrealized losses of $519 million in the prior year.
Additionally, we recorded an income tax provision of $262 million on our net income in fiscal 2010,
as compared to a $246 million income tax benefit in the prior year. These items are discussed in
further detail below.
Segment Review
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 (described below); (k) restructuring charges, net;
(k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other
costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o)
provision or benefit for taxes on income (loss) and (p) cumulative effect of accounting change, net
of tax.
The tables below show selected segment financial information (in millions, except shipments
which are in kt). For additional financial information related to our operating segments. See Note
19 Segment, Geographical Area and Major Customer and Major Supplier Information to our
accompanying audited consolidated financial statements.
Selected Operating Results | North | South | ||||||||||||||||||||||
Year Ended March 31, 2010 | America | Europe | Asia | America | Eliminations | Total | ||||||||||||||||||
Net sales |
$ | 3,292 | $ | 2,975 | $ | 1,501 | $ | 948 | $ | (43 | ) | $ | 8,673 | |||||||||||
Shipments (kt) |
||||||||||||||||||||||||
Rolled products |
1,029 | 803 | 532 | 344 | | 2,708 | ||||||||||||||||||
Ingot products |
34 | 81 | 2 | 29 | | 146 | ||||||||||||||||||
Total shipments |
1,063 | 884 | 534 | 373 | | 2,854 | ||||||||||||||||||
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Selected Operating Results | North | South | ||||||||||||||||||||||
Year Ended March 31, 2009 | America | Europe | Asia | America | Eliminations | Total | ||||||||||||||||||
Net sales |
$ | 3,930 | $ | 3,718 | $ | 1,536 | $ | 1,007 | $ | (14 | ) | $ | 10,177 | |||||||||||
Shipments (kt) |
||||||||||||||||||||||||
Rolled products |
1,067 | 910 | 447 | 346 | | 2,770 | ||||||||||||||||||
Ingot products |
42 | 99 | 13 | 19 | | 173 | ||||||||||||||||||
Total shipments |
1,109 | 1,009 | 460 | 365 | | 2,943 | ||||||||||||||||||
The following table reconciles changes in Segment income for the year ended March 31,
2010 as compared to the year ended March 31, 2009 (in millions):
North | South | |||||||||||||||||||
Changes in Segment Income | America | Europe | Asia | America | Total | |||||||||||||||
Segment income year ended
March 31, 2009 |
$ | 60 | $ | 214 | $ | 79 | $ | 132 | $ | 485 | ||||||||||
Volume: |
||||||||||||||||||||
Rolled products |
(26 | ) | (104 | ) | 34 | 2 | (94 | ) | ||||||||||||
Other |
4 | 2 | (2 | ) | 2 | 6 | ||||||||||||||
Conversion premium and product mix |
78 | 58 | 40 | 54 | 230 | |||||||||||||||
Conversion costs(A) |
75 | 54 | 40 | 6 | 175 | |||||||||||||||
Metal price lag |
73 | (49 | ) | (82 | ) | 3 | (55 | ) | ||||||||||||
Foreign exchange |
27 | 27 | 48 | (30 | ) | 72 | ||||||||||||||
Other changes(B) |
1 | 10 | (3 | ) | (72 | ) | (64 | ) | ||||||||||||
Segment income year ended
March 31, 2010 |
$ | 292 | $ | 212 | $ | 154 | $ | 97 | $ | 755 | ||||||||||
(A) | Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina and melt loss. Fluctuations in this component reflect cost efficiencies during the period as well as cost inflation (deflation). | |
(B) | Other changes include selling, general & administrative costs and research and development for all segments and certain other items which impact one or more regions, including such items as the impact of purchase accounting and metal price ceiling contracts. Significant fluctuations in these items are discussed below. |
North America
As of March 31, 2010, North America manufactured aluminum sheet and light gauge products
through eleven plants, including two dedicated recycling facilities. Important end-use applications
include beverage cans, foil and other packaging, automotive and other transportation applications,
building products and other industrial applications.
North America experienced a reduction in demand in the second half of fiscal 2009 as all
industry sectors were impacted by the economic downturn. While shipments for fiscal 2010 were down
4% as compared to fiscal 2009, fourth quarter 2010 represented an 11% increase over the same period
a year ago and a 13% increase over our seasonally low third quarter of fiscal 2010. Net sales for
fiscal 2010 were down $638 million, or 16%, as compared to fiscal 2009 primarily reflecting lower
average LME prices as well as the reduced volumes discussed above. Prices under certain can
contracts are determined based on a six month price average and therefore do not reflect the recent
increases in LME prices. Can shipments represent approximately 70% of our flat rolled shipments in
North America.
Segment income for fiscal 2010 was $292 million, up $232 million as compared to the prior year
period. Improved conversion premiums and product mix, reductions in conversion costs, favorable
metal price lag and favorable impact of foreign exchange all had a positive impact on segment
income. Conversion cost improvements relate to reductions in a number of cost categories, including
energy, melt loss, production labor and repairs and maintenance as compared to the prior year
period. Other changes include a $98 million favorable impact related to metal price ceilings
contracts which expired on December 31, 2009, partially offset by an $81 million reduction to the
net favorable impact of acquisition related fair value adjustments and a $10 million reduction in
the benefit from used beverage cans.
To consolidate corporate functions and enhance organizational effectiveness, we relocated our
North American headquarters
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from Cleveland, Ohio to Atlanta, Georgia, where our executive offices
are located. We recorded $4 million in fiscal 2010 related to
one-time termination benefits and other employee related costs in connection with the
relocation.
In response to reductions in demand in fiscal 2009, we announced a Voluntary Separation
Program (VSP) available to salaried employees in North America and the Corporate office, aimed at
reducing staffing levels. This VSP plan was supplemented by an Involuntary Severance Program (ISP).
Through the VSP and ISP, we eliminated approximately 120 positions during the fourth quarter of
fiscal 2009 and the first quarter of fiscal 2010.
Europe
As of March 31, 2010, our European segment provided European markets with value-added sheet
and light gauge products through 13 aluminum operating facilities, including one dedicated
recycling facility. End-use applications for this segment include beverage and food cans, foil and
other packaging, construction and industrial products, automotive and lithographic applications.
Europe experienced a reduction in demand in all industry sectors with flat rolled shipments
and net sales down 12% and 20%, respectively, in fiscal 2010 as compared to fiscal 2009. While
shipments for fiscal 2010 were down compared to a year ago, fourth quarter 2010 represented a 21%
increase over the same period a year ago and a 21% increase over our seasonally low third quarter
of fiscal 2010. Net sales for fiscal 2010 were down $743 million, as compared to fiscal 2009
reflecting the volume decrease as well as lower average LME prices.
Segment income for fiscal 2010 was $212 million, down $2 million as compared to the prior
year. Improved conversion premium and product mix, reductions in conversion costs and the
favorable impact of foreign exchange more than offset the impact of volume reduction and the
negative metal price lag. Other changes reflect a favorable impact of $25 million from fixed
forward priced contracts in fiscal 2010.
In late fiscal 2009, we began a number of restructuring actions across Europe, including
the closure of our plant in Rogerstone, United Kingdom effective April 2009. The closure of the
Rogerstone plant resulted in the elimination of 440 positions. Other cost reductions were
implemented in 2009 and throughout 2010 through capacity and staff reductions at plants in
France, Germany, Switzerland and Italy.
Asia
As of March 31, 2010, Asia operated three manufacturing facilities with production balanced
between beverage and food cans, foil and other packaging, industrial products (including
electronics and construction) and transportation applications.
The Asian economies, fueled by government stimulus programs, have been recovering rapidly
since our first quarter of fiscal 2010. We expect growth in Chinas economy to benefit
export-oriented neighboring countries as they participate in demand for finished goods and
infrastructure projects in China. Flat rolled shipments are up 19% as compared to the prior year
and have been consistent each quarter this year. We expect customer demand to continue at these
levels for the near term. Net sales were down 2% in fiscal 2010 as compared to fiscal 2009 as the
decrease in the average LME more than offset volume and conversion premium increases.
Segment income increased from $79 million in fiscal 2009 to $154 million for fiscal 2010
due to improvements in volume, conversion premiums and reductions in conversion costs,
partially offset by the unfavorable metal price lag. As shown above in the Foreign Exchange
Impact discussion, the U.S. dollar strengthened during fiscal 2009, and weakened during fiscal
2010, resulting in a favorable year-over-year foreign exchange impact in this segment.
In response to reduced demand in the fourth quarter of fiscal 2009, we eliminated 34
positions in Asia related to a voluntary retirement program. Also during fiscal 2009, we
recorded an impairment charge of approximately $5 million in Novelis Korea Limited (Novelis
Korea), formerly Alcan Taihan Aluminum Limited, due to the obsolescence of certain production
related fixed assets.
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South America
Our operations in South America manufacture various aluminum rolled products, including can
stock, automotive and industrial sheet and light gauge for the beverage and food can, construction
and industrial, foil and other packaging and transportation applications. Can shipments represented
over 80% of our flat rolled shipments in South America in fiscal 2010. As of March 31, 2010, our
South American operations included two rolling plants in Brazil along with two smelters, bauxite
mines and power generation facilities. We ceased the production of commercial grade alumina at our
Ouro Preto facility effective May 2009 as the decline in alumina prices made alumina production
economically unfeasible at this facility. For the foreseeable future, the plant will purchase
alumina through third parties.
Flat rolled and total shipments were flat in fiscal 2010 as compared to fiscal 2009, while
net sales decreased 6% as compared to the prior year due to lower average LME prices, partially
offset by increases in pricing.
Segment income for South America decreased $35 million in fiscal 2010 as compared to the prior
year period. This decrease in segment income is due to a $59 million decrease in the smelter
benefit compared to the prior year period and a $7 million reduction in the benefit associated with
used beverage cans, included in Other changes in the table above. These reductions in segment
income were partially offset by improvements in conversion premiums on new contracts and reductions
in conversion costs.
Reconciliation of segment results to Net income
Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on
changes in the fair value of derivatives are not utilized by our chief operating decision maker in
evaluating segment performance. The table below reconciles income from reportable segments to Net
income attributable to our common shareholder for the years ended March 31, 2010 and 2009 (in
millions).
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
North America |
$ | 292 | $ | 60 | ||||
Europe |
212 | 214 | ||||||
Asia |
154 | 79 | ||||||
South America |
97 | 132 | ||||||
Total Segment income |
755 | 485 | ||||||
Depreciation and amortization |
(384 | ) | (439 | ) | ||||
Interest expense and amortization of debt issuance costs |
(175 | ) | (182 | ) | ||||
Interest income |
11 | 14 | ||||||
Unrealized gains (losses) on change in fair value of derivative instruments, net |
578 | (519 | ) | |||||
Impairment of goodwill |
| (1,340 | ) | |||||
Gain on extinguishment of debt |
| 122 | ||||||
Restructuring charges, net |
(14 | ) | (95 | ) | ||||
Adjustment to eliminate proportional consolidation |
(52 | ) | (225 | ) | ||||
Other costs, net |
8 | 11 | ||||||
Income (loss) before income taxes |
727 | (2,168 | ) | |||||
Income tax provision (benefit) |
262 | (246 | ) | |||||
Net income (loss) |
465 | (1,922 | ) | |||||
Net income (loss) attributable to noncontrolling interests |
60 | (12 | ) | |||||
Net income (loss) attributable to our common shareholder |
$ | 405 | $ | (1,910 | ) | |||
Corporate and other includes functions 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 been allocated to the regions. Corporate and
other costs increased from $57 million to $90 million primarily due to higher incentive
compensation in fiscal 2010 as compared to the prior period when business conditions declined.
Depreciation and amortization decreased $55 million from the prior year period primarily due
to certain fixed assets that became fully depreciated during the first quarter of fiscal 2010.
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Interest expense and amortization of debt issuance costs decreased primarily due to lower
average interest rates on our variable rate debt. Taking into account the effect of interest rate
swaps, approximately 26% of our debt was variable rate as of March 31, 2010.
Unrealized gains on the change in fair value of derivative instruments represent the mark to
market accounting for changes in the fair value of our derivatives that do not receive hedge
accounting treatment. In fiscal 2010, the $578 million of unrealized gains consisted of (i) $504
million reversal of previously recognized losses upon settlement of derivatives and (ii) $74
million of unrealized gains relating to mark to market adjustments on metal and currency
derivatives. We recorded $519 million of unrealized losses in fiscal 2009.
We recorded a $1.3 billion impairment charge related to goodwill in fiscal 2009. This charge,
along with a $160 million impairment charge related to our investment in the Aluminum Norf GmbH
(Norf) joint venture, reflected the global economic environment at the time and the related market
increase in the cost of capital.
The gain on extinguishment of debt related to the purchase of our 7.25% senior notes with a
principal value of $275 million with the proceeds of an additional term loan with a face value of
$220 million and an estimated fair value of $165 million. See Liquidity and Capital Resources
below for additional discussion about the accounting for this purchase.
Restructuring charges in fiscal 2010 primarily relate to previously announced restructuring
actions initiated in fiscal 2009 related to voluntary and involuntary separation programs for
salaried employees in North America, Europe and Corporate aimed at reducing staff levels. Fiscal
2010 also includes $4 million related to the relocation of our North American headquarters to
Atlanta, Georgia. Restructuring charges for fiscal 2009 includes the costs associated with the
closure of our plant in Rogerstone, United Kingdom and the related employee and environmental
costs. See also Segment Review discussion above as well as Note 2 Restructuring Programs to
our accompanying audited consolidated financial statements.
Adjustment to eliminate proportional consolidation was $52 million for fiscal 2010 as compared
to $225 million in fiscal 2009. This adjustment typically relates to depreciation and amortization
and income taxes at our Norf joint venture. Income taxes related to our equity method investments
are reflected in the carrying value of the investment and not in our consolidated income tax
provision. The adjustment in fiscal 2010 also includes a non-recurring after-tax benefit of $10
million from the refinement of our methodology for recording depreciation and amortization on the
step up in our basis in the underlying assets of an investee. The prior year includes a $160
million pre-tax impairment charge related to our investment in Norf.
We experienced significant fluctuations in income tax expense and the corresponding effective
tax rate in fiscal 2010. The primary factors contributing to the effective tax rate differing from
the statutory Canadian rate include:
| Our functional currency in Canada and Brazil is the U.S. dollar and the company holds significant U.S. dollar denominated debt in these locations. As the value of the local currencies strengthens and weakens against the U.S. dollar, unrealized gains or losses are created in those locations for tax purposes, while the underlying gains or losses are not recorded in our income statement. | ||
| During fiscal 2009, Canadian legislation was enacted allowing us to elect to determine our Canadian taxable income in U.S. dollars. Our election was effective April 1, 2008, and such U.S. dollar taxable gains and losses no longer exist in Canada as of that date. | ||
| We have significant net deferred tax liabilities in Brazil that are remeasured to account for currency fluctuations as the taxes are payable in local currency. | ||
| Our income is taxed at various statutory tax rates in varying jurisdictions. Applying the corresponding amounts of income and loss to the various tax rates results in differences when compared to our Canadian statutory tax rate. | ||
| We record increases and decreases to valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses. |
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For fiscal 2010, we recorded a $262 million income tax provision on our pre-tax income of $742
million, before our equity in net (income) loss of non-consolidated affiliates, which represented
an effective tax rate of 35%. Our effective tax rate differs from the expense at the Canadian
statutory rate primarily due to the following factors: (1) $19 million expense for pre-tax foreign
currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect, (2) a $38 million expense for exchange remeasurement of
deferred income taxes, (3) a $7 million expense for the effects of enacted tax rate changes on
cumulative taxable temporary differences, (4) a $9 million benefit from differences between the
Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions
and (5) a $10 million benefit related to a decrease in uncertain tax positions.
For fiscal 2009, we recorded a $246 million income tax benefit on our pre-tax loss of $2.0
billion, before our equity in net (income) loss of non-consolidated affiliates, which represented
an effective tax rate of 12%. Our effective tax rate differs from the benefit at the Canadian
statutory rate primarily due to the following factors: (1) $415 million related to a non-deductible
goodwill impairment charge, (2) a $48 million benefit for exchange remeasurement of deferred income
taxes, (3) a $61 million increase in valuation allowances primarily related to tax losses in
certain jurisdictions where we believe it is more likely than not that we will not be able to
utilize those losses, (4) a $33 million benefit from differences between the Canadian statutory and
foreign effective tax rates applied to entities in different jurisdictions and (5) a $2 million
expense related to an increase in uncertain tax positions.
During fiscal 2010, the statute of limitations lapsed with respect to unrecognized tax
benefits related to potential withholding taxes and cross-border intercompany pricing of services.
As a result, we recognized a reduction in unrecognized tax benefits of $28 million, including a
decrease in accrued interest of $5 million, recorded as a reduction to the income tax provisions in
the consolidated statement of operations and comprehensive income (loss).
Liquidity and Capital Resources
See Financing Activities below and Note 10 Debt of our financial statements for a
discussion of certain refinancing transactions during the period. Our new debt facilities provide
us greater strategic flexibility to achieve our long-term goals and contain certain customary
restrictive covenants. The first measurement period for our financial covenants was the four
quarters ended March 31, 2011. We believe we have adequate liquidity to meet our operational and
capital requirements for the foreseeable future. Our primary sources of liquidity are cash and cash
equivalents, borrowing availability under our revolving credit facility and cash generated by
operating activities.
Available Liquidity
As of March 31, 2011, our available liquidity increased $35 million from March 31, 2010 to
$1,061 million. This reflects our continued efforts to preserve liquidity through cost and capital
spending controls and effective management of working capital, which we believe are sustainable. We
expect continued strong liquidity throughout fiscal 2012 despite significant expected capital
expenditures. Our estimated liquidity as of March 31, 2011 and 2010 is as follows (in millions):
March 31, | ||||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 311 | $ | 437 | ||||
Overdrafts |
(17 | ) | (14 | ) | ||||
Availability under the ABL facility |
767 | 603 | ||||||
Total estimated liquidity |
$ | 1,061 | $ | 1,026 | ||||
The cash and cash equivalents balance above includes cash held in foreign countries in
which we operate.
Free cash flow
Free cash flow (which is a non-GAAP measure) consists of: (a) net cash provided by (used in)
operating activities, (b) plus net cash provided by (used in) investing activities and (c) less net
proceeds from sales of assets. Management believes that Free cash flow is
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relevant to investors as
it provides a measure of the cash generated internally that is available for debt service and other
value creation
opportunities. However, Free cash flow does not necessarily represent cash available for
discretionary activities, as certain debt service obligations must be funded out of Free cash flow.
Our method of calculating Free cash flow may not be consistent with that of other companies.
The following table shows the reconciliation from Net cash provided by (used in) operating
activities to Free cash flow, the ending balances of cash and cash equivalents and the change
between periods (in millions).
Change | ||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||
Year Ended March 31, | versus | versus | ||||||||||||||||||
2011 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Net cash provided by (used in)
operating activities |
$ | 454 | $ | 844 | $ | (220 | ) | $ | (390 | ) | $ | 1,064 | ||||||||
Net cash provided by (used in)
investing activities |
(113 | ) | (484 | ) | (127 | ) | 371 | (357 | ) | |||||||||||
Less: Proceeds from sales of assets |
(31 | ) | (5 | ) | (5 | ) | (26 | ) | | |||||||||||
Free cash flow |
$ | 310 | $ | 355 | $ | (352 | ) | $ | (45 | ) | $ | 707 | ||||||||
Ending cash and cash equivalents |
$ | 311 | $ | 437 | $ | 248 | $ | (126 | ) | $ | 189 | |||||||||
Free cash flow decreased $45 million in fiscal 2011 as compared to fiscal 2010, driven by
a $133 million increase in capital expenditures. The changes of each component of Free cash flow
are described in greater detail below.
In fiscal 2009, operations consumed cash at a higher rate due to slowing business conditions
and higher working capital levels associated with rapidly changing aluminum prices and the timing
of payments made to suppliers, to brokers to settle derivative positions and the timing of cash
receipts from our customers, which explains an increase in Free cash flow of over $700 million in
fiscal 2010 as compared to fiscal 2009.
Operating Activities
Overall operating results were strong for the year ended March 31, 2011, reflecting the
increase in volumes and our lower fixed cost structure as a result of our prior cost cutting
measures. In conjunction with our recently completed refinancing activities, we paid $17 million of
withholding taxes during fiscal 2011. Additionally, cash flow from operations for the years ended
March 31, 2011 and 2010 benefited from cash receipts of $19 million and $75 million, respectively,
related to customer-directed derivatives, as compared to $81 million of cash outflows for the year
ended March 31, 2009. However, approximately 26% higher working capital balances as a result of
higher LME prices during the year ended March 31, 2011 as compared to the year ended March 31, 2010
had accounted for approximately $251 million lower cash flows in fiscal 2011 as compared to fiscal
2010.
Net cash provided by operating activities in fiscal 2010 significantly improved as compared to
net cash used in the fiscal 2009 due to higher net income and improved working capital management,
including favorable impacts from customer forfaiting and extended payment terms from suppliers.
We have historically maintained forfaiting and factoring arrangements in Asia and South
America that provided additional liquidity in those segments. The economic conditions in 2009
negatively impacted our ability to forfait our customer receivables as well as our suppliers
ability to provide extended payment terms, which resulted in reductions in operating cash flow at
the end of fiscal 2009 in these regions.
In our discussion of metal price ceilings, we disclosed that certain customer contracts
contained a fixed metal price ceiling beyond which the cost of aluminum could not be passed through
to the customer. During the years ended March 31, 2010, and 2009, we were unable to pass through
approximately $10 million, and $176 million, respectively, of metal purchase costs associated with
sales under these contracts. Net cash provided by operating activities was negatively impacted by
the same amount, adjusted for timing difference between customer receipts and vendor payments and
offset partially by reduced income taxes for the duration of these contracts. The last metal price
ceiling contract expired on December 31, 2009.
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Investing Activities
The following table presents information regarding our Net cash used in investing activities
(in millions).
Change | ||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||
Year Ended March 31, | versus | versus | ||||||||||||||||||
2011 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Capital expenditures |
$ | (234 | ) | $ | (101 | ) | $ | (145 | ) | $ | (133 | ) | $ | 44 | ||||||
Net proceeds (outflow) from settlement of derivative instruments |
91 | (395 | ) | (24 | ) | 486 | (371 | ) | ||||||||||||
Proceeds from sales of assets |
31 | 5 | 5 | 26 | | |||||||||||||||
Changes to investment in and advances to non-consolidated affiliates |
| 3 | 20 | (3 | ) | (17 | ) | |||||||||||||
Proceeds (outflow) from related parties loans receivable, net |
(1 | ) | 4 | 17 | (5 | ) | (13 | ) | ||||||||||||
Net cash used in investing activities |
$ | (113 | ) | $ | (484 | ) | $ | (127 | ) | $ | 371 | $ | (357 | ) | ||||||
As our liquidity position has improved, we have increased our capital expenditure plan to
include certain strategic investments. We expect that our total annual capital expenditures for
fiscal 2012 to be between $550 and $600 million as a result of our previously announced expansions
in Brazil, South Korea and North America. The majority of our capital expenditures for fiscal
2011, 2010 and 2009 have been for projects devoted to product quality, technology, productivity
enhancement and increased capacity. In response to the economic downturn, we reduced our capital
spending in the second half of fiscal 2009, with a focus on preserving maintenance and safety and
maintained that level of spending throughout fiscal 2010.
Proceeds from asset sales in fiscal 2011 primarily relate to the sale of certain of our assets
in Europe to Hindalco, the sale of certain assets in South America and the sale of our printed
confectionery foil packaging business at Bridgnorth, UK, to Discovery Foils. The majority of
proceeds from asset sales in fiscal 2010 and 2009 relate to asset sales in Europe and the sale of
land in Kingston, Ontario, respectively.
The settlement of metal and other derivative instruments resulted in a net cash inflow of $91
million in the year ended March 31, 2011 as compared to cash outflows of $395 million in fiscal
2010 and $24 million in fiscal 2009. Based on forward curves for metal, foreign currencies,
interest rates and energy as of March 31, 2011, we forecast approximately $91 million of cash
inflows related to the settlement of derivative instruments in fiscal 2012.
Proceeds (outflow) from related party loans receivable, net during fiscal 2011, 2010 and 2009
are primarily comprised of borrowings and payments on outstanding loans from our non-consolidated
affiliate, Norf.
Financing Activities
The following table presents information regarding our Net cash provided by (used in)
financing activities (in millions).
Change | ||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||
Year Ended March 31, | versus | versus | ||||||||||||||||||
2011 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Proceeds from issuance of debt, third parties |
$ | 3,985 | $ | 177 | $ | 263 | $ | 3,808 | $ | (86 | ) | |||||||||
Proceeds from issuance of debt, related parties |
| 4 | 91 | (4 | ) | (87 | ) | |||||||||||||
Principal repayments, third parties |
(2,489 | ) | (67 | ) | (235 | ) | (2,422 | ) | 168 | |||||||||||
Principal repayments, related parties |
| (95 | ) | | 95 | (95 | ) | |||||||||||||
Short-term borrowings, net |
(56 | ) | (193 | ) | 176 | 137 | (369 | ) | ||||||||||||
Return of capital to our common shareholder |
(1,700 | ) | | | (1,700 | ) | | |||||||||||||
Dividends, noncontrolling interest |
(18 | ) | (13 | ) | (6 | ) | (5 | ) | (7 | ) | ||||||||||
Debt issuance costs |
(193 | ) | (1 | ) | (3 | ) | (192 | ) | 2 | |||||||||||
Net cash provided by (used in) financing activities |
$ | (471 | ) | $ | (188 | ) | $ | 286 | $ | (283 | ) | $ | (474 | ) | ||||||
On December 17, 2010, we completed a series of refinancing transactions. The refinancing
transactions consisted of the sale of $1.1 billion in aggregate principal amount of 8.375% Senior
Notes Due 2017 and $1.4 billion in aggregate principal amount of 8.75% Senior Notes Due 2020
(collectively, the Notes) and the issuance of new $1.5 billion secured term loan credit facility
(the 2010 Term Loan Facility). We also replaced our existing $800 million asset based loan (ABL)
facility with a new $800 million ABL facility.
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The proceeds from the refinancing transactions were used to refinance our prior secured term
loan credit facility, to fund our tender offers and related consent solicitations for our old 7.25%
Senior Notes due 2015 and our old 11.5% Senior Notes due 2015 and to pay premiums, fees and
expenses associated with the refinancing. In addition, a portion of the proceeds were used to fund
a distribution of $1.7 billion as a return of capital to Hindalco.
On March 10, 2011, we amended the 2010 Term Loan Facility originally entered into on December
17, 2010, and entered into an amended agreement (the 2011 Term Loan Facility) due March 2017. The
amended term loan resulted in a reduction of interest rate from a spread of 3.75% and LIBOR floor
of 150 basis points to a spread of 3.00% and LIBOR floor of 100 basis points.
See Note 10 Debt for a further discussion of the refinancing transactions and the tender
offers and related consent solicitations.
As of March 31, 2011, our short-term borrowings were $17 million consisting of bank overdrafts
and borrowings under the new ABL Facility. Also, as of March 31, 2011, $33 million of the ABL
Facility was utilized for letters of credit and we had $767 million in remaining availability under
this revolving credit facility. The weighted average interest rate on our total short-term
borrowings was 2.43% and 1.71% as of March 31, 2011 and 2010, respectively.
We repaid $100 million related to a bank loan in Korea when it came due on October 25, 2010.
Dividends paid to our noncontrolling interests, primarily in our Asia operating segment, were
$18 million, $13 million, and $6 million for fiscal 2011, 2010 and 2009, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
In accordance with SEC rules, the following qualify as off-balance sheet arrangements:
| any obligation under certain derivative instruments; | ||
| any obligation under certain guarantees or contracts; | ||
| a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets and | ||
| any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant. |
The following discussion addresses the applicable off-balance sheet items for our Company.
Derivative Instruments
See Note 14 Financial Instruments and Commodity Contracts to our accompanying audited
consolidated financial statements for a full description of derivative instruments.
Guarantees of Indebtedness
We have issued guarantees on behalf of certain of our 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 holds any assets of any third parties as collateral to offset the potential settlement
of these guarantees. Since we consolidate wholly-owned and majority-owned subsidiaries in our
consolidated financial statements, all liabilities associated with trade payables and short-term
debt facilities for these entities are already included in our consolidated balance sheets. The
following table discloses information about our obligations under guarantees of indebtedness of
others as of March 31, 2011 (in millions).
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Maximum | Liability | |||||||
Potential Future | Carrying | |||||||
Payment | Value | |||||||
Wholly-owned Subsidiaries |
$ | 134 | $ | 63 |
We have no retained or contingent interest in assets transferred to an unconsolidated
entity or similar entity or similar arrangement that serves as credit, liquidity or market risk
support to that entity for such assets.
Other Arrangements
Forfaiting of Trade Receivables
Novelis Korea Limited forfaits trade receivables in the ordinary course of business. These
trade receivables are typically outstanding for 60 to 120 days. Forfaiting is a non-recourse method
to manage credit and interest rate risks. Under this method, customers contract to pay a financial
institution. The institution assumes the risk of non-payment and remits the invoice value (net of a
fee) to us after presentation of a proof of delivery of goods to the customer. We do not retain a
financial or legal interest in these receivables, and they are not included in our consolidated
balance sheets.
Factoring of Trade Receivables
Our Brazilian operations factor, without recourse, certain trade receivables that are
unencumbered by pledge restrictions. Under this method, customers are directed to make payments on
invoices to a financial institution, but are not contractually required to do so. The financial
institution pays us any invoices it has approved for payment (net of a fee). We do not retain
financial or legal interest in these receivables, and they are not included in our consolidated
balance sheets.
Summary Disclosures of Forfaited and Factored Financial Amounts
The following tables summarize our forfaiting and factoring amounts (in millions).
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Receivables forfaited |
$ | 396 | $ | 423 | $ | 570 | ||||||
Receivables factored |
$ | 77 | $ | 149 | $ | 70 | ||||||
Forfaiting expense |
$ | 1 | $ | 2 | $ | 5 | ||||||
Factoring expense |
$ | 1 | $ | 1 | $ | 1 |
March 31, | ||||||||
2011 | 2010 | |||||||
Forfaited receivables outstanding |
$ | 52 | $ | 83 | ||||
Factored receivables outstanding |
$ | 8 | $ | 34 |
Other
As part of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities (SPEs), which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of March 31, 2011 and 2010, we were not involved in any
unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
We have future obligations under various contracts relating to debt and interest payments,
capital and operating leases, long-term purchase obligations, and postretirement benefit plans. The
following table presents our estimated future payments under contractual obligations that exist as
of March 31, 2011, based on undiscounted amounts (in millions). The future cash flow commitments
that we
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may have related to derivative contracts are not estimable and are therefore not included.
Furthermore, due to the difficulty in determining the timing of settlements, the table excludes $45
million of uncertain tax positions. See Note 17 Income Taxes to our accompanying audited
consolidated financial statements.
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Debt(A) |
$ | 4,078 | $ | 16 | $ | 32 | $ | 106 | $ | 3,924 | ||||||||||
Interest on long-term debt(B) |
2,354 | 285 | 856 | 757 | 456 | |||||||||||||||
Capital leases(C) |
63 | 8 | 14 | 14 | 27 | |||||||||||||||
Operating leases(D) |
138 | 24 | 38 | 32 | 44 | |||||||||||||||
Purchase obligations(E) |
8,377 | 3,759 | 2,934 | 1,186 | 498 | |||||||||||||||
Unfunded pension plan benefits(F) |
161 | 13 | 28 | 31 | 89 | |||||||||||||||
Other post-employment benefits(F) |
125 | 8 | 18 | 23 | 76 | |||||||||||||||
Funded pension plans(F) |
49 | 49 | | | | |||||||||||||||
Total |
$ | 15,345 | $ | 4,162 | $ | 3,920 | $ | 2,149 | $ | 5,114 | ||||||||||
(A) | Includes only principal payments on our Senior Notes, term loans, revolving credit facilities and notes payable to banks and others. These amounts exclude payments under capital lease obligations. | |
(B) | Interest on our fixed rate debt is estimated using the stated interest rate. Interest on our variable-rate debt is estimated using the rate in effect as of March 31, 2011 and includes the effect of current interest rate swap agreements. Actual future interest payments may differ from these amounts based on changes in floating interest rates or other factors or events. These amounts include an estimate for unused commitment fees. Excluded from these amounts are interest related to capital lease obligations, the amortization of debt issuance and other costs related to indebtedness. | |
(C) | Includes both principal and interest components of future minimum capital lease payments. Excluded from these amounts are insurance, taxes and maintenance associated with the property. | |
(D) | Includes the minimum lease payments for non-cancelable leases for property and equipment used in our operations. We do not have any operating leases with contingent rents. Excluded from these amounts are insurance, taxes and maintenance associated with the properties and equipment. | |
(E) | Includes agreements to purchase goods (including raw materials and capital expenditures) and services that are enforceable and legally binding on us, and that specify all significant terms. Some of our raw material purchase contracts have minimum annual volume requirements. In these cases, we estimate our future purchase obligations using annual minimum volumes and costs per unit that are in effect as of March 31, 2011. Due to volatility in the cost of our raw materials, actual amounts paid in the future may differ from these amounts. Excluded from these amounts are the impact of any derivative instruments and any early contract termination fees, such as those typically present in energy contracts. | |
(F) | Obligations for postretirement benefit plans are estimated based on actuarial estimates using benefit assumptions for, among other factors, discount rates, rates of compensation increases and healthcare cost trends. Payments for unfunded pension plan benefits and other post-employment benefits are estimated through 2020. For funded pension plans, estimating the requirements beyond fiscal 2012 is not practical, as it depends on the performance of the plans investments, among other factors. |
RETURN OF CAPITAL
On December 17, 2010, we paid $1.7 billion to our shareholder as a return of capital.
Dividends are at the discretion of the board of directors and will depend on, among other
things, our financial resources, cash flows generated by our business, our cash requirements,
restrictions under the instruments governing our indebtedness, being in compliance with the
appropriate indentures and covenants under the instruments that govern our indebtedness that would
allow us to legally pay dividends and other relevant factors.
ENVIRONMENT, HEALTH AND SAFETY
We strive to be a leader in environment, health and safety (EHS). Our EHS system is aligned
with ISO 14001, an international environmental management standard, and OHSAS 18001, an
international occupational health and safety management standard. All of our facilities are
expected to implement the necessary management systems to support ISO 14001 and OHSAS 18001
certifications.
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As of March 31, 2011, all of our manufacturing facilities worldwide were ISO 14001 certified,
31 facilities were OHSAS 18001 certified and 29 have dedicated quality improvement management
systems.
Our capital expenditures for environmental protection and the betterment of working conditions
in our facilities were $1 million in fiscal 2011. We expect these capital expenditures will be
approximately $5 million and $2 million in fiscal 2012 and 2013, respectively. In addition,
expenses for environmental protection (including estimated and probable environmental remediation
costs as well as general environmental protection costs at our facilities) were $18 million in
fiscal 2011, and are expected to be $34 million and $27 million in fiscal 2012 and 2013,
respectively. Generally, expenses for environmental protection are recorded in Cost of goods sold.
However, significant remediation costs that are not associated with on-going operations are
recorded in Other (income) expenses, net.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and liquidity and capital resources
are based on our consolidated financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP). In connection with the
preparation of our consolidated financial statements, we are required to make assumptions and
estimates about future events, and apply judgments that affect the reported amounts of assets,
liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors we believe to be relevant at
the time we prepare our consolidated financial statements. On a regular basis, we review the
accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial
statements are presented fairly and in accordance with GAAP. However, because future events and
their effects cannot be determined with certainty, actual results could differ from our assumptions
and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 Business and Summary of
Significant Accounting Policies to our accompanying consolidated financial statements. We believe
the following accounting policies are the most critical to aid in fully understanding and
evaluating our reported financial results, as they require management to make difficult, subjective
or complex judgments, and to make estimates about the effect of matters that are inherently
uncertain. Although management believes that the estimates and judgments discussed herein are
reasonable, actual results could differ, which could result in gains or losses that could be
material. We have reviewed these critical accounting policies and related disclosures with the
Audit Committee of our board of directors.
Derivative Financial Instruments
We hold derivatives for risk management purposes and not for trading. We use derivatives to
mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign
exchange rates, interest rate, and energy prices. The fair values of all derivative instruments
are recognized as assets or liabilities at the balance sheet date and are reported gross.
We may be exposed to losses in the future if the counterparties to our derivative contracts
fail to perform. We are satisfied that the risk of such non-performance is remote due to our
monitoring of credit exposures. Additionally, we enter into master netting agreements with
contractual provisions that allow for netting of counterparty positions in case of default, and we
do not face credit contingent provisions that would result in the posting of collateral.
For derivatives designated as fair value hedges, we assess hedge effectiveness by formally
evaluating the high correlation of changes in the fair value of the hedged item and the derivative
hedging instrument. The changes in the fair values of the underlying hedged items are reported in
other current and noncurrent assets and liabilities in the consolidated balance sheet. Changes in
the fair values of these derivatives and underlying hedged items generally offset and are recorded
each period in revenue, consistent with the underlying hedged item.
For derivatives designated as cash flow hedges or net investment hedges, we assess hedge
effectiveness by formally evaluating the high correlation of the expected future cash flows of the
hedged item and the derivative hedging instrument. The effective portion of gain or loss on the
derivative is included in Other comprehensive income (loss) 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. 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
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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.
For all derivatives designated in hedging relationships, gains or losses representing hedge
ineffectiveness or amounts excluded from effectiveness testing are recognized in (Gain) loss on
change in fair value of derivative instruments, net in our current period earnings.
If no hedging relationship is designated, the gains or losses are recognized in (Gain) loss on
change in fair value of derivative instruments, net in our current period earnings. We classify
cash settlement amounts associated with these derivatives as part of investing activities in the
consolidated statements of cash flows.
The majority of our derivative contracts are valued using industry-standard models that use
observable market inputs as their basis, such as time value, forward interest rates, volatility
factors, and current (spot) and forward market prices for foreign exchange rates. See Note 15
Fair Value of Assets and Liabilities and Note 11 Fair Value Measurements to our accompanying
consolidated audited financial statements for discussion on fair value of derivative instruments.
Impairment of Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable
net assets of acquired companies. As a result of the Arrangement, we estimated fair value of the
identifiable net assets of acquired companies using a number of factors, including the application
of multiples and discounted cash flow estimates. We have allocated goodwill to our operating
segments in North America, Europe and South America, which are also reporting units for purposes of
performing our goodwill impairment testing as follows (in millions):
March 31, 2011 | ||||
North America |
$ | 288 | ||
Europe |
181 | |||
South America |
142 | |||
$ | 611 | |||
Goodwill is not amortized; instead, it is tested for impairment annually or more
frequently if indicators of impairment exist. On an ongoing basis, absent any impairment
indicators, we perform our goodwill impairment testing as of the last day of February of each year.
We test goodwill for impairment using a fair value approach at the reporting unit level. We
use our operating segments as our reporting units and perform our goodwill impairment test in two
steps. Step one compares the fair value of each reporting unit (operating segment) to its carrying
amount. If step one indicates that the carrying value of the reporting unit exceeds the fair value,
the second step is performed to measure the amount of impairment, if any.
For purposes of our step one analysis, our estimate of fair value for each reporting unit is
based on a combination of (1) quoted market prices/relationships (the market approach), (2)
discounted cash flows (the income approach) and (3) a stock price build-up approach (the build-up
approach). The estimated fair value for each reporting unit is within the range of fair values
yielded under each approach. The approach to determining fair value for all reporting units is
consistent given the similarity of our operations in each region.
Under the market approach, the fair value of each reporting unit is determined based upon
comparisons to public companies engaged in similar businesses. Under the income approach, the fair
value of each reporting unit is based on the present value of estimated future cash flows. The
income approach is dependent on a number of significant management assumptions including markets
and market share, sales volumes and prices, costs to produce, capital spending, working capital
changes and the discount rate. We estimate future cash flows for each of our reporting units based
on our projections for the respective reporting unit. These projected cash flows are discounted to
the present value using a weighted average cost of capital (discount rate). The discount rate is
commensurate with the risk inherent in the projected cash flows and reflects the rate of return
required by an investor in the current economic conditions. For our annual impairment test
conducted in the fourth quarter of fiscal 2011, we used a discount rate of 10.25%
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for all reporting units, a decrease of 0.5% from the rate used in our prior year impairment
test. An increase or decrease of 0.5% in the discount rate impacted the estimated fair value of
each reporting unit by $150-265 million, depending on the relative size of the reporting unit. The
projections are based on both past performance and the expectations of future performance and
assumptions used in our current operating plan. We use specific revenue growth assumptions for each
reporting unit, based on history and economic conditions, ranging from 2.5% to 3.5% growth through
2016.
Under the build-up approach, which is a variation of the market approach, we estimate the fair
value of each reporting unit based on the estimated contribution of each of the reporting units to
Hindalcos total business enterprise value.
We performed our annual testing for goodwill impairment as of the last day of February 2011
and no goodwill impairment was identified. The fair values of the reporting units exceeded their
respective carrying amounts as of February 28, 2011 by 157% for North America, by 78% for Europe
and by 160% for South America.
Equity Investments
We invest in a number of public and privately-held companies, primarily through joint ventures
and consortiums. If they are not consolidated, these investments are accounted for using the equity
method. As a result of the Arrangement, investments in and advances to affiliates as of May 16,
2007 were adjusted to reflect fair value.
We review equity investments for impairment whenever certain indicators are present suggesting
that the carrying value of an investment is not recoverable. This analysis requires a significant
amount of judgment to identify events or circumstances indicating that an equity investment may be
impaired. Once an impairment indicator is identified, we must determine if an impairment exists,
and if so, whether the impairment is other than temporary, in which case the equity investment
would be written down to its estimated fair value.
Impairment of Intangible Assets
Our other intangible assets of $707 million as of March 31, 2011 consist of tradenames,
technology, customer relationships and favorable energy and supply contracts and are amortized over
3 to 20 years. As of March 31, 2011, we do not have any intangible assets with indefinite useful
lives. We consider the potential impairment of these other intangibles assets in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (Codification)
No. 360, Property, Plant and Equipment. For tradenames and technology, we utilize a
relief-from-royalty method. All other intangible assets are assessed using the income approach. As
a result of these assessments, no impairment was indicated.
Impairment of Long Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment when events or
changes in circumstances indicate that the carrying value of the assets contained in our financial
statements may not be recoverable. When evaluating long-lived assets for potential impairment, we
first compare the carrying value of the asset to the assets estimated future net cash flows
(undiscounted and without interest charges). If the estimated future net cash flows are less than
the carrying value of the asset, we calculate and recognize an impairment loss. If we recognize an
impairment loss, the carrying amount of the asset is adjusted to fair value based on the discounted
estimated future net cash flows and will be its new cost basis. For a depreciable long-lived asset,
the new cost basis will be depreciated over the remaining useful life of that asset.
Our impairment loss calculations require management to apply judgments in estimating future
cash flows to determine asset fair values, including forecasting useful lives of the assets and
selecting the discount rate that represents the risk inherent in future cash flows. For the year
ended March 31, 2011, we recorded impairment charges of $5 million classified as Restructuring
charges, net related to the write down of land and buildings at our Bridgnorth facility, offset by
a $10 million gain on asset sales at our Rogerstone facility. We recorded impairment charges on
long-lived assets of $1 million and $18 million (including $17 million classified as Restructuring
charges, net), during the years ended March 31, 2010 and 2009, respectively.
If actual results are not consistent with our assumptions and judgments used in estimating
future cash flows and asset fair values, we may be exposed to additional impairment losses that
could be material to our results of operations.
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Pension and Other Postretirement Plans
We account for our pensions and other postretirement benefits in accordance with ASC 715,
Compensation Retirement Benefits (ASC 715). Liabilities and expense for pension plans and other
postretirement benefits are determined using actuarial methodologies and incorporate significant
assumptions, including the rate used to discount the future estimated liability, the long-term rate
of return on plan assets, and several assumptions related to the employee workforce (salary
increases, medical costs, retirement age, and mortality).
The actuarial models use an attribution approach that generally spreads the financial impact
of changes to the plan and actuarial assumptions over the average remaining service lives of the
employees in the plan. Changes in liability due to changes in actuarial assumptions such as
discount rate, rate of compensation increases and mortality, as well as annual deviations between
what was assumed and what was experienced by the plan are treated as gains or losses. Gains and
losses are amortized over the groups average future service life of the employees. The average
future service life for pension plans and other postretirement benefit plans is 11.4 and 12.4 years
respectively. The principle underlying the required attribution approach is that employees render
service over their average remaining service lives on a relatively smooth basis and, therefore, the
accounting for benefits earned under the pension or non-pension postretirement benefits plans
should follow the same relatively smooth pattern.
Our pension obligations relate to funded defined benefit pension plans we have established in
the United States, Canada, Switzerland and the United Kingdom, unfunded defined benefit pension
plans primarily in Germany, unfunded lump sum indemnities payable upon retirement to employees in
France, Malaysia, and Italy and partially funded lump sum indemnities in South Korea. Pension
benefits are generally based on the employees service and either on a flat rate for years of
service or on the highest average eligible compensation before retirement. Our other postretirement
benefit obligations include unfunded healthcare and life insurance benefits provided to retired
employees in Canada, the U.S. and Brazil.
All net actuarial gains and losses are generally amortized over the expected average remaining
service life of the employees. The costs and obligations of pension and other postretirement
benefits are calculated based on assumptions including the long-term rate of return on pension
assets, discount rates for pension and other postretirement benefit obligations, expected service
period, salary increases, retirement ages of employees and healthcare cost trend rates. These
assumptions bear the risk of change as they require significant judgment and they have inherent
uncertainties that management may not be able to control.
The most significant assumption used to calculate pension and other postretirement obligations
is the discount rates used to determine the present value of benefits. It is based on spot rate
yield curves and individual bond matching models for pension and other postretirement plans in
Canada and the United States, and on published long-term high quality corporate bond indices in
other countries, at the end of each fiscal year. Adjustments were made to the index rates based on
the duration of the plans obligations for each country. The weighted average discount rate used to
determine the pension benefit obligation was 5.3%, 5.5% and 6.0% as of March 31, 2011, 2010 and
2009, respectively. The weighted average discount rate used to determine the other postretirement
benefit obligation was 5.2% as of March 31, 2011, compared to 5.6% and 6.2% for March 31, 2010 and
2009, respectively. The weighted average discount rate used to determine the net periodic benefit
cost is the rate used to determine the benefit obligation at the end of the previous fiscal year.
As of March 31, 2011, an increase in the discount rate of 0.5%, assuming inflation remains
unchanged, would result in a decrease of $109 million in the pension and other postretirement
obligations and in a decrease of $14 million in the net periodic benefit cost. A decrease in the
discount rate of 0.5% as of March 31, 2011, assuming inflation remains unchanged, would result in
an increase of $109 million in the pension and other postretirement obligations and in an increase
of $14 million in the net periodic benefit cost. The calculation of the estimate of the expected
return on assets and additional discussion regarding pension and other postretirement plans is
described in Note 12 Postretirement Benefit Plans to our accompanying consolidated financial
statements. The weighted average expected return on assets was 6.8% for 2011, 6.7% for 2010, and
6.9% for 2009. The expected return on assets is a long-term assumption whose accuracy can only be
measured over a long period based on past experience. A variation in the expected return on assets
by 0.5% as of March 31, 2011 would result in a variation of approximately $5 million in the net
periodic benefit cost.
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Income Taxes
We account for income taxes using the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, deferred tax assets
are also recorded with respect to net operating losses and other tax attribute carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. Valuation allowances are
established when realization of the benefit of deferred tax assets is not deemed to be more likely
than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The ultimate recovery of certain of our deferred tax assets is dependent on the amount and
timing of taxable income that we will ultimately generate in the future and other factors such as
the interpretation of tax laws. This means that significant estimates and judgments are required to
determine the extent that valuation allowances should be provided against deferred tax assets. We
have provided valuation allowances as of March 31, 2011 aggregating $239 million against such
assets based on our current assessment of future operating results, timing and nature of realizing
deferred tax liabilities, tax planning strategies and tax carrybacks.
By their nature, tax laws are often subject to interpretation. Further complicating matters is
that in those cases where a tax position is open to interpretation, differences of opinion can
result in differing conclusions as to the amount of tax benefits to be recognized under Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes. ASC
740 utilizes a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when an
enterprise concludes that a tax position, based solely on its technical merits, is more likely than
not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been
satisfied. Under Step 2, the tax benefit is measured as the largest amount of benefit, determined
on a cumulative probability basis that is more likely than not to be realized upon ultimate
settlement. Consequently, the level of evidence and documentation necessary to support a position
prior to being given recognition and measurement within the financial statements is a matter of
judgment that depends on all available evidence.
As of March 31, 2011 the total amount of unrecognized benefits that, if recognized, would
affect the effective income tax rate in future periods based on anticipated settlement dates is $45
million.
Assessment of Loss Contingencies
We have legal and other contingencies, including environmental liabilities, which could result
in significant losses upon the ultimate resolution of such contingencies. Environmental liabilities
that are not legal asset retirement obligations are accrued on an undiscounted basis when it is
probable that a liability exists for past events.
We have provided for losses in situations where we have concluded that it is probable that a
loss has been or will be incurred and the amount of the loss is reasonably estimable. A significant
amount of judgment is involved in determining whether a loss is probable and reasonably estimable
due to the uncertainty involved in determining the likelihood of future events and estimating the
financial statement impact of such events. If further developments or resolution of a contingent
matter are not consistent with our assumptions and judgments, we may need to recognize a
significant charge in a future period related to an existing contingency.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 Business and Summary of Significant Accounting Policies to our accompanying
audited consolidated financial statements for a full description of recent accounting
pronouncements including the respective expected dates of adoption and expected effects on results
of operations and financial condition.
NON-GAAP FINANCIAL MEASURES
Total Segment Income presents the sum of the results of our four operating segments on a
consolidated basis. We believe that Total Segment Income is an operating performance measure that
measures operating results unaffected by differences in capital structures, capital investment
cycles and ages of related assets among otherwise comparable companies. In reviewing our corporate
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operating results, we also believe it is important to review the aggregate consolidated
performance of all of our segments on the same basis that we review the performance of each of our
regions and to draw comparisons between periods based on the same measure of consolidated
performance.
Management believes that investors understanding of our performance is enhanced by including
this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of
operations. Many investors are interested in understanding the performance of our business by
comparing our results from ongoing operations from one period to the next and would ordinarily add
back items that are not part of normal day-to-day operations of our business. By providing Total
Segment Income, together with reconciliations, we believe we are enhancing investors understanding
of our business and our results of operations, as well as assisting investors in evaluating how
well we are executing strategic initiatives.
However, Total Segment Income is not a measurement of financial performance under GAAP, and
our Total Segment Income may not be comparable to similarly titled measures of other companies.
Total Segment Income has important limitations as an analytical tool, and you should not consider
this measure in isolation or as a substitute for analysis of our results as reported under GAAP.
For example, Total Segment Income:
| does not reflect the companys cash expenditures or requirements for capital expenditures or capital commitments; | ||
| does not reflect changes in, or cash requirements for, the companys working capital needs; | ||
| does not reflect any costs related to the current or future replacement of assets being depreciated and amortized. |
We also use Total Segment Income:
| as a measure of operating performance to assist us in comparing our operating performance on a consistent basis because it removes the impact of items not directly resulting from our core operations; | ||
| for planning purposes, including the preparation of our internal annual operating budgets and financial projections; | ||
| to evaluate the performance and effectiveness of our operational strategies; and | ||
| as a basis to calculate incentive compensation payments for our key employees. |
Total Segment Income is equivalent to our Adjusted EBITDA, which we refer to in our earnings
announcements and other external presentations to analysts and investors.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business operations, including
risks from changes in commodity prices (primarily aluminum, electricity and natural gas), foreign
currency exchange rates and interest rates that could impact our results of operations and
financial condition. We manage our exposure to these and other market risks through regular
operating and financing activities and derivative financial instruments. We use derivative
financial instruments as risk management tools only, and not for speculative purposes. Except where
noted, the derivative contracts are marked-to-market and the related gains and losses are included
in earnings in the current accounting period.
By their nature, all derivative financial instruments involve risk, including the credit risk
of non-performance by counterparties. All derivative contracts are executed with counterparties
that, in our judgment, are creditworthy. Our maximum potential loss may exceed the amount
recognized in the accompanying March 31, 2011 consolidated balance sheet.
The decision of whether and when to execute derivative instruments, along with the duration of
the instrument, can vary from period to period depending on market conditions and the relative
costs of the instruments. The duration is always linked to the timing of the underlying exposure,
with the connection between the two being regularly monitored.
Commodity Price Risks
We have commodity price risk with respect to purchases of certain raw materials including
aluminum, electricity, natural gas and transport fuel.
Aluminum
Most of our business is conducted under a conversion model that allows us to pass through
increases or decreases in the price of aluminum to our customers. Nearly all of our products have a
price structure with two components: (i) a pass through aluminum price based on the LME plus local
market premiums and (ii) a conversion premium based on the conversion cost to produce the rolled
product and the competitive market conditions for that product.
A key component of our conversion model is the use of derivative instruments on projected
aluminum requirements to preserve our conversion margin. We enter into forward metal purchases
simultaneous with the sales contracts that contain fixed metal prices. These forward metal
purchases directly hedge the economic risk of future metal price fluctuation associated with these
contracts. 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 recognition of revenue impacts income (loss) before income taxes and net income
(loss). Gains and losses on metal derivative contracts are not recognized in segment income until
realized.
Metal price lag associated with inventory and non-fixed priced sales exposes us to potential
losses in periods of falling aluminum prices. We sell short-term LME futures contracts to reduce
our exposure to this risk. We expect the gain or loss on the settlement of the derivative to offset
the effect of changes in aluminum prices on future product sales. These hedges generally generate
losses in periods of increasing aluminum prices.
Sensitivities
As of March 31, 2011, we estimate that a 10% decline in LME aluminum prices would decrease the
value of our aluminum contracts by $15 million.
Energy
We use several sources of energy in the manufacture and delivery of our aluminum rolled
products. For the year ended March 31, 2011, natural gas and electricity represented approximately
83% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of
energy usage occurs at our casting centers, at our smelters in South America and during the hot
rolling of aluminum. Our cold rolling facilities require relatively less energy.
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We purchase our natural gas on the open market, which subjects us to market pricing
fluctuations. We seek to stabilize our future exposure to natural gas prices through the use of
forward purchase contracts. Natural gas prices in Europe, Asia and South America have historically
been more stable than in the United States. As of March 31, 2011, we have a nominal amount of
forward purchases outstanding related to natural gas.
A portion of our electricity requirements are purchased pursuant to long-term contracts in the
local regions in which we operate. A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs. In South America, we own and operate hydroelectric
facilities that meet approximately 65% of our total electricity requirements in that segment.
Additionally, we have entered into an electricity swap in North America to fix a portion of the
cost of our electricity requirements.
We purchase a nominal amount of heating oil forward contracts to hedge against fluctuations in
the price of our transport fuel.
Fluctuating energy costs worldwide, due to the changes in supply and international and
geopolitical events, expose us to earnings volatility as such changes in such costs cannot
immediately be recovered under existing contracts and sales agreements, and may only be mitigated
in future periods under future pricing arrangements.
Sensitivities
The following table presents the estimated potential effect on the fair values of these
derivative instruments as of March 31, 2011 given a 10% decline in spot prices for energy contracts
($ in millions).
Change in | Change in | |||||||
Price | Fair Value | |||||||
Electricity |
(10 | )% | $ | (1 | ) | |||
Natural Gas |
(10 | )% | (3 | ) |
Foreign Currency Exchange Risks
Exchange rate movements, particularly the euro, the Brazilian real and the Korean won against
the U.S. dollar, have an impact on our operating results. In Europe, where we have predominantly
local currency selling prices and operating costs, we benefit as the euro strengthens, but are
adversely affected as the euro weakens. In Korea, where we have local currency selling prices for
local sales and U.S. dollar denominated selling prices for exports, we benefit slightly as the won
weakens, but are adversely affected as the won strengthens, due to a slightly higher percentage of
exports compared to local sales. In Brazil, where we have predominately U.S. dollar selling prices
and local currency operating costs, we benefit as the local currency weakens, but are adversely
affected as the local currency strengthens. Foreign currency contracts may be used to hedge the
economic exposures at our foreign operations.
It is our policy to minimize exposures from non-functional currency denominated transactions
within each of our operating segments. As such, the majority of our foreign currency exposures are
from either forecasted net sales or forecasted purchase commitments in non-functional currencies.
Our most significant non-U.S. dollar functional currency operations have the euro and the Korean
won as their functional currencies, respectively. Our Brazilian operations are U.S. dollar
functional.
We also face translation risks related to the changes in foreign currency exchange rates which
are generally not hedged. Amounts invested in these foreign operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date. The resulting translation
adjustments are recorded as a component of Accumulated other comprehensive income (loss) in the
Shareholders equity section of the accompanying condensed consolidated balance sheets. Net sales
and expenses at these non-U.S. dollar functional currency entities are translated into varying
amounts of U.S. dollars depending upon whether the U.S. dollar weakens or strengthens against other
currencies. Therefore, changes in exchange rates may either positively or negatively affect our net
sales and expenses as expressed in U.S. dollars.
Any negative impact of currency movements on the currency contracts that we have entered into
to hedge foreign currency commitments to purchase or sell goods and services would be offset by an
equal and opposite favorable exchange impact on the commitments being hedged. For a discussion of
accounting policies and other information relating to currency contracts, see Note 1 Business
and Summary of Significant Accounting Policies and Note 14 Financial Instruments and Commodity
Contracts.
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Sensitivities
The following table presents the estimated potential effect on the fair values of these
derivative instruments as of March 31, 2011, given a 10% change in rates ($ in millions).
Change in | Change in | |||||||
Exchange Rate | Fair Value | |||||||
Currency measured against the U.S. dollar |
||||||||
Brazilian real |
(10 | )% | $ | (41 | ) | |||
Euro |
10 | % | (24 | ) | ||||
Korean won |
(10 | )% | (18 | ) | ||||
Canadian dollar |
(10 | )% | (5 | ) | ||||
British pound |
(10 | )% | (7 | ) | ||||
Swiss franc |
(10 | )% | (11 | ) |
Interest Rate Risks
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest
rate which impacts our variable-rate debt. Prior to the completion of the December 17, 2010
refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the
refinancing transaction, our exposure to changes in the benchmark LIBOR interest rate was limited
which resulted in de-designation. The 2011 Term Loan Facility contains a floor feature of the
higher of LIBOR or 100 basis points plus a spread of 3.00%. As of March 31, 2011, this floor
feature was in effect, changing our variable rate debt to fixed rate debt. Due to the nature of
fixed-rate debt, there would be no significant impact on our interest expense or cash flows from
either a 10% increase or decrease in market rates of interest.
Due to the floor feature of our 2011 Term Loan Facility mentioned above, a 10 basis point
increase in the interest rates on our outstanding variable rate debt as of March 31, 2011, would
have no impact on our annual pre-tax income. To be above the 2011 Term Loan Facility floor feature,
as of March 31, 2011, interest rates would have to increase by 70 basis points (bp). From time to
time, we have used interest rate swaps to manage our debt cost. In Korea, we entered into interest
rate swaps to fix the interest rate on various floating rate debt. See Note 10 Debt for further
information.
Sensitivities
The following table presents the estimated potential effect on the fair values of these
derivative instruments as of March 31, 2011, given a 100 bps negative shift in USD LIBOR ($ in
millions).
Change in | Change in | |||||||
Rate | Fair Value | |||||||
Interest Rate Contracts |
||||||||
North America |
(100) bps | $ | (2 | ) |
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Item 8. Financial Statements and Supplementary Data
|
TABLE OF CONTENTS
65 | ||||
66 | ||||
67 | ||||
68 | ||||
69 | ||||
70 | ||||
71 |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Novelis Inc.:
In our opinion, the consolidated balance sheets and the related consolidated statements of
operations, comprehensive income (loss), shareholders equity and cash flows present fairly, in all
material respects, the financial position of Novelis Inc. and its subsidiaries (the Company) at
March 31, 2011 and March 31, 2010, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2011 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of March 31, 2011,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal Control over Financial Reporting under Item
9A. Our responsibility is to express opinions on these financial statements and on the Companys
internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Atlanta, GA
May 26, 2011
May 26, 2011
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Year Ended | ||||||||||||||
March 31, | ||||||||||||||
2011 | 2010 | 2009 | ||||||||||||
Net sales |
$ | 10,577 | $ | 8,673 | $ | 10,177 | ||||||||
Cost of goods sold (exclusive of depreciation and amortization) |
9,227 | 7,213 | 9,276 | |||||||||||
Selling, general and administrative expenses |
375 | 337 | 294 | |||||||||||
Depreciation and amortization |
404 | 384 | 439 | |||||||||||
Research and development expenses |
40 | 38 | 41 | |||||||||||
Interest expense and amortization of debt issuance costs |
207 | 175 | 182 | |||||||||||
Interest income |
(13 | ) | (11 | ) | (14 | ) | ||||||||
(Gain) loss on change in fair value of derivative instruments, net |
(43 | ) | (194 | ) | 556 | |||||||||
Impairment of goodwill |
| | 1,340 | |||||||||||
(Gain) loss on extinguishment of debt |
84 | | (122 | ) | ||||||||||
Restructuring charges, net |
34 | 14 | 95 | |||||||||||
Equity in net loss of non-consolidated affiliates |
12 | 15 | 172 | |||||||||||
Other (income) expenses, net |
7 | (25 | ) | 86 | ||||||||||
10,334 | 7,946 | 12,345 | ||||||||||||
Income (loss) before income taxes |
243 | 727 | (2,168 | ) | ||||||||||
Income tax provision (benefit) |
83 | 262 | (246 | ) | ||||||||||
Net income (loss) |
160 | 465 | (1,922 | ) | ||||||||||
Net income (loss) attributable to noncontrolling interests |
44 | 60 | (12 | ) | ||||||||||
Net income (loss) attributable to our common shareholder |
$ | 116 | $ | 405 | $ | (1,910 | ) | |||||||
See accompanying notes to the consolidated financial statements.
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Novelis Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares)
(In millions, except number of shares)
March 31, | ||||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 311 | $ | 437 | ||||
Accounts receivable (net of allowances of $7 and $4 as of March 31, 2011 and 2010, respectively) |
||||||||
third parties |
1,480 | 1,143 | ||||||
related parties |
28 | 24 | ||||||
Inventories, net |
1,338 | 1,083 | ||||||
Prepaid expenses and other current assets |
50 | 39 | ||||||
Fair value of derivative instruments |
165 | 197 | ||||||
Deferred income tax assets |
39 | 12 | ||||||
Total current assets |
3,411 | 2,935 | ||||||
Property, plant and equipment, net |
2,543 | 2,632 | ||||||
Goodwill |
611 | 611 | ||||||
Intangible assets, net |
707 | 749 | ||||||
Investment in and advances to non-consolidated affiliates |
743 | 709 | ||||||
Fair value of derivative instruments, net of current portion |
17 | 7 | ||||||
Deferred income tax assets |
52 | 5 | ||||||
Other long-term assets |
||||||||
third parties |
193 | 93 | ||||||
related parties |
19 | 21 | ||||||
Total assets |
$ | 8,296 | $ | 7,762 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 21 | $ | 116 | ||||
Short-term borrowings |
17 | 75 | ||||||
Accounts payable |
||||||||
third parties |
1,378 | 1,076 | ||||||
related parties |
50 | 53 | ||||||
Fair value of derivative instruments |
82 | 110 | ||||||
Accrued expenses and other current liabilities |
568 | 436 | ||||||
Deferred income tax liabilities |
43 | 34 | ||||||
Total current liabilities |
2,159 | 1,900 | ||||||
Long-term debt, net of current portion |
4,065 | 2,480 | ||||||
Deferred income tax liabilities |
552 | 497 | ||||||
Accrued postretirement benefits |
526 | 499 | ||||||
Other long-term liabilities |
359 | 376 | ||||||
7,661 | 5,752 | |||||||
Commitments and contingencies |
||||||||
Shareholders equity |
||||||||
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and
outstanding as of March 31, 2011 and 2010, respectively |
| | ||||||
Additional paid-in capital |
1,830 | 3,530 | ||||||
Accumulated deficit |
(1,442 | ) | (1,558 | ) | ||||
Accumulated other comprehensive income (loss) |
57 | (103 | ) | |||||
Total equity of our common shareholder |
445 | 1,869 | ||||||
Noncontrolling interests |
190 | 141 | ||||||
Total equity |
635 | 2,010 | ||||||
Total liabilities and equity |
$ | 8,296 | $ | 7,762 | ||||
See accompanying notes to the consolidated financial statements.
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Novelis Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(In millions)
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income (loss) |
$ | 160 | $ | 465 | $ | (1,922 | ) | |||||
Adjustments to determine net cash provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
404 | 384 | 439 | |||||||||
(Gain) loss on change in fair value of derivative instruments, net |
(43 | ) | (194 | ) | 556 | |||||||
(Gain) loss on extinguishment of debt |
84 | | (122 | ) | ||||||||
Non-cash restructuring charges, net |
5 | 2 | 22 | |||||||||
Deferred income taxes |
(45 | ) | 229 | (331 | ) | |||||||
Write-off and amortization of fair value adjustments, net |
4 | (134 | ) | (233 | ) | |||||||
Impairment of goodwill |
| | 1,340 | |||||||||
Equity in net loss of non-consolidated affiliates |
12 | 15 | 172 | |||||||||
Foreign exchange remeasurement on debt |
| (20 | ) | 26 | ||||||||
(Gain) loss on sale of assets |
(4 | ) | 1 | | ||||||||
Gain on reversal of accrued legal claim |
| (3 | ) | (26 | ) | |||||||
Other, net |
2 | 10 | 8 | |||||||||
Changes in assets and liabilities (net of effects from acquisitions and divestitures): |
||||||||||||
Accounts receivable |
(295 | ) | (46 | ) | 73 | |||||||
Inventories |
(218 | ) | (264 | ) | 466 | |||||||
Accounts payable |
263 | 311 | (643 | ) | ||||||||
Other current assets |
(8 | ) | 14 | (6 | ) | |||||||
Other current liabilities |
134 | 47 | (63 | ) | ||||||||
Other noncurrent assets |
(6 | ) | (15 | ) | 17 | |||||||
Other noncurrent liabilities |
5 | 42 | 7 | |||||||||
Net cash provided by (used in) operating activities |
454 | 844 | (220 | ) | ||||||||
INVESTING ACTIVITIES |
||||||||||||
Capital expenditures |
(234 | ) | (101 | ) | (145 | ) | ||||||
Proceeds from sales of assets |
||||||||||||
third parties |
21 | 5 | 5 | |||||||||
related parties |
10 | | | |||||||||
Changes to investment in and advances to non-consolidated affiliates |
| 3 | 20 | |||||||||
Proceeds from related party loans receivable, net |
(1 | ) | 4 | 17 | ||||||||
Net proceeds from settlement of derivative instruments |
91 | (395 | ) | (24 | ) | |||||||
Net cash used in investing activities |
(113 | ) | (484 | ) | (127 | ) | ||||||
FINANCING ACTIVITIES |
||||||||||||
Proceeds from issuance of debt |
||||||||||||
third parties |
3,985 | 177 | 263 | |||||||||
related parties |
| 4 | 91 | |||||||||
Principal repayments |
||||||||||||
third parties |
(2,489 | ) | (67 | ) | (235 | ) | ||||||
related parties |
| (95 | ) | | ||||||||
Short-term borrowings, net |
(56 | ) | (193 | ) | 176 | |||||||
Return of capital to our common shareholder |
(1,700 | ) | | | ||||||||
Dividends, noncontrolling interest |
(18 | ) | (13 | ) | (6 | ) | ||||||
Debt issuance costs |
(193 | ) | (1 | ) | (3 | ) | ||||||
Net cash provided by (used in) financing activities |
(471 | ) | (188 | ) | 286 | |||||||
Net increase (decrease) in cash and cash equivalents |
(130 | ) | 172 | (61 | ) | |||||||
Effect of exchange rate changes on cash balances held in foreign currencies |
4 | 17 | (17 | ) | ||||||||
Cash and cash equivalents beginning of period |
437 | 248 | 326 | |||||||||
Cash and cash equivalents end of period |
$ | 311 | $ | 437 | $ | 248 | ||||||
See accompanying notes to the consolidated financial statements.
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Novelis Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In millions, except number of shares)
(In millions, except number of shares)
Equity of our Common Shareholder | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Retained | Other | |||||||||||||||||||||||||||
Additional | Earnings/ | Comprehensive | Non- | |||||||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Income (Loss) | Controlling | Total | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit) | (AOCI) | Interests | Equity | ||||||||||||||||||||||
Balance as of March 31, 2008 |
1,398,583 | | $ | 3,497 | $ | (53 | ) | $ | 46 | $ | 149 | $ | 3,639 | |||||||||||||||
Fiscal 2009 Activity: |
||||||||||||||||||||||||||||
Net income attributable to our common
shareholder |
| | | (1,910 | ) | | | (1,910 | ) | |||||||||||||||||||
Net income attributable to
noncontrolling interests |
| | | | | (12 | ) | (12 | ) | |||||||||||||||||||
Forgiveness of interest on
intercompany note |
9,347 | | 23 | | | | 23 | |||||||||||||||||||||
Payment of income taxes by AV Metals
on behalf of Novelis, Inc. |
4,116 | | 10 | | | | 10 | |||||||||||||||||||||
Currency translation adjustment, net
of tax of $ in AOCI |
| | | | (122 | ) | (41 | ) | (163 | ) | ||||||||||||||||||
Change in fair value of effective
portion of hedges, net of tax benefit
of $11 included in AOCI |
| | | | (19 | ) | | (19 | ) | |||||||||||||||||||
Postretirement benefit plans: |
||||||||||||||||||||||||||||
Change in pension and other benefits,
net of tax provision of $31 included
in AOCI |
| | | | (53 | ) | | (53 | ) | |||||||||||||||||||
Noncontrolling interests cash dividends |
| | | | | (6 | ) | (6 | ) | |||||||||||||||||||
Balance as of March 31, 2009 |
1,412,046 | | 3,530 | (1,963 | ) | (148 | ) | 90 | 1,509 | |||||||||||||||||||
Fiscal 2010 Activity: |
||||||||||||||||||||||||||||
Net income attributable to our common
shareholder |
| | | 405 | | | 405 | |||||||||||||||||||||
Net income attributable to
noncontrolling interests |
| | | | | 60 | 60 | |||||||||||||||||||||
Share consolidation |
(1,411,046 | ) | | | | | | | ||||||||||||||||||||
Currency translation adjustment, net
of tax of $ in AOCI |
| | | | 54 | 21 | 75 | |||||||||||||||||||||
Change in fair value of effective
portion of hedges, net of tax benefit
of $5 included in AOCI |
| | | | (8 | ) | | (8 | ) | |||||||||||||||||||
Postretirement benefit plans: |
||||||||||||||||||||||||||||
Change in pension and other benefits,
net of tax provision of $10 included
in AOCI |
| | | | (1 | ) | | (1 | ) | |||||||||||||||||||
Noncontrolling interests cash dividends |
| | | | | (30 | ) | (30 | ) | |||||||||||||||||||
Balance as of March 31, 2010 |
1,000 | | 3,530 | (1,558 | ) | (103 | ) | 141 | 2,010 | |||||||||||||||||||
Fiscal 2011 Activity: |
||||||||||||||||||||||||||||
Net income attributable to our common
shareholder |
| | | 116 | | | 116 | |||||||||||||||||||||
Net income attributable to
noncontrolling interests |
| | | | | 44 | 44 | |||||||||||||||||||||
Currency translation adjustment, net
of tax provision of $6 in AOCI |
| | | | 111 | 6 | 117 | |||||||||||||||||||||
Change in fair value of effective
portion of hedges, net of tax
provision of $27 included in AOCI |
| | | | 49 | | 49 | |||||||||||||||||||||
Postretirement benefit plans: |
||||||||||||||||||||||||||||
Change in pension and other benefits,
net of tax benefit of $3 included in
AOCI |
| | | | | | | |||||||||||||||||||||
Return of capital to our common
shareholder |
| | (1,700 | ) | | | | (1,700 | ) | |||||||||||||||||||
Noncontrolling interests cash dividends |
| | | | | (1 | ) | (1 | ) | |||||||||||||||||||
Balance as of March 31, 2011 |
1,000 | $ | | $ | 1,830 | $ | (1,442 | ) | $ | 57 | $ | 190 | $ | 635 | ||||||||||||||
See accompanying notes to the consolidated financial statements.
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Novelis Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(In millions)
Year Ended | ||||||||||||||
March 31, | ||||||||||||||
2011 | 2010 | 2009 | ||||||||||||
Net income (loss) attributable to our
common shareholder |
$ | 116 | $ | 405 | $ | (1,910 | ) | |||||||
Other comprehensive income (loss): |
||||||||||||||
Currency translation adjustment |
117 | 54 | (122 | ) | ||||||||||
Change in fair value of effective portion of
hedges, net |
76 | (13 | ) | (30 | ) | |||||||||
Postretirement benefit plans: |
||||||||||||||
Change in pension and other benefits |
(3 | ) | 9 | (84 | ) | |||||||||
Other comprehensive income (loss) before
income tax effect |
190 | 50 | (236 | ) | ||||||||||
Income tax provision (benefit) related to
items of other comprehensive income (loss) |
30 | 5 | (42 | ) | ||||||||||
Other comprehensive income (loss), net of tax |
160 | 45 | (194 | ) | ||||||||||
Comprehensive income (loss) attributable to
our common shareholder |
276 | 450 | (2,104 | ) | ||||||||||
Net income (loss) attributable to
noncontrolling interests |
44 | 60 | (12 | ) | ||||||||||
Other comprehensive income (loss): |
||||||||||||||
Currency translation adjustment |
6 | 21 | (41 | ) | ||||||||||
Other comprehensive income (loss), net of tax |
6 | 21 | (41 | ) | ||||||||||
Comprehensive income (loss) attributable to
noncontrolling interests |
50 | 81 | (53 | ) | ||||||||||
Comprehensive income (loss) |
$ | 326 | $ | 531 | $ | (2,157 | ) | |||||||
See accompanying notes to the consolidated financial statements.
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Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
References herein to Novelis, the Company, we, our, or us refer to Novelis Inc. and
its subsidiaries unless the context specifically indicates otherwise. References herein to
Hindalco refer to Hindalco Industries Limited. In October 2007, the Rio Tinto Group purchased all
the outstanding shares of Alcan, Inc. References herein to Alcan refer to Rio Tinto Alcan Inc.
Organization and Description of Business
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the worlds
leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and
light gauge products for the beverage and food can, transportation, construction and industrial,
and foil products markets. As of March 31, 2011, we had operations in eleven countries on four
continents: North America, South America, Asia and Europe, 30 operating plants and seven research
and development facilities in eleven countries. In addition to aluminum rolled products plants, our
South American businesses include bauxite mining, primary aluminum smelting and power generation
facilities.
Acquisition of Novelis Common Stock
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned
subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The
aggregate purchase price for all of the Companys common shares was $3.4 billion and Hindalco also
assumed $2.8 billion of Novelis debt for a total transaction value of $6.2 billion. Subsequent to
completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by
Hindalco.
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, the
amalgamated Novelis Inc. remains liable for all of our and AV Aluminums 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 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 March 31, 2010, the Amalgamation increased the Companys previously reported Additional
paid-in capital by $33 million, and reduced Accumulated deficit by $33 million. The Amalgamation
had no impact on our consolidated statements of operations or our consolidated statements of cash
flows for the years ended March 31, 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.
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We use the equity method to account for our investments in entities that we do not control,
but where we have the ability to exercise significant influence over operating and financial
policies. Consolidated net income (loss) attributable to our common shareholder includes our share
of the net earnings (losses) of these entities. The difference between consolidation and the equity
method impacts certain of our financial ratios because of the presentation of the detailed line
items reported in the consolidated financial statements for consolidated entities, compared to a
two-line presentation of equity method investments and net losses.
We use the cost method to account for our investments in entities that we do not control and
for which we do not have the ability to exercise significant influence over operating and financial
policies. These investments are recorded at the lower of their cost or fair value.
Use of Estimates and Assumptions
The preparation of our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires us to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting
periods. The principal areas of judgment relate to (1) the fair value of derivative financial
instruments; (2) impairment of goodwill; (3) impairments of long lived assets, intangible assets
and equity investments; (4) actuarial assumptions related to pension and other postretirement
benefit plans; (5) income tax reserves and valuation allowances and (6) assessment of loss
contingencies, including environmental and litigation reserves. Future events and their effects
cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise
of judgment. The accounting estimates used in the preparation of our consolidated financial
statements will change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. We evaluate and update our
assumptions and estimates on an ongoing basis and may employ outside experts to assist in our
evaluations. Actual results could differ from the estimates we have used.
Risks and Uncertainties
We are exposed to a number of risks in the normal course of our operations that could
potentially affect our financial position, results of operations, and cash flows.
Laws and regulations
We operate in an industry that is subject to a broad range of environmental, health and safety
laws and regulations in the jurisdictions in which we operate. These laws and regulations impose
increasingly stringent environmental, health and safety protection standards and permitting
requirements regarding, among other things, air emissions, wastewater storage, treatment and
discharges, the use and handling of hazardous or toxic materials, waste disposal practices, the
remediation of environmental contamination, post-mining reclamation and working conditions for our
employees. Some environmental laws, such as the U.S. Comprehensive Environmental Response,
Compensation, and Liability Act, also known as CERCLA or Superfund, and comparable state laws,
impose joint and several liability for the cost of environmental remediation, natural resource
damages, third party claims, and other expenses, without regard to the fault or the legality of the
original conduct.
The costs of complying with these laws and regulations, including participation in assessments
and remediation of contaminated sites and installation of pollution control facilities, have been,
and in the future could be, significant. In addition, these laws and regulations may also result in
substantial environmental liabilities associated with divested assets, third party locations and
past activities. In certain instances, these costs and liabilities, as well as related action to be
taken by us, could be accelerated or increased if we were to close, divest of or change the
principal use of certain facilities with respect to which we may have environmental liabilities or
remediation obligations. Currently, we are involved in a number of compliance efforts, remediation
activities and legal proceedings concerning environmental matters, including certain activities and
proceedings arising under U.S. Superfund and comparable laws in other jurisdictions where we have
operations.
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We have established reserves for environmental remediation activities and liabilities where
appropriate. However, the cost of addressing environmental matters (including the timing of any
charges related thereto) cannot be predicted with certainty, and these reserves may not ultimately
be adequate, especially in light of potential changes in environmental conditions, changing
interpretations of laws and regulations by regulators and courts, the discovery of previously
unknown environmental conditions, the risk of governmental orders to carry out additional
compliance on certain sites not initially included in remediation in progress, our potential
liability to remediate sites for which provisions have not been previously established and the
adoption of more stringent environmental laws. Such future developments could result in increased
environmental costs and liabilities and could require significant capital expenditures, any of
which could have a material adverse effect on our financial position or results of operations or
cash flows. Furthermore, the failure to comply with our obligations under the environmental laws
and regulations could subject us to administrative, civil or criminal penalties, obligations to pay
damages or other costs, and injunctions or other orders, including orders to cease operations. In
addition, the presence of environmental contamination at our properties could adversely affect our
ability to sell a property, receive full value for a property or use a property as collateral for a
loan.
Some of our current and potential operations are located or could be located in or near
communities that may regard such operations as having a detrimental effect on their social and
economic circumstances. Environmental laws typically provide for participation in permitting
decisions, site remediation decisions and other matters. Concern about environmental justice issues
may affect our operations. Should such community objections be presented to government officials,
the consequences of such a development may have a material adverse impact upon the profitability
or, in extreme cases, the viability of an operation. In addition, such developments may adversely
affect our ability to expand or enter into new operations in such location or elsewhere and may
also have an effect on the cost of our environmental remediation projects.
We use a variety of hazardous materials and chemicals in our rolling processes, as well as in
our smelting operations in Brazil and in connection with maintenance work on our manufacturing
facilities. Because of the nature of these substances or related residues, we may be liable for
certain costs, including, among others, costs for health-related claims or removal or re-treatment
of such substances. Certain of our current and former facilities incorporate asbestos-containing
materials, a hazardous substance that has been the subject of health-related claims for occupation
exposure. In addition, although we have developed environmental, health and safety programs for our
employees, including measures to reduce employee exposure to hazardous substances, and conduct
regular assessments at our facilities, we are currently, and in the future may be, involved in
claims and litigation filed on behalf of persons alleging injury predominantly as a result of
occupational exposure to substances at our current or former facilities. It is not possible to
predict the ultimate outcome of these claims and lawsuits due to the unpredictable nature of
personal injury litigation. If these claims and lawsuits, individually or in the aggregate, were
finally resolved against us, our financial position, results of operations and cash flows could be
adversely affected.
Materials and labor
In the aluminum rolled products industry, our raw materials are subject to continuous price
volatility. We may not be able to pass on the entire cost of the increases to our customers or
offset fully the effects of higher raw material costs, other than metal, through productivity
improvements, which may cause our profitability to decline. In addition, there is a potential time
lag between changes in prices under our purchase contracts and the point when we can implement a
corresponding change under our sales contracts with our customers. As a result, we could be exposed
to fluctuations in raw materials prices, including metal, since, during the time lag period, we may
have to temporarily bear the additional cost of the change under our purchase contracts, which
could have a material adverse effect on our financial position, results of operations and cash
flows. Significant price increases may result in our customers substituting other materials, such
as plastic or glass, for aluminum or switch to another aluminum rolled products producer, which
could have a material adverse effect on our financial position, results of operations and cash
flows.
We consume substantial amounts of energy in our rolling operations, our cast house operations
and our Brazilian smelting operations. The factors that affect our energy costs and supply
reliability tend to be specific to each of our facilities. A number of factors could materially
adversely affect our energy position including, but not limited to: (a) increases in the cost of
natural gas; (b) increases in the cost of supplied electricity or fuel oil related to
transportation; (c) interruptions in energy supply due to equipment failure or other causes and (d)
the inability to extend energy supply contracts upon expiration on economical terms. A significant
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increase in energy costs or disruption of energy supplies or supply arrangements could have a
material adverse impact on our financial position, results of operations and cash flows.
Approximately 63% of our employees are represented by labor unions under a large number of
collective bargaining agreements with varying durations and expiration dates. We may not be able to
satisfactorily renegotiate our collective bargaining agreements when they expire. In addition,
existing collective bargaining agreements may not prevent a strike or work stoppage at our
facilities in the future, and any such work stoppage could have a material adverse effect on our
financial position, results of operations and cash flows.
Geographic markets
We are, and will continue to be, subject to financial, political, economic and business risks
in connection with our global operations. We have made investments and carry on production
activities in various emerging markets, including Brazil, Korea and Malaysia, and we market our
products in these countries, as well as China and certain other countries in Asia. While we
anticipate higher growth or attractive production opportunities from these emerging markets, they
also present a higher degree of risk than more developed markets. In addition to the business risks
inherent in developing and servicing new markets, economic conditions may be more volatile, legal
and regulatory systems less developed and predictable, and the possibility of various types of
adverse governmental action more pronounced. In addition, inflation, fluctuations in currency and
interest rates, competitive factors, civil unrest and labor problems could affect our revenues,
expenses and results of operations. Our operations could also be adversely affected by acts of war,
terrorism or the threat of any of these events as well as government actions such as controls on
imports, exports and prices, tariffs, new forms of taxation, or changes in fiscal regimes and
increased government regulation in the countries in which we operate or service customers.
Unexpected or uncontrollable events or circumstances in any of these markets could have a material
adverse effect on our financial position, results of operations and cash flows.
Other risks and uncertainties
In addition, refer to Note 15 Fair Value of Assets and Liabilities and Note 18
Commitments and Contingencies for a discussion of financial instruments and commitments and
contingencies.
Reclassifications and adjustments
Certain reclassifications of the prior period amounts and presentation have been made to
conform to the presentation adopted for the current period.
For the years ended March 31, 2010 and 2009, we reclassified $23 million and $25 million,
respectively, from Selling, general and administrative expenses to Costs of goods sold (exclusive
of depreciation and amortization).
In the 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 statements 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 and an increase to investing cash flow of $16
million for the year ended March 31, 2009. This reclassification did not have any impact on total
cash or on the balance sheet, income statement or related disclosures.
Revenue recognition
We recognize sales when the revenue is realized or realizable, and has been earned. We record
sales when a firm sales agreement is in place, delivery has occurred and collectability of the
fixed or determinable sales price is reasonably assured.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recognize product revenue, net of trade discounts and allowances, in the reporting period
in which the products are shipped and the title and risk of ownership pass to the customer. We
generally ship our product to our customers FOB (free on board) destination point. Our standard
terms of delivery are included in our contracts of sale, order confirmation documents and invoices.
We sell most of our products under contracts based on a conversion premium, which is subject to
periodic adjustments based on market factors. As a result, the aluminum price risk is largely
absorbed by the customer. In situations where we offer customers fixed prices for future
delivery of our products, we may enter into derivative instruments for all or a portion of the
cost of metal inputs to protect our profit on the conversion of the product. In addition, through
December 31, 2009, certain of our sales contracts provided for a ceiling over which metal prices
could not be contractually passed through to the customer. We partially mitigated the risk of this
metal price exposure through the purchase of derivative instruments.
We record tolling revenue when the revenue is realized or realizable, and has been earned.
Tolling refers to the process by which certain customers provide metal to us for conversion to
rolled product. We do not take title to the metal and, after the conversion and return shipment of
the rolled product to the customer, we charge them for the value-added conversion cost and record
these amounts in Net sales.
Shipping and handling amounts we bill to our customers are included in Net sales and the
related shipping and handling costs we incur are included in Cost of goods sold (exclusive of
depreciation and amortization).
Cost of goods sold (exclusive of depreciation and amortization)
Cost of goods sold (exclusive of depreciation and amortization) includes all costs associated
with inventories, including the procurement of materials, the conversion of such materials into
finished product, and the costs of warehousing and distributing finished goods to customers.
Material procurement costs include inbound freight charges as well as purchasing, receiving,
inspection and storage costs. Conversion costs include the costs of direct production inputs such
as labor and energy, as well as allocated overheads from indirect production centers and plant
administrative support areas. Warehousing and distribution expenses include inside and outside
storage costs, outbound freight charges and the costs of internal transfers.
Selling, general and administrative expenses
Selling, general and administrative expenses include selling, marketing and advertising
expenses; salaries, travel and office expenses of administrative employees and contractors; legal
and professional fees; software license fees; and bad debt expenses.
Cash and cash equivalents
Cash and cash equivalents includes investments that are highly liquid and have maturities of
three months or less when purchased. The carrying values of cash and cash equivalents approximate
their fair value due to the short-term nature of these instruments.
We maintain amounts on deposit with various financial institutions, which may, at times,
exceed federally insured limits. However, management periodically evaluates the credit-worthiness
of those institutions, and we have not experienced any losses on such deposits.
Accounts receivable
Our accounts receivable are geographically dispersed. We do not obtain collateral relating to
our accounts receivable. We do not believe there are any significant concentrations of revenues
from any particular customer or group of customers that would subject us to any significant credit
risks in the collection of our accounts receivable. We report accounts receivable at the estimated
net realizable amount we expect to collect from our customers.
Additions to the allowance for doubtful accounts are made by means of the provision for
doubtful accounts. We write-off uncollectible accounts receivable against the allowance for
doubtful accounts after exhausting collection efforts.
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For each of the periods presented, we performed an analysis of our historical cash collection
patterns and considered the impact of any known material events in determining the allowance for
doubtful accounts. In performing the analysis, the impact of any adverse changes in general
economic conditions was considered, and for certain customers we reviewed a variety of factors
including: past due receivables; macro-economic conditions; significant one-time events and
historical experience. Specific reserves for individual accounts may be established due to a
customers inability to meet their financial obligations, such as in the case of bankruptcy filings
or the deterioration in a customers operating results or financial position. As circumstances
related to customers change, we adjust our estimates of the recoverability of the accounts
receivable.
Derivative Instruments
We hold derivatives for risk management purposes and not for trading. We use derivatives to
mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign
exchange rates, interest rate, and energy prices. The fair values of all derivative instruments
are recognized as assets or liabilities at the balance sheet date and are reported gross.
We may be exposed to losses in the future if the counterparties to our derivative contracts
fail to perform. We are satisfied that the risk of such non-performance is remote due to our
monitoring of credit exposures. Additionally, we enter into master netting agreements with
contractual provisions that allow for netting of counterparty positions in case of default, and we
do not face credit contingent provisions that would result in the posting of collateral.
For derivatives designated as fair value hedges, we assess hedge effectiveness by formally
evaluating the high correlation of changes in the fair value of the hedged item and the derivative
hedging instrument. The changes in the fair values of the underlying hedged items are reported in
other current and noncurrent assets and liabilities in the consolidated balance sheet. Changes in
the fair values of these derivatives and underlying hedged items generally offset and are recorded
each period in revenue, consistent with the underlying hedged item.
For derivatives designated as cash flow hedges or net investment hedges, we assess hedge
effectiveness by formally evaluating the high correlation of the expected future cash flows of the
hedged item and the derivative hedging instrument. 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 exclude the time value component of foreign currency capital expenditure hedges when
measuring and assessing ineffectiveness. 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.
For all derivatives designated in hedging relationships, gains or losses representing hedge
ineffectiveness or amounts excluded from effectiveness testing are recognized in (Gain) loss on
change in fair value of derivative instruments, net in our current period earnings.
If no hedging relationship is designated, the gains or losses are recognized in (Gain) loss on
change in fair value of derivative instruments, net in our current period earnings. We classify
cash settlement amounts associated with these derivatives and designated derivatives as part of
investing activities in the consolidated statements of cash flows.
The majority of our derivative contracts are valued using industry-standard models that use
observable market inputs as their basis, such as time value, forward interest rates, volatility
factors, and current (spot) and forward market prices for foreign exchange rates. See Note 14
Financial Instruments and Commodity Contracts and Note 15 Fair Value of Assets and Liabilities
to our accompanying consolidated audited financial statements for discussion on fair value of
derivative instruments.
Inventories
We carry our inventories at the lower of their cost or market value, reduced by reserves for
excess and obsolete items. We use the average cost method to determine cost.
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Property, plant and equipment
We record land, buildings, leasehold improvements and machinery and equipment at cost. We
record assets under capital lease obligations at the lower of their fair value or the present value
of the aggregate future minimum lease payments as of the beginning of the lease term. We depreciate
our assets using the straight-line method over the shorter of the estimated useful life of the
assets or the lease term, excluding any lease renewals, unless the lease renewals are reasonably
assured.
The ranges of estimated useful lives are as follows:
Years | ||||
Buildings |
30 to 40 | |||
Leasehold improvements |
7 to 20 | |||
Machinery and equipment |
2 to 25 | |||
Furniture, fixtures and equipment |
3 to 10 | |||
Equipment under capital lease obligations |
6 to 15 |
As noted above, our machinery and equipment have useful lives of 2 to 25 years. Most of
our large scale machinery, including hot mills, cold mills, continuous casting mills, furnaces and
finishing mills have useful lives of 15-25 years. Supporting machinery and equipment, including
automation and work rolls, have useful lives of 2-15 years.
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize
replacements and improvements that increase the estimated useful life of an asset, and when
material, we capitalize interest on major construction and development projects while in progress.
We retain fully depreciated assets in property and accumulated depreciation accounts until we
remove them from service. In the case of sale, retirement or disposal, the asset cost and related
accumulated depreciation balances are removed from the respective accounts, and the resulting net
amount, after consideration of any proceeds, is included as a gain or loss in Other (income)
expenses, net in our consolidated statements of operations.
We account for operating leases under the provisions of ASC 840, Leases. These pronouncements
require us to recognize escalating rents, including any rent holidays, on a straight-line basis
over the term of the lease for those lease agreements where we receive the right to control the use
of the entire leased property at the beginning of the lease term.
Goodwill
We test goodwill for impairment using a fair value approach at the reporting unit level. We
use our operating segments as our reporting units. We test for impairment at least annually during
the fourth quarter of each fiscal year, unless some triggering event occurs that would require an
impairment assessment.
We use the present value of estimated future cash flows to establish the estimated fair value
of our reporting units as of the testing dates. This approach includes many assumptions related to
future growth rates, discount factors and tax rates, among other considerations. Changes in
economic and operating conditions impacting these assumptions could result in goodwill impairment
in future periods. When available and as appropriate, we use comparative market multiples to
corroborate the estimated fair value. If the carrying amount of a reporting units goodwill were to
exceed its estimated fair value, the second step of the impairment test must be performed in order
to determine the amount of impairment loss, if any. The second step compares the implied fair value
of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of
the reporting units goodwill exceeds its implied fair value we would recognize, an impairment
charge in an amount equal to that excess in Impairment of goodwill in our consolidated statements
of operations.
When a business within a reporting unit is disposed of, goodwill is allocated to the gain or
loss on disposition using the relative fair value methodology.
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Long-Lived Assets and Other Intangible Assets
We amortize the cost of intangible assets over their respective estimated useful lives to
their estimated residual value.
We assess the recoverability of long-lived assets (excluding goodwill) and definite-lived
intangible assets, whenever events or changes in circumstances indicate that we may not be able to
recover the assets carrying amount. We measure the recoverability of assets to be held and used by
a comparison of the carrying amount of the asset (groups) to the expected, undiscounted future net
cash flows to be generated by that asset (groups), or, for identifiable intangible assets, by
determining whether the amortization of the intangible asset balance over its remaining life can be
recovered through undiscounted future cash flows. The amount of impairment of identifiable
intangible assets is based on the present value of estimated future cash flows. We measure the
amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the
carrying value of the asset exceeds the fair value of the asset, which is generally determined as
the present value of estimated future cash flows or as the appraised value. Impairments of
long-lived assets have been included in Restructuring charges, net and Other income (expense), net
in the consolidated statement of operations.
If the carrying amount of an intangible asset were to exceed its fair value, we would
recognize an impairment charge in Other (income) expenses, net in our consolidated statements of
operations. No impairments of other intangible assets have been identified during any of the
periods presented.
We continue to amortize long-lived assets to be disposed of other than by sale. We carry
long-lived assets to be disposed of by sale in our consolidated balance sheets at the lower of net
book value or the fair value less cost to sell, and we cease depreciation.
Investment in and Advances to Non-Consolidated Affiliates
Management assesses the potential for other-than-temporary impairment of our equity method and
cost method investments. We consider all available information, including the recoverability of the
investment, the earnings and near-term prospects of the affiliate, factors related to the industry,
conditions of the affiliate, and our ability, if any, to influence the management of the affiliate.
We assess fair value based on valuation methodologies, as appropriate, including the present value
of estimated future cash flows, estimates of sales proceeds, and external appraisals. If an
investment is considered to be impaired and the decline in value is other than temporary, we record
an appropriate write-down.
Guarantees
We recognize a liability for the fair value of obligations undertaken at the inception of a
guarantee.
Financing Costs and Interest Income
We amortize financing costs and premiums, and accrete discounts, over the remaining life of
the related debt using the effective interest amortization method. The related income or expense
is included in Interest expense and amortization of debt issuance costs in our consolidated
statements of operations. We record discounts or premiums as a direct deduction from, or addition
to, the face amount of the financing.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about fair value
measurements. ASC 820 also applies to measurements under other accounting pronouncements, such as
ASC 825, Financial Instruments (ASC 825) that require or permit fair value measurements. ASC 825
requires disclosures of the fair value of financial instruments. Our financial instruments include:
cash and cash equivalents; certificates of deposit; accounts receivable; accounts payable; foreign
currency, energy and interest rate derivative instruments; cross-currency swaps; metal option and
forward contracts; related party notes receivable and payable; letters of credit; short-term
borrowings and long-term debt.
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The carrying amounts of cash and cash equivalents, certificates of deposit, accounts
receivable, accounts payable and current related party notes receivable and payable approximate
their fair value because of the short-term maturity and highly liquid nature of these instruments.
The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our
behalf by third party financial institutions. We determine the fair value of our short-term
borrowings and long-term debt based on various factors including maturity schedules, call features
and current market rates. We also use quoted market prices, when available, or the present value of
estimated future cash flows to determine fair value of short-term borrowings and long-term debt.
When quoted market prices are not available for various types of financial instruments (such as
currency, energy and interest rate derivative instruments, swaps, options and forward contracts),
we use standard pricing models with market-based inputs, which take into account the present value
of estimated future cash flows.
Pensions and Postretirement Benefits
We recognize the funded status of our benefit plans as a net asset or liability, with an
offsetting adjustment to AOCI in shareholders equity. The funded status is calculated as the
difference between the fair value of plan assets and the benefit obligation. For the years ended
March 31, 2011 and 2010, we used March 31 as the measurement date.
We use standard actuarial methods and assumptions to account for our pension and other
postretirement benefit plans. Pension and postretirement benefit obligations are actuarially
calculated using managements best estimates of expected service periods, salary increases and
retirement ages of employees. Pension and postretirement benefit expense includes the actuarially
computed cost of benefits earned during the current service period, the interest cost on accrued
obligations, the expected return on plan assets based on fair market value and the straight-line
amortization of net actuarial gains and losses and adjustments due to plan amendments. Generally,
all net actuarial gains and losses are amortized over the expected average remaining service lives
of plan participants.
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada,
Switzerland and the U.K., unfunded pension plans in Germany, and unfunded lump sum indemnities in
France, South Korea, Malaysia and Italy. Our other postretirement obligations include unfunded
healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and
Brazil.
Noncontrolling Interests in Consolidated Affiliates
These financial statements reflect the retrospective application of ASC 810, Consolidations
(ASC 810), subparagraph 10-65-1, Transition Related to FASB Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51, and No. 164,
Not-for-Profit Entities: Mergers and Acquisitions for all periods presented. ASC 810 establishes
accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by
parties other than the parent to be clearly identified and presented in the consolidated balance
sheet within shareholders equity, but separate from the parents equity; (ii) the amount of
consolidated net income attributable to the parent and the noncontrolling interest to be clearly
identified and presented on the face of the consolidated statement of operations and (iii) changes
in a parents ownership interest while the parent retains its controlling financial interest in its
subsidiary to be accounted for consistently.
Our consolidated financial statements include all assets, liabilities, revenues and expenses
of less-than-100%-owned affiliates that we control or for which we are the primary beneficiary. We
record a noncontrolling interest for the allocable portion of income or loss to which the
noncontrolling interest holders are entitled based upon their ownership share of the affiliate.
Distributions made to the holders of noncontrolling interests are charged to the respective
noncontrolling interest balance.
Losses attributable to the noncontrolling interest in an affiliate may exceed our interest in
the affiliates equity. The excess, and any further losses attributable to the noncontrolling
interest, shall be attributed to those interests. The noncontrolling interest shall continue to be
attributed its share of losses even if that attribution results in a deficit noncontrolling
interest balance. As of March 31, 2011, we have no such losses.
Environmental Liabilities
We record accruals for environmental matters when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on current law and
existing technologies. We adjust these accruals periodically as assessment and
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remediation efforts
progress or as additional technical or legal information become available. Accruals for
environmental liabilities are stated at undiscounted amounts. Environmental liabilities are
included in our consolidated balance sheets in Accrued expenses and other current liabilities and
Other long-term liabilities, depending on their short- or long-term nature. Any receivables for
related insurance or other third party recoveries for environmental liabilities are recorded when
it is probable that a recovery will be realized and are included in our consolidated balance sheets
in Prepaid expenses and other current assets.
Costs related to environmental contamination treatment and clean-up are charged to expense.
Estimated future incremental operations, maintenance and management costs directly related to
remediation are accrued in the period in which such costs are determined to be probable and
estimable.
Litigation Reserves
We accrue for loss contingencies associated with outstanding litigation, claims and
assessments for which management has determined it is probable that a loss contingency exists and
the amount of loss can be reasonably estimated. We expense professional fees associated with
litigation claims and assessments as incurred.
Income Taxes
We provide for income taxes using the asset and liability method. This approach recognizes
the amount of income taxes payable or refundable for the current year, as well as deferred tax
assets and liabilities for the future tax consequence of events recognized in the consolidated
financial statements and income tax returns. Deferred income tax assets and liabilities are
adjusted to recognize the effects of changes in tax laws or enacted tax rates. Under ASC 740, a
valuation allowance is required when it is more likely than not that some portion of the deferred
tax assets will not be realized. Realization is dependent on generating sufficient taxable income
through various sources.
We record tax benefits related to uncertain tax positions taken or expected to be taken on a
tax return when such benefits meet a more than likely than not threshold. Otherwise, these tax
benefits are recorded when a tax position has been effectively settled, the statute of limitation
has expired or the appropriate taxing authority has completed their examination. Interest and
penalties related to uncertain tax positions are recognized as part of the provision for income
taxes and are accrued beginning in the period that such interest and penalties would be applicable
under relevant tax law until such time that the related tax benefits are recognized. See Note 17
Income Taxes for additional discussion.
Share-Based Compensation
In accordance with ASC 718, Compensation Stock Compensation (ASC 718), we recognize
compensation expense for a share-based award over an employees requisite service period based on
the awards grant date fair value, subject to adjustment.
We adopted ASC 718 using the modified prospective method, which requires companies to record
compensation cost beginning with the effective date based on the requirements of ASC 718 for all
share-based payments granted after the effective date of ASC 718. All awards granted to employees
prior to the effective date of ASC 718 that remained unvested at the adoption date continued to be
expensed over the remaining service period. Additionally, we determined that all of our
compensation plans settled in cash are considered liability based awards. As such, liabilities for
awards under these plans are required to be measured at each reporting date until the date of
settlement. The Black-Scholes model was used to determine the fair value of these awards.
Cash flows resulting from tax benefits for deductions in excess of compensation cost
recognized are classified within financing cash flows.
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Foreign Currency Translation
The assets and liabilities of foreign operations, whose functional currency is other than the
U.S. dollar (located in Europe and Asia), are translated to U.S. dollars at the period end exchange
rates and revenues and expenses are translated at average exchange rates for the period.
Differences arising from the translation of assets and liabilities are included in the currency
translation adjustment (CTA) component of AOCI. If there is a reduction in our ownership in a
foreign operation, the relevant portion of the CTA is recognized in Other (income) expenses, net.
For all operations, the monetary items denominated in currencies other than the functional
currency are remeasured at period-end exchange rates and transaction gains and losses are included
in Other (income) expenses, net in our consolidated statements of operations. Non-monetary items
are remeasured at historical rates.
Research and Development
We incur costs in connection with research and development programs that are expected to
contribute to future earnings, and charge such costs against income as incurred. Research and
development costs consist primarily of salaries and administrative costs.
Restructuring Activities
Restructuring charges, net include employee severance and benefit costs, impairments of
assets, and other costs associated with exit activities. We apply the provisions of ASC 420, Exit
or Disposal Cost Obligations (ASC 420) relating to one-time termination benefits. Severance costs
accounted for under ASC 420 are recognized when management with the proper level of authority has
committed to a restructuring plan and communicated those actions to employees. Impairment losses
are based upon the estimated fair value less costs to sell, with fair value estimated based on
existing market prices for similar assets. Other exit costs include environmental remediation costs
and contract termination costs, primarily related to equipment and facility lease obligations. At
each reporting date, we evaluate the accruals for restructuring costs to ensure the accruals are
still appropriate.
Customer Directed Derivatives
We classify all customer directed derivatives and associated trading activities as operating
activities in our consolidated statement of cash flows. Cash flows provided by (used in), from such
derivatives, totaled $19 million, $75 million and ($81) million in the years ended March 31, 2011,
2010 and 2009, respectively. There were no customer directed derivatives outstanding for the year
ended March 31, 2011.
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 7 Consolidation of Variable Interest Entities.
Recently Issued Accounting Standards
We have determined that all other recently issued accounting standards will not have a
material impact on our consolidated financial position, results of operations or cash flows, or do
not apply to our operations.
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2. RESTRUCTURING PROGRAMS
Restructuring charges, net for the year ended March 31, 2011, 2010 and 2009 of $34 million,
$14 million and $95 million, respectively, includes $5 million, $2 million and $22 million,
respectively, of non-cash charges discussed in greater detail below.
Restructuring charges, net for the year ended March 31, 2011 includes a $10 million gain from
the sale of assets to Hindalco further discussed 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, 2008 |
$ | 20 | $ | 4 | $ | | $ | | $ | | $ | 24 | ||||||||||||
Fiscal 2009 Activity: |
||||||||||||||||||||||||
Provisions, net |
53 | 16 | 1 | 2 | 1 | 73 | ||||||||||||||||||
Cash payments |
(8 | ) | (5 | ) | (1 | ) | | | (14 | ) | ||||||||||||||
Impact of exchange rate changes |
(4 | ) | 1 | | | | (3 | ) | ||||||||||||||||
Balance as of March 31, 2009 |
61 | 16 | | 2 | 1 | 80 | ||||||||||||||||||
Fiscal 2010 Activity: |
||||||||||||||||||||||||
Provisions, net |
8 | 5 | | (1 | ) | | 12 | |||||||||||||||||
Cash payments |
(46 | ) | (11 | ) | | (2 | ) | (1 | ) | (60 | ) | |||||||||||||
Impact of exchange rate changes |
5 | | | 1 | | 6 | ||||||||||||||||||
Balance as of March 31, 2010 |
28 | 10 | | | | 38 | ||||||||||||||||||
Fiscal 2011 Activity: |
||||||||||||||||||||||||
Provisions, net |
17 | 13 | | 5 | 5 | 40 | ||||||||||||||||||
Cash payments |
(10 | ) | (17 | ) | | (1 | ) | (2 | ) | (30 | ) | |||||||||||||
Impact of exchange rate changes |
2 | | | | | 2 | ||||||||||||||||||
Balance as of March 31, 2011 |
$ | 37 | $ | 6 | $ | | $ | 4 | $ | 3 | $ | 50 | ||||||||||||
As of March 31, 2011, $30 million of restructuring reserves is classified as short-term
and is included in Accrued expenses and other current liabilities on our consolidated balance
sheets.
Europe
On March 1, 2011, we announced the sale of our printed confectionery foil packaging business
at Bridgnorth, UK to Discovery Foils for $1 million, effective immediately. Approximately 105
employees transferred to Discovery Foils along with the assets of the business. We will continue to
provide aluminum foil to the operation under a supply agreement. The business produces
multi-colored printed foil used as packaging for confectionery products. The operation is
associated with the Bridgnorth aluminum foil rolling and laminating activities that ceased
operations at the end of April 2011.
Consolidating Bridgnorth foil rolling and laminating operations into our other European
operations will improve the competitiveness of our European foil and packaging production systems
in response to overcapacity and increased competition from manufacturers in low-cost countries.
The Bridgnorth closure impacted approximately 200 employees. For the year ended March 31, 2011, we
recorded $15 million of restructuring costs consisting of the following: $8 million in severance
and environmental costs; $2 million in contract termination and other expenses and $5 million in
asset impairment costs related to the write down of land and building to fair value.
In fiscal 2011, we recorded a $10 million gain on the sale of assets to Hindalco and $1
million in other restructuring related costs related to the previously announced closure of our
Rogerstone facility.
Also, we recorded an additional $3 million of restructuring expense for severance and
environmental costs and $2 million of contract termination and other costs related to restructuring
actions initiated in prior years at other European plants. For fiscal 2011, we made $6 million in
severance payments and $4 million in payments for environmental remediation and other costs.
For the year ended March 31, 2010, we made the following payments relating to restructuring
programs in Europe: $30 million in severance payments, $10 million in payments for environmental
remediation and $6 million of other payments. We made additional
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
staff reductions at plants in
Italy, Switzerland and Germany, resulting in additional one-time terminations charges of $4
million. We also incurred $4 million of environmental and other costs at our Borgofranco facility,
which was closed in March 2006.
In fiscal 2009, we initiated a number of restructuring actions throughout Europe to reduce
labor and overhead costs through capacity and staff reductions. Most significantly, in March 2009,
we announced the closure of our aluminum sheet mill in Rogerstone, South Wales, U.K. Operations
ceased in April 2009, resulting in the elimination of 440 positions. The total amount expected to
be incurred in connection with this closure is $63 million, of which $60 million was recorded in
fiscal 2009. We recorded an additional
$3 million of net costs related to on-going maintenance of the Rogerstone facility, write-down
of additional plant assets and adjustments of reserves established in fiscal 2009. The components
of restructuring charges related to Rogerstone for the year ended March 31, 2010 and 2009 are as
follows (in millions):
Year Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Severance related costs |
$ | (2 | ) | $ | 20 | |||
Environmental remediation expense |
1 | 20 | ||||||
Fixed asset impairments(A) |
| 12 | ||||||
Write-down of parts, supplies and scrap(A) |
2 | 8 | ||||||
Reduction of reserve associated with unfavorable contract(A) |
| (3 | ) | |||||
Other exit costs |
2 | 3 | ||||||
$ | 3 | $ | 60 | |||||
(A) | These non-cash items are not included in the restructuring provision table above but have been reflected as reductions to the respective balance sheet accounts. |
Also in March 2009, we announced plans to streamline operations at plants in France and
Germany. At our facility in Rugles, located in Upper Normandy, France, we eliminated approximately
80 positions. The facility continues the operation of its three major processes, including
continuous casting, foil rolling, and finishing. For the year ended March 31, 2009, we recorded $9
million in severance-related costs. We also recorded $1 million in severance costs at our Ohle,
Germany facility related to the elimination of 13 positions.
North America
We recorded $13 million and $4 million of restructuring expense for the year ended March 31,
2011 and 2010, respectively, related to the relocation of our North American headquarters from
Cleveland to Atlanta, and made $17 million in payments related to this move.
In November 2008, we announced a Voluntary Separation Program (VSP) available to salaried
employees in North America and the Corporate office aimed at reducing staff levels. This VSP
supplemented a pre-existing Involuntary Severance Program (ISP). We eliminated approximately 120
positions and recorded $16 million in severance-related costs for the VSP and ISP programs for the
year ended March 31, 2009. This program continued into fiscal 2010, with an additional $1 million
in severance costs recorded under the voluntary and involuntary separation programs. We made $11
million in severance payments related to this plan in the year ended March 31, 2010.
South America
We recorded $7 million of restructuring expense for the year ended March 31, 2011 for employee
termination and certain environmental remediation costs related to the closure of our primary
aluminum smelter at Aratu, Brazil, of which $2 million were expensed as incurred; therefore, these
costs were not reflected in the table above. The closure was in response to high operating costs
and lack of competitively priced energy supply. The closure affected approximately 300 workers and
was completed by December 31, 2010. For fiscal 2011, we made $1 million in severance payments. In
December 2009, we completed all restructuring actions initiated in fiscal 2009.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2009, we announced that we would cease production of alumina at our Ouro Preto
facility in Brazil effective May 2009. The global economic crisis and the dramatic drop in alumina
prices made alumina production at Ouro Preto economically unfeasible. For the foreseeable future,
the Ouro Preto facility will purchase alumina through third-parties. Approximately 290 positions
were eliminated at Ouro Preto, including 150 employees and 140 contractors. For the year ended
March 31, 2009, we recorded approximately $2 million in severance-related costs. Other exit costs
include less than $1 million related to the idling of the refinery. Other activities related to the
facility, including electric power generation and the production of primary aluminum, will continue
unaffected.
Asia
In February 2009, we recorded approximately $1 million in severance-related costs related to a
voluntary retirement program in Asia which eliminated 34 positions. Also, during the year ended
March 31, 2009, we recorded an impairment charge of approximately $5 million related to the
obsolescence of certain production related fixed assets. These impairment charges are not included
in the restructuring provision table above but were reflected as reductions to the respective
balance sheet account.
Corporate
We recorded $3 million of restructuring expense for the year ended March 31, 2011, related to
lease termination costs incurred in the relocation of our Corporate headquarters to a new facility
in Atlanta and other contract termination fees. The lease termination costs include a $2 million
deferred credit on the former facility.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in millions).
March 31, | ||||||||
2011 | 2010 | |||||||
Trade accounts receivable |
$ | 1,413 | $ | 1,080 | ||||
Other accounts receivable |
74 | 67 | ||||||
Accounts receivable third parties |
1,487 | 1,147 | ||||||
Allowance for doubtful accounts third parties |
(7 | ) | (4 | ) | ||||
1,480 | 1,143 | |||||||
Other accounts receivable related parties |
28 | 24 | ||||||
Accounts receivable, net |
$ | 1,508 | $ | 1,167 | ||||
Allowance for Doubtful Accounts
As of March 31, 2011 and 2010, our allowance for doubtful accounts represented approximately
0.5% and 0.4%, respectively, of gross accounts receivable.
Activity in the allowance for doubtful accounts is as follows (in millions).
Balance at | Additions | Accounts | Foreign | |||||||||||||||||
Beginning | Charged to | Recovered/ | Exchange | Balance at | ||||||||||||||||
of Period | Expense | (Written-Off) | and Other | End of Period | ||||||||||||||||
Year Ended March 31, 2009 |
$ | 1 | $ | 2 | $ | (1 | ) | $ | | $ | 2 | |||||||||
Year Ended March 31, 2010 |
$ | 2 | $ | 2 | $ | (1 | ) | $ | 1 | $ | 4 | |||||||||
Year Ended March 31, 2011 |
$ | 4 | $ | 2 | $ | (1 | ) | $ | 2 | $ | 7 |
Forfaiting and Factoring of Trade Receivables
Novelis Korea Ltd. forfaits trade receivables in the ordinary course of business. These trade
receivables are typically outstanding for 60 to 120 days. Forfaiting is a non-recourse method to
manage credit and interest rate risks. Under this method, customers contract
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to pay a financial
institution. The institution assumes the risk of non-payment and remits the invoice value (net of a
fee) to us after presentation of a proof of delivery of goods to the customer. We do not retain a
financial or legal interest in these receivables, and they are excluded from the accompanying
consolidated balance sheets. Forfaiting expenses are included in Selling, general and
administrative expenses in our consolidated statements of operations.
Our Brazilian operations factor, without recourse, certain trade receivables that are
unencumbered by pledge restrictions. Under this method, customers are directed to make payments on
invoices to a financial institution, but are not contractually required to do so. The financial
institution pays us for invoices it has approved for payment (net of a fee). We do not retain
financial or legal interest in these receivables, and they are excluded from the accompanying
consolidated balance sheets. Factoring expenses are included in Selling, general and administrative
expenses in our consolidated statements of operations.
Summary Disclosures of Financial Amounts
The following tables summarize amounts relating to our forfaiting and factoring activities (in
millions).
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Receivables forfaited |
$ | 396 | $ | 423 | $ | 570 | ||||||
Receivables factored |
$ | 77 | $ | 149 | $ | 70 | ||||||
Forfaiting expense |
$ | 1 | $ | 2 | $ | 5 | ||||||
Factoring expense |
$ | 1 | $ | 1 | $ | 1 |
March 31, | ||||||||
2011 | 2010 | |||||||
Forfaited receivables outstanding |
$ | 52 | $ | 83 | ||||
Factored receivables outstanding |
$ | 8 | $ | 34 |
4. INVENTORIES
Inventories consist of the following (in millions).
March 31, | ||||||||
2011 | 2010 | |||||||
Finished goods |
$ | 293 | $ | 270 | ||||
Work in process |
529 | 431 | ||||||
Raw materials |
414 | 295 | ||||||
Supplies |
109 | 93 | ||||||
1,345 | 1,089 | |||||||
Allowances |
(7 | ) | (6 | ) | ||||
Inventories |
$ | 1,338 | $ | 1,083 | ||||
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consists of the following (in millions).
March 31, | ||||||||
2011 | 2010 | |||||||
Land and property rights |
$ | 228 | $ | 227 | ||||
Buildings |
816 | 781 | ||||||
Machinery and equipment |
2,787 | 2,645 | ||||||
3,831 | 3,653 | |||||||
Accumulated depreciation and amortization |
(1,441 | ) | (1,074 | ) | ||||
2,390 | 2,579 | |||||||
Construction in progress |
153 | 53 | ||||||
Property, plant and equipment, net |
$ | 2,543 | $ | 2,632 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2011 and 2010, there were $328 million and $242 million, respectively, of
fully depreciated assets included in our consolidated balance sheet.
Total depreciation expense is shown in the table below (in millions). Capitalized interest
related to construction of property, plant and equipment was immaterial in the periods presented.
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Depreciation expense related to property, plant and equipment |
$ | 357 | $ | 336 | $ | 398 | ||||||
Asset impairments
During the year ended March 31, 2011, we recorded no asset impairment charges that were
included in Other (income) expense, net on the consolidated statement of operations. However,
during the year ended March 31, 2011, we recorded impairment charges of approximately $5 million
related to the write down to fair value land and building at our Bridgnorth facility which has been
included in Restructuring charges, net on the consolidated statement of operations (see Note 2
Restructuring Programs). During the years ended March 31, 2010 and 2009, we recorded $1 million
of impairment charges in each period, which is included in Other (income) expense, net on the
consolidated statement of operations. During the year ended March 31, 2009, we also recorded
impairment charges totaling $17 million related to assets in Europe and Asia which have been
included in Restructuring charges, net on the consolidated statement of operations (see Note 2
Restructuring Programs).
Leases
We lease certain land, buildings and equipment under non-cancelable operating leases expiring
at various dates through 2015, and we lease assets in Sierre, Switzerland including a 15-year
capital lease through 2020 from Alcan. Operating leases generally have five to ten-year terms, with
one or more renewal options, with terms to be negotiated at the time of renewal. Various facility
leases include provisions for rent escalation to recognize increased operating costs or require us
to pay certain maintenance and utility costs.
The following table summarizes rent expense included in our consolidated statements of
operations (in millions):
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Rent expense |
$ | 26 | $ | 24 | $ | 25 | ||||||
Future minimum lease payments as of March 31, 2011, for our operating and capital leases
having an initial or remaining non-cancelable lease term in excess of one year are as follows (in
millions).
Operating | Capital Lease | |||||||
Year Ending March 31, |
Leases | Obligations | ||||||
2012 |
$ | 24 | $ | 8 | ||||
2013 |
20 | 7 | ||||||
2014 |
18 | 7 | ||||||
2015 |
17 | 7 | ||||||
2016 |
15 | 7 | ||||||
Thereafter |
44 | 28 | ||||||
Total minimum lease payments |
$ | 138 | 64 | |||||
Less: interest portion on capital lease |
15 | |||||||
Principal obligation on capital leases |
$ | 49 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The future minimum lease payments for capital lease obligations exclude $3 million of
unamortized fair value adjustments recorded as a result of the Arrangement (see Note 10 Debt).
Assets and related accumulated amortization under capital lease obligations as of March 31,
2011 and 2010 are as follows (in millions).
March 31, | ||||||||
2011 | 2010 | |||||||
Assets under capital lease obligations: |
||||||||
Buildings |
$ | 11 | $ | 10 | ||||
Machinery and equipment |
78 | 67 | ||||||
89 | 77 | |||||||
Accumulated amortization |
(44 | ) | (29 | ) | ||||
$ | 45 | $ | 48 | |||||
Sale of assets
For the year ended March 31, 2011, we recorded a $10 million gain on sale of assets to
Hindalco related to the previously announced closure of our Rogerstone facility (see Note 2
Restructuring). There were no material sales of fixed assets during the years March 31, 2010 and
2009.
Asset Retirement Obligations
The following is a summary of our asset retirement obligation activity. The period-end
balances are included in Other long-term liabilities in our consolidated balance sheets (in
millions).
Balance at | ||||||||||||||||
Beginning | Balance at | |||||||||||||||
of Period | Accretion | Other | End of Period | |||||||||||||
Year Ended March 31, 2009 |
$ | 16 | $ | 1 | $ | (1 | ) | $ | 16 | |||||||
Year Ended March 31, 2010 |
$ | 16 | $ | 1 | $ | | $ | 17 | ||||||||
Year Ended March 31, 2011 |
$ | 17 | $ | 1 | $ | (2 | ) | $ | 16 |
6. GOODWILL AND INTANGIBLE ASSETS
The following tables summarize the changes in our goodwill (in millions).
March 31, 2011 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount(A) | Impairment | Value | ||||||||||
North America |
$ | 1,148 | $ | (860 | ) | $ | 288 | |||||
Europe |
511 | (330 | ) | 181 | ||||||||
South America |
292 | (150 | ) | 142 | ||||||||
$ | 1,951 | $ | (1,340 | ) | $ | 611 | ||||||
March 31, 2010 | ||||||||||||||||
Gross | Net | |||||||||||||||
Carrying | Accumulated | Carrying | ||||||||||||||
Amount(A) | Adjustments(B) | Impairment | Value | |||||||||||||
North America |
$ | 1,148 | $ | | $ | (860 | ) | $ | 288 | |||||||
Europe |
511 | | (330 | ) | 181 | |||||||||||
South America |
263 | 29 | (150 | ) | 142 | |||||||||||
$ | 1,922 | $ | 29 | $ | (1,340 | ) | $ | 611 | ||||||||
(A) | Represents goodwill balance, net of prior period accumulated adjustments and excluding accumulated impairments. | |
(B) | During the second quarter of fiscal 2010, we identified an immaterial error in our consolidated annual and interim financial statements included in previously filed Forms 10-Q and Forms 10-K for fiscal 2009. The error related to deferred income taxes recorded in connection with purchase accounting in South America. As of and for the year ended March 31, 2010, the impact of the correction was an increase to goodwill of $29 million, an increase to deferred tax liabilities of $25 million and a reduction of our income tax expense of $4 million. |
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The components of intangible assets were as follows (in millions).
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||||||
Weighted | Gross | Net | Gross | Net | ||||||||||||||||||||||||
Average | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||||
Life | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||||
Tradenames |
20 years | $ | 145 | $ | (28 | ) | $ | 117 | $ | 140 | $ | (20 | ) | $ | 120 | |||||||||||||
Technology and software |
13 years | 210 | (72 | ) | 138 | 206 | (57 | ) | 149 | |||||||||||||||||||
Customer-related intangible assets |
20 years | 475 | (92 | ) | 383 | 464 | (67 | ) | 397 | |||||||||||||||||||
Favorable energy supply contract |
9.5 years | 123 | (54 | ) | 69 | 124 | (42 | ) | 82 | |||||||||||||||||||
Other favorable contracts |
3.3 years | 16 | (16 | ) | | 15 | (14 | ) | 1 | |||||||||||||||||||
16.9 years | $ | 969 | $ | (262 | ) | $ | 707 | $ | 949 | $ | (200 | ) | $ | 749 | ||||||||||||||
Our favorable energy supply contract and other favorable contracts are amortized over
their estimated useful lives using methods that reflect the pattern in which the economic benefits
are expected to be consumed. All other intangible assets are amortized using the straight-line
method.
Amortization expense related to intangible assets is as follows (in millions):
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Total Amortization expense related to intangible assets |
$ | 60 | $ | 66 | $ | 59 | ||||||
Less: Amortization expense related to intangible assets included in Cost of goods sold
(exclusive of depreciation and amortization)(A) |
(13 | ) | (18 | ) | (18 | ) | ||||||
Amortization expense related to intangible assets included in Depreciation and amortization |
$ | 47 | $ | 48 | $ | 41 | ||||||
(A) | Relates to amortization of favorable energy and other supply contracts. |
Estimated total amortization expense related to intangible assets for each of the five
succeeding fiscal years is as follows (in millions). Actual amounts may differ from these estimates
due to such factors as customer turnover, raw material consumption patterns, impairments,
additional intangible asset acquisitions and other events.
Fiscal Year Ending March 31, |
||||
2012 |
$ | 61 | ||
2013 |
60 | |||
2014 |
59 | |||
2015 |
59 | |||
2016 |
59 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
The entity that has a controlling financial interest in a variable interest entity (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 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
VIEs 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. Logans creditors do
not have recourse to our general credit.
Novelis has a majority voting right on Logans board of directors and has the ability to
direct the majority of Logans production operations. We also have the ability to take the majority
share of production and associated costs. These facts qualify Novelis as Logans 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.
On April 4, 2011, a consortium of Japanese companies, agreed to purchase ARCOs share of
Logan. The transaction does not impact Novelis interest in Logan.
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 1 | $ | 3 | ||||
Accounts receivable |
27 | 29 | ||||||
Inventories, net |
36 | 31 | ||||||
Prepaid expenses and other current assets |
| 1 | ||||||
Total current assets |
64 | 64 | ||||||
Property, plant and equipment, net |
13 | 10 | ||||||
Goodwill |
12 | 12 | ||||||
Deferred income taxes |
52 | 41 | ||||||
Other long-term assets |
3 | 3 | ||||||
Total assets |
$ | 144 | $ | 130 | ||||
Liabilities |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 26 | $ | 23 | ||||
Accrued expenses and other current liabilities |
11 | 12 | ||||||
Total current liabilities |
37 | 35 | ||||||
Accrued postretirement benefits |
120 | 97 | ||||||
Other long-term liabilities |
2 | 3 | ||||||
Total liabilities |
$ | 159 | $ | 135 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
The following table summarizes the ownership structure and our ownership percentage of the
non-consolidated affiliates in which we have an investment as of March 31, 2011, and which we
account for using the equity method. We do not control our non-consolidated affiliates, but have
the ability to exercise significant influence over their operating and financial policies. We have
no material investments that we account for using the cost method.
Ownership | ||||||
Affiliate Name |
Ownership Structure |
Percentage | ||||
Aluminium Norf GmbH |
Corporation | 50 | % | |||
Consorcio Candonga |
Unincorporated Joint Venture | 50 | % | |||
MiniMRF LLC |
Limited Liability Company | 50 | % |
The following table summarizes our share of the condensed assets, liabilities and equity
of our equity method affiliates. The results include the unamortized fair value adjustments
relating to our non-consolidated affiliates due to the Arrangement.
March 31, | ||||||||
2011 | 2010 | |||||||
Assets: |
||||||||
Current assets |
$ | 80 | $ | 82 | ||||
Non-current assets |
889 | 856 | ||||||
Total assets |
$ | 969 | $ | 938 | ||||
Liabilities: |
||||||||
Current liabilities |
$ | 63 | $ | 61 | ||||
Non-current liabilities |
163 | 168 | ||||||
Total liabilities |
226 | 229 | ||||||
Equity: |
||||||||
Novelis equity investment |
743 | 709 | ||||||
Total liabilities and equity |
$ | 969 | $ | 938 | ||||
Included in the accompanying consolidated financial statements are transactions and
balances arising from businesses 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). These results include the incremental depreciation and amortization expense that we
record in our equity method accounting as a result of fair value adjustments we made to our
investments in non-consolidated affiliates due to the Arrangement. These results also include the
$160 million impairment charge to reduce the carrying value of our investment in Aluminium Norf
GmbH for the year ended March 31, 2009. The results for the year ended March 31, 2010 also include
a $10 million after tax benefit from the refinement of our methodology for recording depreciation
and amortization on the step-up in our basis in the underlying assets of an investee.
Year Ended March 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
$ | 229 | $ | 242 | $ | 277 | ||||||
Costs, expenses and
provision for taxes
on income |
241 | 257 | 289 | |||||||||
Impairment charge |
| | 160 | |||||||||
Net income (loss) |
$ | (12 | ) | $ | (15 | ) | $ | (172 | ) | |||
Purchase of tolling
services from
Aluminium Norf GmbH
(Norf) |
$ | 229 | $ | 241 | $ | 257 | ||||||
During the year ended March 31, 2011, Norf borrowed $15 million in a related party loan
and repaid $14 million throughout the year in prior loans. We earned less than $1 million of
interest income these loan due from Norf during each of the periods presented in the table above.
We estimate the probability of receiving the full amount of the loan payments from Norf as high;
thus, no allowance for loan loss was provided for this loan as of March 31, 2011 and 2010.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consolidated
balance sheets (in millions). We had no other material related party balances.
March 31, | ||||||||
2011 | 2010 | |||||||
Accounts receivable |
$ | 28 | $ | 24 | ||||
Other long-term receivables |
$ | 19 | $ | 21 | ||||
Accounts payable |
$ | 50 | $ | 53 |
On December 17, 2010, we paid $1.7 billion to our shareholder as a return of capital.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following (in millions).
March 31, | ||||||||
2011 | 2010 | |||||||
Accrued compensation and benefits |
$ | 199 | $ | 165 | ||||
Accrued interest payable |
64 | 15 | ||||||
Accrued income taxes |
35 | 25 | ||||||
Other current liabilities |
270 | 231 | ||||||
Accrued expenses and other current liabilities |
$ | 568 | $ | 436 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. DEBT
Debt consists of the following (in millions).
March 31, 2011 | 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 |
2.43 | % | $ | 17 | $ | | $ | 17 | $ | 75 | $ | | $ | 75 | ||||||||||||||
Novelis Inc. |
||||||||||||||||||||||||||||
Floating rate Term Loan Facility, due March
2017 |
4.00 | % | 1,496 | (38 | ) | 1,458 | | | | |||||||||||||||||||
Floating rate Term Loan Facility, due July 2014 |
| %(C) | | | | 292 | | 292 | ||||||||||||||||||||
8.375% Senior Notes, due December 2017 |
8.375 | % | 1,100 | | 1,100 | | | | ||||||||||||||||||||
8.75% Senior Notes, due December 2020 |
8.75 | % | 1,400 | (1 | ) | 1,399 | | | | |||||||||||||||||||
11.5% Senior Notes, due February 2015 |
| %(C) | | | | 185 | (3 | ) | 182 | |||||||||||||||||||
7.25% Senior Notes, due February 2015 |
7.25 | %(C) | 74 | 3 | 77 | 1,124 | 41 | 1,165 | ||||||||||||||||||||
Novelis Corporation |
||||||||||||||||||||||||||||
Floating rate Term Loan Facility, due July 2014 |
| %(C) | | | | 859 | (46 | ) | 813 | |||||||||||||||||||
Novelis Switzerland S.A. |
||||||||||||||||||||||||||||
Capital lease obligation, due December 2019
(Swiss francs (CHF) 46 million) |
7.50 | % | 48 | (3 | ) | 45 | 45 | (3 | ) | 42 | ||||||||||||||||||
Capital lease obligation, due August 2011 (CHF
1 million) |
2.49 | % | 1 | | 1 | 1 | | 1 | ||||||||||||||||||||
Novelis Brazil |
||||||||||||||||||||||||||||
BNDES loans, due December 2018 through March
2019 |
5.50 | % | 5 | (2 | ) | 3 | | | | |||||||||||||||||||
Novelis Korea Limited |
||||||||||||||||||||||||||||
Bank loan, due October 2010 |
| % | | | | 100 | | 100 | ||||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Other debt, due December 2011 through November
2015 |
4.16 | % | 3 | | 3 | 1 | | 1 | ||||||||||||||||||||
Total debt third parties |
4,144 | (41 | ) | 4,103 | 2,682 | (11 | ) | 2,671 | ||||||||||||||||||||
Less: Short term borrowings |
(17 | ) | | (17 | ) | (75 | ) | | (75 | ) | ||||||||||||||||||
Current portion of long term debt |
(21 | ) | | (21 | ) | (116 | ) | | (116 | ) | ||||||||||||||||||
Long-term debt, net of current portion
third parties: |
$ | 4,106 | $ | (41 | ) | $ | 4,065 | $ | 2,491 | $ | (11 | ) | $ | 2,480 | ||||||||||||||
(A) | Interest rates are as of March 31, 2011 and exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of the Arrangement, the debt exchange completed in fiscal 2009 and the Refinancing completed in December 2010. | |
(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. In connection with the refinancing transaction of our prior secured term loan with the 2010 Term Loan Facility, a portion of these historical fair value adjustments were allocated to the 2010 Term Loan Facility, and subsequently to the amended 2011 Term Loan Facility. | |
(C) | On December 17, 2010, we completed a series of refinancing transactions which resulted in the repayment of the total principal amount of the floating rate Term Loan Facility due July 2014, the total outstanding principal amount of the 11.5% Senior Notes due February 2015 and $1.05 billion of aggregate principal amount of 7.25% Senior Notes due 2015. See Refinancing below for additional discussion. |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Principal repayment requirements for our total debt over the next five years and
thereafter (excluding unamortized fair value adjustments and using exchange rates as of March 31,
2011 for our debt denominated in foreign currencies) are as follows (in millions).
Amount | ||||
Within one year |
$ | 38 | ||
2 years |
20 | |||
3 years |
21 | |||
4 years |
96 | |||
5 years |
21 | |||
Thereafter |
3,948 | |||
Total |
$ | 4,144 | ||
Refinancing
On December 17, 2010 we completed a series of refinancing transactions. The refinancing
transactions consisted of the sale of $1.1 billion in aggregate principal amount of 8.375% Senior
Notes Due 2017 (the 2017 Notes) and $1.4 billion in aggregate principal amount of 8.75% Senior
Notes Due 2020 (the 2020 Notes and together with the 2017 Notes, the Notes) and a new $1.5 billion
secured term loan credit facility (the 2010 Term Loan Facility).
The proceeds from the refinancing transactions were used to repay our prior secured term loan
credit facility, to fund our tender offers and related consent solicitations for our 7.25% Senior
Notes and our 11.5% Senior Notes and to pay premiums, fees and expenses associated with the
refinancing. In addition, a portion of the proceeds were used to fund a distribution of $1.7
billion as a return of capital to our shareholder.
In addition, we replaced our existing $800 million asset based loan (ABL) facility with a new
$800 million ABL facility (the 2010 ABL Facility). We refer to the 2010 Term Loan Facility and the
2010 ABL Facility collectively as our new senior secured credit facilities.
We also commenced a cash tender offer and consent solicitation for our 7.25% Senior Notes due
2015 (the 7.25% Notes) and our 11.5% Senior Notes due 2015 (the 11.5% Notes). The entire $185
million aggregate outstanding principal amount of the 11.5% Notes was tendered and redeemed. Of
the $1.1 billion aggregate principal amount of the 7.25% Notes, $74 million was not redeemed and is
expected to remain outstanding through maturity in February 2015. The 7.25% Notes that remain
outstanding are no longer subject to substantially all of the restrictive covenants and certain
events of default originally included in the indenture for the 7.25% Notes.
We paid tender premiums, fees and other costs of $174 million associated with the refinancing
transactions, including fees paid to lenders, arrangers, and outside professionals such as
attorneys and rating agencies. In accordance with FASB ASC 470 Debt, we performed an analysis
to determine whether the old debt had been extinguished or modified. This analysis determines the
treatment of fees paid in connection with the transaction and any existing unamortized fees,
discounts and fair value adjustments associated with the old debt. As a result of that analysis,
we recorded a Loss on early extinguishment of debt of $74 million. The remaining new fees and
existing unamortized fees, discounts and fair value adjustments associated with the old debt of
$125 million were capitalized and will be amortized as an increase to interest expense
over the term of the related debt.
On March 10, 2011 we amended the 2010 Term Loan Facility originally entered into on
December 17, 2010, and entered into an amended agreement (the 2011 Term Loan Facility) due March
2017. We paid an additional $19 million in fees and other costs associated with the amendment. We
recorded an additional Loss on early extinguishment of debt of $10 million. The remaining new fees
and existing unamortized fees, discounts and fair value adjustments of $9 million were capitalized
and will be amortized as an increase to interest expense over the term of the 2011 Term
Loan Facility. The amended term loan resulted in a reduction of interest rate from a spread of
3.75% and LIBOR floor of 150 basis points to a spread of 3.00% and LIBOR floor of 100 basis points.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2017 Notes and 2020 Notes
Interest on the Notes is payable on June 15 and December 15 of each year, commencing on June
15, 2011. The Notes will mature on December 15, 2017 and 2020, respectively. Upon a change of
control, we must offer to purchase the Notes at 101% of the principal amount, plus accrued and
unpaid interest to the purchase date.
The Notes are our senior unsecured obligations and rank equally with all of our existing and
future unsecured senior indebtedness. The Notes are guaranteed, jointly and severally, on a senior
unsecured basis, by all of our existing and future Canadian and U.S. restricted subsidiaries,
certain of our existing foreign restricted subsidiaries and our other restricted subsidiaries that
guarantee debt in the future under any credit facilities, provided that the borrower of such debt
is a Canadian or a U.S. subsidiary (the Guarantors). The Notes and the guarantees effectively
rank junior to our secured debt and the secured debt of the guarantors (including debt under our
new senior secured credit facilities), to the extent of the value of the assets securing that debt.
Prior to December 15, 2013 in the case of the 2017 Notes and prior to December 15, 2015 in the
case of the 2020 Notes, the Company, at its option and from time to time, may redeem all or a
portion of the Notes by paying a make-whole premium calculated under the Indenture. At any time
on or after December 15, 2013 in the case of the 2017 Notes and on or after December 15, 2015 in
the case of the 2020 Notes, the Company, at its option and from time to time, may redeem all or a
portion of the applicable Notes. The redemption prices for the Notes are calculated based on a
percentage of the principal amount of the Notes being redeemed, plus accrued and unpaid interest,
if any, to the redemption date, and are dependent on the date on which the Notes are redeemed.
These percentages range from between 100.000% and 106.281% in the case of the 2017 Notes and from
between 100.000% and 104.375% in the case of the 2020 Notes. At any time prior to December 15,
2013, the Company may also redeem up to 35% of the original aggregate principal amount of each
series of the Notes with the proceeds of certain equity offerings, at a redemption price equal to
108.375% of the principal amount of the Notes being redeemed (in the case of the 2017 Notes) and
108.75% of the principal amount of the Notes being redeemed (in the case of the 2020 Notes), plus,
in each case, accrued and unpaid interest, if any, to the redemption date, provided that at least
65% of the original aggregate principal amount of the applicable series of Notes issued remains
outstanding after the redemption.
The Notes contain customary covenants and events of default that will limit our ability and,
in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and
provide additional guarantees, (2) pay dividends beyond certain amounts and make other restricted
payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds
from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of
certain of the Companys subsidiaries to pay dividends or make other distributions to the Company,
(7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions,
(9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all
or substantially all of the our assets and the assets of certain of our subsidiaries. During any
future period in which either Standard & Poors Ratings Group, Inc., a division of the McGraw-Hill
Companies, Inc. or Moodys Investors Service, Inc. have assigned an investment grade credit rating
to the Notes and no default or event of default under the Indenture has occurred and is continuing,
most of the covenants will be suspended.
The Notes were registered under the Securities Act of 1933, as amended (the Securities
Act) effective April 14, 2011, pursuant to Regulation S of the Securities Act.
New Senior Secured Credit Facilities
Our new senior secured credit facilities consist of (1) the $1.5 billion six-year 2011
Term Loan Facility that may be increased in minimum amounts of $50 million per increase provided
that the senior secured net leverage ratio shall not, on a proforma basis, exceed 2.5 to 1 and (2)
the $800 million five-year New ABL Facility that may be increased by an additional $200 million.
Scheduled principal amortization payments under the 2011 Term Loan Facility are $3.75 million per
calendar quarter. Any unpaid principal will be due in full in March 2017. Borrowings under the
2010 ABL Facility are subject to certain limitations, generally based on 85% of the book value of
eligible North American and certain eligible European accounts receivable; plus up to the lesser of
(i) 75% of the net book value of all eligible North American and U.K. inventory or (ii) 85% of the
appraised net orderly liquidation value of all eligible North American and U.K. inventory; minus
such reserves as the agent bank may establish in good faith in accordance with such agent
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
banks
permitted discretion. Substantially all of our assets are pledged as collateral under the new
senior secured credit facilities. The new senior secured credit facilities are guaranteed by
substantially all of our restricted subsidiaries that guarantee the Notes. Generally, for both the
2011 Term Loan Facility and 2010 ABL Facility, interest rates reset periodically and interest is
payable on a periodic basis depending on the type of loan. We may prepay borrowings under the new
senior secured credit facilities, if certain
minimum prepayment amounts and breakage costs are satisfied.
The new senior secured credit facilities include various customary covenants and events of
default, including limitations on our ability to 1) make certain restricted payments, 2) incur
additional indebtedness, 3) sell certain assets, 4) enter into sale and leaseback transactions, 5)
make investments, loans and advances, 6) pay dividends and distributions beyond certain amounts, 7)
engage in mergers, amalgamations or consolidations, 8) engage in certain transactions with
affiliates, and 9) prepay certain indebtedness. In addition, under the New ABL Facility, if (a)
our excess availability under the New ABL Facility is less than the greater of (i) 12.5% of the
lesser of (x) the total New ABL Facility commitment at any time and (y) the then applicable
borrowing base and (ii) $90 million, at any time or (b) any event of default has occurred and is
continuing, we are required to maintain a minimum fixed charge coverage ratio of at least 1.1 to 1
until (1) such excess availability has subsequently been at least the greater of (i) 12.5% of the
lesser of (x) the total New ABL Facility commitments at such time and (y) the then applicable
borrowing base for 30 consecutive days and (ii) $90 million and (2) no default is outstanding
during such 30 day period. As of March 31, 2011 our excess availability under the New ABL Facility
was $767 million, or 96% of the lender commitments.
Further, under the New Term Loan Facility we may not permit our total net leverage ratio as of
the last day of our four consecutive quarters ending with any fiscal quarter to be greater than the
ratio set forth below opposite the period in the table below during which the last day of such
period occurs:
Total Net | ||
Period |
Leverage Ratio | |
March 30, 2011 through March 31, 2012 |
4.75 to 1.0 | |
April 1, 2012 through March 31, 2013 |
4.50 to 1.0 | |
April 1, 2013 through March 31, 2014 |
4.375 to 1.0 | |
April 1, 2014 through March 31, 2015 |
4.25 to 1.0 | |
April 1, 2015 and thereafter |
4.0 to 1.0 |
The new senior secured credit facilities also contains various affirmative covenants,
including covenants with respect to our financial statements, litigation and other reporting
requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations)
causing new subsidiaries to pledge collateral and guaranty our obligations. As of March 31, 2011,
we were compliant with these covenants.
BNDES Loans
In the fourth quarter of fiscal 2011, Novelis Brazil entered into two new loan agreements (the
BNDES loans) with Brazils National Bank for Economic and Social Development (BNDES) related to the
plant expansion in Pindamonhangaba, Brazil (Pinda). The agreements provided for a commitment of
borrowings at a fixed Brazilian Real (R$) rate of 5.5% up to $4 million (R$7 million) and $15
million (R$25 million) entered into in February and March of 2011, respectively. As of March 31,
2011, we had borrowed $1 million (R$2 million) and $4 million (R$7 million) under the BNDES loan
agreements with maturity dates of December 2018 and March 2019, respectively. Since the BNDES loans
bear sub-market interest rates, we have calculated the fair value of the loans at inception and
will amortize the discount over the life of the loans using the effective interest method. As of
March 31, 2011, the total unamortized discount on the BNDES loans was $2 million.
Short-Term Borrowings and Lines of Credit
As of March 31, 2011, our short-term borrowings were $17 million consisting of bank
overdrafts. As of March 31, 2011, $33 million of the ABL Facility was utilized for letters of
credit, and we had $767 million in remaining availability under this revolving credit facility. The
weighted average interest rate on our total short-term borrowings was 2.43% and 1.71% as of March
31, 2011 and 2010, respectively.
As of March 31, 2011, we had $151 million of outstanding letters of credit in Korea which are
not related to the ABL Facility.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest
rate which impacts our variable-rate debt. Prior to the completion of the December 17, 2010
refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the
refinancing transaction, our exposure to changes in the benchmark LIBOR interest rate was limited.
The 2011 Term Loan Facility contains a floor feature of the higher of LIBOR or 100 basis points
applied to a spread of 3.00%. As of March 31, 2011, this floor feature was in effect, changing our
variable rate debt to fixed rate debt. We ceased hedge accounting for
these swaps on December 17, 2010. As of March 31, 2010, we had $520 million of interest rate
swaps, of which $510 million were designated as cash flow hedges. No interest rate swaps were
designated as of March 31, 2011.
We had 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%. On October 25, 2010, at maturity, we repaid
this $100 million loan. The swap expired concurrent with the maturity of the loan.
Capital Lease Obligations
In December 2004, we entered into a fifteen-year capital lease obligation with Alcan for
assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of
CHF 1.7 million, which is equivalent to $2 million at the exchange rate as of March 31, 2011.
In September 2005, we entered into a six-year capital lease obligation for equipment in
Switzerland which has an interest rate of 2.49% and fixed quarterly payments of CHF 0.2 million,
which is equivalent to less than $1 million at the exchange rate as of March 31, 2011.
11. 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 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, where market values are denominated in Indian rupees and converted to the
participants payroll currency at the time of exercise. The amount of cash paid is limited to (i)
2.5 times the target payout if exercised within one year of vesting or (ii) 3 times the target
payout if exercised after one year of vesting. The SARs do not transfer any shareholder rights in
Hindalco to a participant. The SARs are classified as liability awards and are remeasured at fair
value each reporting period until the SARs are settled.
The performance criterion for vesting is based on the actual overall Novelis operating
earnings before interest, taxes, depreciation and amortization, as adjusted (adjusted Operating
EBITDA) compared to the target adjusted Operating EBITDA established and approved each fiscal year.
The minimum threshold for vesting each year is 75% of each annual target adjusted Operating EBITDA,
at which point 75% of the SARs for that period would vest, with an equal pro rata amount of SARs
vesting through 100% achievement of the target. Given that the performance criterion is based on an
earnings target in a future period for each fiscal year, the grant date of the awards for
accounting purposes is generally not established until the performance criterion has been defined.
The RSUs under the 2011 LTIP vest in full three years from the grant date and are not subject
to performance criteria. The payout
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 years ended March 31, 2011 and 2010.
Year Ended March 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Novelis Long-Term Incentive Plan 2009 |
$ | 4 | $ | 6 | $ | | ||||||
Novelis Long-Term Incentive Plan 2010 |
9 | 3 | | |||||||||
Novelis Long-Term Incentive Plan 2011 |
5 | | | |||||||||
$ | 18 | $ | 9 | $ | | |||||||
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 in | ||||||||||
2011 LTIP |
RSUs | (in Indian Rupees) | millions) | |||||||||
RSUs outstanding as of March 31, 2010 |
| | $ | | ||||||||
Granted |
918,301 | 148.77 | 3 | |||||||||
Forfeited/Cancelled |
(12,244 | ) | 147.10 | |||||||||
RSUs outstanding as of March 31, 2011 |
906,057 | 148.79 | $ | 4 | ||||||||
Weighted | Weighted Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise Price | Contractual Term | Value (USD in | |||||||||||||
2011 LTIP |
SARs | (in Indian Rupees) | (In years) | millions) | ||||||||||||
SARs outstanding as of March 31, 2010 |
| | | $ | | |||||||||||
Granted |
7,213,839 | 148.77 | ||||||||||||||
Forfeited/Cancelled |
(96,187 | ) | 147.10 | |||||||||||||
SARs outstanding as of March 31, 2011 |
7,117,652 | 148.79 | 6.15 | $ | 10 | |||||||||||
Weighted | Weighted Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise Price | Contractual Term | Value (USD in | |||||||||||||
2010 LTIP |
SARs | (in Indian Rupees) | (In years) | millions) | ||||||||||||
SARs outstanding as of March 31, 2010 |
13,680,431 | 87.68 | 6.24 | $ | 29 | |||||||||||
Granted |
32,278 | 125.33 | ||||||||||||||
Exercised |
(2,002,387 | ) | 86.18 | |||||||||||||
Forfeited/Cancelled |
(657,831 | ) | 85.79 | |||||||||||||
SARs outstanding as of March 31, 2011 |
11,052,491 | 88.46 | 5.24 | $ | 25 | |||||||||||
Weighted | Weighted Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise Price | Contractual Term | Value (USD in | |||||||||||||
2009 LTIP |
SARs | (in Indian Rupees) | (In years) | millions) | ||||||||||||
SARs outstanding as of March 31, 2010 |
11,371,399 | 60.50 | 5.25 | $ | 18 | |||||||||||
Exercised |
(1,690,380 | ) | 60.50 | |||||||||||||
Forfeited/Cancelled |
(736,197 | ) | 60.50 | |||||||||||||
SARs outstanding as of March 31, 2011 |
8,944,822 | 60.50 | 4.22 | $ | 14 | |||||||||||
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 March 31, 2011 using the
following assumptions:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2011 LTIP |
2010 LTIP |
2009 LTIP |
||||
Risk-free interest rate |
7.61 - 7.91% | 7.63 - 7.93% | 7.65 - 7.95% | |||
Dividend yield |
0.65% | 0.65% | 0.65% | |||
Volatility |
49.43% | 52.31% | 54.34% | |||
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 March 31,
2011, 3,480,536 SARs were exercisable.
Unrecognized compensation expense related to the non-vested SARs (assuming all future
performance criteria are met) is $28 million which is expected to be realized over a weighted
average period of 1.6 years. Unrecognized compensation expense related to the RSUs is $3 million
and will be recognized over the vesting period of three years.
12. POSTRETIREMENT BENEFIT PLANS
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada,
Switzerland and the U.K.; unfunded defined benefit 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.
Some of our employees participated in defined benefit plans that were previously managed by
Alcan in Canada and the U.K. In Switzerland, we continue to participate in the Rio Tinto Alcan
defined benefit and defined contribution plans. The pension asset transfers of $49 million and the
pension liability transfers of $48 million for fiscal year 2009, relate to pension transfers from
Alcan.
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).
Year Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Funded pension plans |
$ | 41 | $ | 50 | $ | 29 | ||||||
Unfunded pension plans |
13 | 11 | 16 | |||||||||
Savings and defined contribution pension plans |
18 | 16 | 16 | |||||||||
Total contributions |
$ | 72 | $ | 77 | $ | 61 | ||||||
During fiscal year 2012, we expect to contribute $49 million to our funded pension plans,
$13 million to our unfunded pension plans and $20 million to our savings and defined contribution
plans.
Investment Policy and Asset Allocation
The companys overall investment strategy is to achieve a mix of approximately 50% of
investments for long-term growth (equities, real estate) and 50% for near-term benefit payments
(debt securities, other) with a wide diversification of asset categories, investment styles, fund
strategies and fund managers. Since most of the defined benefit plans are closed to new entrants,
we expect this strategy to gradually shift more investments toward near-term benefit payments.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Each of our funded pension plans is governed by an Investment Fiduciary, who establishes an
investment policy appropriate for the pension plan. The Investment Fiduciary is responsible for
selecting the asset allocation for each plan, monitoring investment managers, monitoring returns
versus benchmarks and monitoring compliance with the investment policy. The targeted allocation
ranges by asset class, and the actual allocation percentages for each class are listed in the table
below.
Allocation in | ||||||||||||
Aggregate as of | ||||||||||||
Target | March 31, | |||||||||||
Asset Category |
Allocation Ranges | 2011 | 2010 | |||||||||
Equity securities |
35 - 60 | % | 50 | % | 51 | % | ||||||
Debt securities |
35 - 55 | % | 39 | % | 40 | % | ||||||
Real estate |
0 - 25 | % | 4 | % | 4 | % | ||||||
Other |
0 - 15 | % | 7 | % | 5 | % |
Benefit Obligations, Fair Value of Plan Assets, Funded Status and Amounts Recognized in
Financial Statements
The following tables present the change in benefit obligation, change in fair value of plan
assets and the funded status for pension and other benefits (in millions), including the Swiss
Pension Plan. Other Benefits in the tables below include unfunded healthcare and life insurance
benefits provided to retired employees in Canada, Brazil and the U.S.
Pension Benefits | ||||||||||||
Year Ended March 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Benefit obligation at beginning of period |
$ | 1,154 | $ | 945 | $ | 991 | ||||||
Service cost |
36 | 35 | 38 | |||||||||
Interest cost |
64 | 61 | 57 | |||||||||
Members contributions |
5 | 5 | 9 | |||||||||
Benefits paid |
(45 | ) | (40 | ) | (39 | ) | ||||||
Amendments |
1 | 1 | | |||||||||
Transfers/mergers |
(6 | ) | 4 | 48 | ||||||||
Curtailments/termination benefits |
| 1 | (2 | ) | ||||||||
Actuarial (gains) losses |
23 | 107 | (33 | ) | ||||||||
Currency (gains) losses |
43 | 35 | (124 | ) | ||||||||
Benefit obligation at end of period |
$ | 1,275 | $ | 1,154 | $ | 945 | ||||||
Benefit obligation of funded plans |
$ | 1,101 | $ | 976 | $ | 787 | ||||||
Benefit obligation of unfunded plans |
174 | 178 | 158 | |||||||||
Benefit obligation at end of period |
$ | 1,275 | $ | 1,154 | $ | 945 | ||||||
Other Benefits | ||||||||||||
Year Ended March 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Benefit obligation at beginning of period |
$ | 167 | $ | 162 | $ | 171 | ||||||
Service cost |
7 | 6 | 7 | |||||||||
Interest cost |
10 | 10 | 10 | |||||||||
Benefits paid |
(7 | ) | (7 | ) | (7 | ) | ||||||
Curtailments/termination benefits |
| | (3 | ) | ||||||||
Actuarial (gains) losses |
18 | (6 | ) | (14 | ) | |||||||
Currency (gains) losses |
1 | 2 | (2 | ) | ||||||||
Benefit obligation at end of period |
$ | 196 | $ | 167 | $ | 162 | ||||||
Benefit obligation of funded plans |
$ | | $ | | $ | | ||||||
Benefit obligation of unfunded plans |
196 | 167 | 162 | |||||||||
Benefit obligation at end of period |
$ | 196 | $ | 167 | $ | 162 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension Benefits | ||||||||||||
Year Ended March 31, |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Change in fair value of plan assets |
||||||||||||
Fair value of plan assets at beginning of period |
$ | 805 | $ | 598 | $ | 724 | ||||||
Actual return on plan assets |
81 | 147 | (102 | ) | ||||||||
Members contributions |
5 | 5 | 9 | |||||||||
Benefits paid |
(45 | ) | (40 | ) | (39 | ) | ||||||
Company contributions |
54 | 62 | 45 | |||||||||
Transfers/mergers |
(6 | ) | 4 | 49 | ||||||||
Currency gains (losses) |
33 | 29 | (88 | ) | ||||||||
Fair value of plan assets at end of period |
$ | 927 | $ | 805 | $ | 598 | ||||||
March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Pension | Other | Pension | Other | |||||||||||||
Benefits | Benefits | Benefits | Benefits | |||||||||||||
Funded status |
||||||||||||||||
Funded Status at end of period: |
||||||||||||||||
Assets less the benefit obligation of
funded plans |
$ | (174 | ) | $ | | $ | (171 | ) | $ | | ||||||
Benefit obligation of unfunded plans |
(174 | ) | (196 | ) | (178 | ) | (167 | ) | ||||||||
$ | (348 | ) | $ | (196 | ) | $ | (349 | ) | $ | (167 | ) | |||||
As included on consolidated balance sheet |
||||||||||||||||
Accrued expenses and other current
liabilities |
$ | 11 | $ | 8 | $ | (12 | ) | $ | (7 | ) | ||||||
Accrued postretirement benefits |
337 | 188 | (337 | ) | (160 | ) | ||||||||||
$ | 348 | $ | 196 | $ | (349 | ) | $ | (167 | ) | |||||||
The postretirement amounts recognized in Accumulated other comprehensive income (loss),
before tax effects, are presented in the table below (in millions).
March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Pension | Other | Pension | Other | |||||||||||||
Benefits | Benefits | Benefits | Benefits | |||||||||||||
Net actuarial loss |
$ | 100 | $ | 19 | $ | 111 | $ | 1 | ||||||||
Prior service cost (credit) |
(5 | ) | | (6 | ) | | ||||||||||
Total postretirement
amounts recognized in
Accumulated other
comprehensive loss
(income) |
$ | 95 | $ | 19 | $ | 105 | $ | 1 | ||||||||
The estimated amounts that will be amortized from Accumulated other comprehensive income
(loss) into net periodic benefit cost in fiscal 2012 are $10 million for pension benefits and $1
million for other postretirement benefits, primarily related to net actuarial losses.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Benefit Obligation in Excess of Plan Assets
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets
for pension plans with an accumulated benefit obligation in excess of plan assets as of March 31,
2011 and 2010 are presented in the table below (in millions).