10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 16, 2006
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2005 | ||
or | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to . |
Commission file number: 001-32312
Novelis Inc.
(Exact name of registrant as specified in its charter)
Canada | 98-0442987 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) |
|
3399 Peachtree Road NE, Suite 1500 Atlanta, Georgia (Address of principal executive offices) |
30326 (Zip Code) |
Telephone: (404) 814-4200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
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 April 30, 2006, there were 74,005,649 common shares
outstanding.
Table of Contents
EXPLANATORY NOTE
Concurrently with the filing of this quarterly report on
Form 10-Q for the period ended September 30, 2005, we
are filing amendments on Form 10-Q/ A to our quarterly
reports on Form 10-Q for the periods ended March 31,
2005 and June 30, 2005, to reflect the restatement of our
unaudited condensed consolidated and combined financial
statements for the quarter ended March 31, 2005 and the
quarter and six months ended June 30, 2005, to correct
errors for:
| the misapplication of GAAP related to liability recognition; | |
| income tax accounting; | |
| other miscellaneous items; and | |
| out-of-period adjustments. |
This quarterly report on Form 10-Q for the period ended
September 30, 2005 was delayed pending our completion of
the restatements and the related review of our reserves and
contingencies, as well as adjustments to arrive at our opening
balance sheet as of January 6, 2005.
Novelis Inc.
Index
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(unaudited)
(in millions of US$, except per share amounts)
Third Quarter | Nine Months | ||||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Sales and operating revenues
|
|||||||||||||||||
third parties
|
2,053 | 1,893 | 6,337 | 5,416 | |||||||||||||
related parties
|
| 107 | | 323 | |||||||||||||
2,053 | 2,000 | 6,337 | 5,739 | ||||||||||||||
Costs and expenses
|
|||||||||||||||||
Cost of sales and operating expenses, excluding depreciation and
amortization noted below
|
|||||||||||||||||
third parties
|
1,833 | 1,661 | 5,677 | 4,744 | |||||||||||||
related parties
|
| 96 | | 288 | |||||||||||||
Depreciation and amortization
|
56 | 60 | 173 | 178 | |||||||||||||
Selling, general and administrative expenses
|
79 | 72 | 243 | 182 | |||||||||||||
Research and development expenses
|
10 | 3 | 29 | 13 | |||||||||||||
Research and development expenses related parties
|
| 10 | | 28 | |||||||||||||
Other expenses (income) net
|
|||||||||||||||||
third parties
|
(27 | ) | | (38 | ) | 8 | |||||||||||
related parties
|
| 1 | (1 | ) | (21 | ) | |||||||||||
Interest expense
|
|||||||||||||||||
third parties
|
48 | 10 | 142 | 31 | |||||||||||||
related parties
|
| 7 | | 24 | |||||||||||||
1,999 | 1,920 | 6,225 | 5,475 | ||||||||||||||
Income before income taxes and other items
|
54 | 80 | 112 | 264 | |||||||||||||
Income taxes
|
37 | 45 | 67 | 111 | |||||||||||||
Income before other items
|
17 | 35 | 45 | 153 | |||||||||||||
Equity in net income of non-consolidated affiliates
|
2 | 1 | 6 | 4 | |||||||||||||
Minority interests in earnings of consolidated affiliates
|
(9 | ) | (2 | ) | (19 | ) | (9 | ) | |||||||||
Net income
|
10 | 34 | 32 | 148 | |||||||||||||
Earnings per share
|
|||||||||||||||||
Net income per share basic
|
0.14 | 0.47 | 0.43 | 2.01 | |||||||||||||
Net income per share diluted
|
0.14 | 0.47 | 0.43 | 2.00 | |||||||||||||
Dividends per common share
|
0.09 | | 0.27 | | |||||||||||||
Supplemental information for 2005:
|
|||||||||||||||||
Net income attributable to consolidated and combined results of
Novelis from January 6 to September 30, 2005
increase to Retained earnings
|
10 | 61 | |||||||||||||||
Net loss attributable to the combined results of Novelis from
January 1 to January 5, 2005 decrease to
Owners net investment(A)
|
| (29 | ) | ||||||||||||||
Net income
|
10 | 32 | |||||||||||||||
(A) | Refer to Note 1 Background and Basis of Presentation. |
The accompanying notes are an integral part of the financial
statements.
2
Table of Contents
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(unaudited)
(in millions of US$, except number of shares)
September 30, | December 31, | ||||||||
As of | 2005 | 2004 | |||||||
ASSETS | |||||||||
Current assets
|
|||||||||
Cash and cash equivalents
|
124 | 31 | |||||||
Trade receivables (net of allowances of $28 in 2005 and $33 in
2004)
|
|||||||||
third parties
|
959 | 710 | |||||||
related parties
|
| 87 | |||||||
Other receivables
|
|||||||||
third parties
|
8 | 5 | |||||||
related parties
|
30 | 846 | |||||||
Prepaid expenses
|
52 | 36 | |||||||
Inventories
|
|||||||||
Aluminum
|
941 | 1,081 | |||||||
Raw materials
|
20 | 20 | |||||||
Other supplies
|
126 | 125 | |||||||
1,087 | 1,226 | ||||||||
Other current assets
|
181 | 77 | |||||||
Total current assets
|
2,441 | 3,018 | |||||||
Deferred charges and other assets
|
219 | 71 | |||||||
Long-term receivables from related parties
|
77 | 104 | |||||||
Property, plant and equipment, net
|
2,170 | 2,348 | |||||||
Investments in non-consolidated affiliates
|
100 | 122 | |||||||
Intangible assets (net of accumulated amortization of $10 in
2005 and $9 in 2004)
|
29 | 35 | |||||||
Goodwill
|
228 | 256 | |||||||
Total assets
|
5,264 | 5,954 | |||||||
The accompanying notes are an integral part of the financial
statements.
3
Table of Contents
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(unaudited) (Continued)
(in millions of US$, except number of shares)
September 30, | December 31, | ||||||||
As of | 2005 | 2004 | |||||||
LIABILITIES AND SHAREHOLDERS/ INVESTED EQUITY | |||||||||
Current liabilities
|
|||||||||
Current portion of long-term debt
|
|||||||||
third parties
|
3 | 1 | |||||||
related parties
|
| 290 | |||||||
Short-term borrowings
|
|||||||||
third parties
|
35 | 229 | |||||||
related parties
|
| 312 | |||||||
Accounts payable, trade
|
|||||||||
third parties
|
752 | 496 | |||||||
related parties
|
38 | 401 | |||||||
Accrued expenses
|
418 | 339 | |||||||
Interest payable
|
22 | 2 | |||||||
Accrued income taxes
|
58 | 1 | |||||||
Other current liabilities
|
14 | 21 | |||||||
Total current liabilities
|
1,340 | 2,092 | |||||||
Long-term debt, net of current portion
|
|||||||||
third parties
|
2,647 | 139 | |||||||
related parties
|
| 2,307 | |||||||
Accrued post-retirement benefits
|
307 | 284 | |||||||
Deferred credits and other liabilities
|
224 | 188 | |||||||
Deferred income taxes
|
191 | 249 | |||||||
Commitments and contingencies
|
|||||||||
Minority interests in equity of consolidated affiliates
|
151 | 140 | |||||||
Shareholders/invested equity
|
|||||||||
Preferred shares unlimited number of first preferred
and second preferred shares authorized; none issued
|
| | |||||||
Common shares, no par value unlimited number of
shares authorized; issued and outstanding: 74,005,649 shares as
of September 30, 2005
|
| | |||||||
Additional paid-in capital
|
433 | | |||||||
Retained earnings
|
41 | | |||||||
Accumulated other comprehensive income (loss)
|
(70 | ) | 88 | ||||||
Owners net investment
|
| 467 | |||||||
Total shareholders/invested equity
|
404 | 555 | |||||||
Total liabilities and shareholders/invested equity
|
5,264 | 5,954 | |||||||
The accompanying notes are an integral part of the financial
statements.
4
Table of Contents
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions of US$)
Nine Months Ended September 30 | 2005 | 2004 | |||||||
OPERATING ACTIVITIES
|
|||||||||
Net cash provided by operating activities
|
366 | 292 | |||||||
INVESTING ACTIVITIES
|
|||||||||
Capital expenditures
|
(104 | ) | (95 | ) | |||||
Proceeds from sales of fixed assets and investments
|
9 | 8 | |||||||
Proceeds from loans receivable net
|
|||||||||
third parties
|
19 | | |||||||
related parties
|
373 | 501 | |||||||
Premiums paid on purchased derivatives
|
(26 | ) | | ||||||
Net proceeds from settlement of derivatives
|
96 | | |||||||
Net cash provided by investing activities
|
367 | 414 | |||||||
FINANCING ACTIVITIES
|
|||||||||
Proceeds from issuance of new debt third parties
|
2,750 | 443 | |||||||
Principal repayments
|
|||||||||
third parties
|
(1,742 | ) | (895 | ) | |||||
related parties
|
(1,180 | ) | | ||||||
Short-term borrowings net
|
|||||||||
third parties
|
(137 | ) | (133 | ) | |||||
related parties
|
(302 | ) | 4 | ||||||
Dividends common shareholders
|
(20 | ) | | ||||||
Dividends minority interest
|
(7 | ) | (4 | ) | |||||
Net receipts from (payments to) Alcan
|
72 | (121 | ) | ||||||
Debt issuance costs paid
|
(71 | ) | | ||||||
Net cash used in financing activities
|
(637 | ) | (706 | ) | |||||
Net increase in cash and cash equivalents
|
96 | | |||||||
Effect of exchange rate changes on cash balances held in foreign
currencies
|
(3 | ) | | ||||||
Cash and cash equivalents beginning of period
|
31 | 27 | |||||||
Cash and cash equivalents end of period
|
124 | 27 | |||||||
Supplemental schedule of 2005 non-cash investing and
financing activities:
|
|||||||||
Spin-off transaction and post-closing adjustments
|
|||||||||
Other receivables
|
433 | ||||||||
Short-term borrowings related parties
|
(57 | ) | |||||||
Long-term debt related parties
|
32 | ||||||||
Capital lease obligation
|
52 | ||||||||
Additional paid-in capital
|
(98 | ) |
The accompanying notes are an integral part of the financial
statements.
5
Table of Contents
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF
SHAREHOLDERS/INVESTED EQUITY (unaudited)
Nine Months Ended September 30, 2005
(in millions of US$, except number of shares which is in
thousands and per share amounts)
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Common Shares | Additional | Comprehensive | ||||||||||||||||||||||||||
Paid-in | Retained | Income | Owners Net | |||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | (Loss) | Investment | Total | ||||||||||||||||||||||
Balance as of December 31, 2004
|
| | | | 88 | 467 | 555 | |||||||||||||||||||||
2005 Activity:
|
||||||||||||||||||||||||||||
Net loss January 1 to January 5
|
(29 | )(A) | (29 | ) | ||||||||||||||||||||||||
Adjusted Invested equity at spin-off date January 6
|
| | | | 88 | 438 | (B) | 526 | ||||||||||||||||||||
Issuance of common stock in connection with the spin-off
|
73,989 | | 438 | (438 | ) | | ||||||||||||||||||||||
Spin settlement and post-closing adjustments
|
2 | (C) | 2 | |||||||||||||||||||||||||
Issuance of common stock in connection with stock plans
|
17 | | ||||||||||||||||||||||||||
Net income January 6 to September 30
|
61 | 61 | ||||||||||||||||||||||||||
Deferred translation adjustments
|
(146 | ) | (146 | ) | ||||||||||||||||||||||||
Change in minimum pension liability
|
(12 | ) | (12 | ) | ||||||||||||||||||||||||
Dividends on common shares ($0.27 per common share)
|
(20 | ) | (20 | ) | ||||||||||||||||||||||||
Dividends on preferred stock shares of consolidated affiliates
|
(7 | ) | (7 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2005
|
74,006 | | 433 | 41 | (70 | ) | | 404 | ||||||||||||||||||||
(A) | Refer to Note 1 Background and Basis of Presentation. |
(B) | Represents the amount of Owners net investment as of January 6, 2005. |
(C) | In connection with the spin-off from Alcan, we entered into agreements which provide for various post-transaction adjustments. These adjustments, for the most part, have been and will be reflected as changes to shareholders equity and include items such as working capital, pension assets and liabilities, and adjustments to opening balance sheet accounts. This is further discussed in Note 1 Background and Basis of Presentation. |
The accompanying notes are an integral part of the financial
statements.
6
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
(unaudited)
(in millions of US$, except where indicated)
1. | BACKGROUND AND BASIS OF PRESENTATION |
Background |
Novelis Inc., formed in Canada on September 21, 2004, and
its subsidiaries, is the worlds leading aluminum rolled
products producer. We produce aluminum sheet and light gauge
products where the end-use destination of the products includes
the construction and industrial, beverage and food cans, foil
products and transportation markets. As of September 30,
2005, we had operations on four continents, North America, South
America, Asia and Europe, through 36 operating plants and three
research facilities in 11 countries. In addition to aluminum
rolled products plants, our South American businesses include
bauxite mining, alumina refining and smelting facilities that
are integrated with the rolling plants in Brazil. We are the
only company of our size and scope focused solely on aluminum
rolled products markets and capable of local supply of
technically sophisticated products in all of these geographic
regions.
The accompanying unaudited condensed consolidated and combined
financial statements should be read in conjunction with our
audited combined financial statements and accompanying notes
filed with the U.S. Securities and Exchange Commission
(SEC) in our Annual Report on
Form 10-K for the
year ended December 31, 2004. References herein to
Novelis, the Company, we,
our, or us refer to Novelis Inc. and its
subsidiaries unless the context specifically requires otherwise.
The accompanying (a) condensed combined balance sheet as of
December 31, 2004, which has been derived from audited
financial statements, and (b) unaudited condensed
consolidated and combined financial statements have been
prepared pursuant to the rules and regulations of the SEC.
Certain information and note disclosures normally included in
annual financial statements prepared in accordance with
generally accepted accounting principles in the United States of
America (GAAP) have been condensed or omitted pursuant to
those rules and regulations, although we believe that the
disclosures made are adequate to make the information not
misleading. In the opinion of management, the accompanying
condensed consolidated and combined financial statements
recognize all adjustments of a normal recurring nature
considered necessary to fairly state our financial position as
of September 30, 2005 and December 31, 2004; our
results of operations for the three and nine months ended
September 30, 2005 and 2004; and our cash flows for the
nine months ended September 30, 2005 and 2004.
On May 18, 2004, Alcan Inc. (Alcan) announced its intention
to transfer its rolled products businesses into a separate
company and to pursue a spin-off of that company to its
shareholders. The rolled products businesses were managed under
two separate operating segments within Alcan Rolled
Products Americas and Asia; and Rolled Products Europe. On
January 6, 2005, Alcan and its subsidiaries contributed and
transferred to us substantially all of the aluminum rolled
products businesses operated by Alcan prior to its 2003
acquisition of Pechiney, together with some of Alcans
alumina and primary metal-related businesses in Brazil, which
are fully integrated with the rolled products operations there,
as well as four former Pechiney rolling facilities in Europe, as
their end-use markets and customers are more similar to ours.
On January 6, 2005, the spin-off occurred following the
approval by Alcans board of directors and shareholders,
and the receipt of other required legal and regulatory
approvals. Alcan shareholders received one Novelis common share
for every five Alcan common shares held. Our common shares began
trading on a when issued basis on the Toronto
(TSX) and New York (NYSE) stock exchanges on
January 6, 2005, with a distribution record date of
January 11, 2005. Regular Way trading began on
the TSX on January 7, 2005, and on the NYSE on
January 19, 2005.
We have determined that under the rules and regulations
promulgated by the SEC, as of February 27, 2006, a majority
of our outstanding shares were directly or indirectly held by
U.S. residents and,
7
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
accordingly, we ceased to qualify as a foreign private issuer.
We will henceforth assume the status of a domestic issuer for
purposes of the Securities Exchange Act of 1934, as amended.
In 2004 and prior years, Alcan was considered a related party
due to its parent-subsidiary relationship with the Novelis
entities. However, subsequent to the spin-off, Alcan is no
longer a related party as defined in Financial Accounting
Standards Board (FASB) Statement No. 57, Related
Party Disclosures. Refer to Note 5 Related
Party Transactions.
Restatement |
Concurrently with the filing of this quarterly report on
Form 10-Q for the
period ended September 30, 2005, we are filing amendments
on Form 10-Q/ A to
our quarterly reports on
Form 10-Q for the
periods ended March 31, 2005 and June 30, 2005, to
reflect the restatement of our unaudited condensed consolidated
and combined financial statements for the quarter ended
March 31, 2005 and the quarter and six months ended
June 30, 2005, to correct errors for:
| the misapplication of GAAP related to liability recognition; | |
| income tax accounting; | |
| other miscellaneous items; and | |
| out-of-period adjustments. |
Our results of operations for the nine months ended
September 30, 2005 were impacted by the
out-of-period
adjustments noted above. These
out-of-period
adjustments decreased our Net income by $2, net, for the nine
months ended September 30, 2005.
Post-Transaction Adjustments |
The agreements giving effect to the spin-off provide for various
post-transaction adjustments and the resolution of outstanding
matters, which are expected to be carried out by the parties by
mid-2006. These adjustments, for the most part, have been and
will be reflected as changes to shareholders equity and
include items such as working capital, pension assets and
liabilities, and adjustments to opening balance sheet accounts.
Agreements between Novelis and Alcan |
We have entered into various agreements with Alcan including the
use of transitional and technical services, the supply of
Alcans metal and alumina, the licensing of certain of
Alcans patents, trademarks and other intellectual property
rights, and the use of certain buildings, machinery and
equipment, technology and employees at certain facilities
retained by Alcan, but required in our business.
Basis of Presentation |
The unaudited condensed consolidated and combined financial
statements for the nine months ended September 30, 2005
include the results for the period from January 1 to
January 5, 2005 prior to our spin-off from Alcan, in
addition to the results for the period from January 6 to
September 30, 2005, as described below. The unaudited
condensed combined financial results for the period from January
1 to January 5, 2005 present our operations and cash flows
on a carve-out basis. The unaudited condensed consolidated
balance sheet as of September 30, 2005 and results for the
period from January 6 (the date
8
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
of the spin-off from Alcan) to September 30, 2005 present
our results of operations, financial position and cash flows as
a stand-alone entity.
All income earned and cash flows generated by us as well as the
risks and rewards of these businesses from January 1 to
January 5, 2005 were primarily attributed to us and are
included in our unaudited condensed consolidated results for the
period from January 6 to September 30, 2005, with the
exception of unrealized losses of $43 ($29 after-tax) arising
from the change in market value of derivative contracts,
primarily with Alcan. These
mark-to-market losses
for the period from January 1 to January 5, 2005 were
recorded in the unaudited condensed consolidated and combined
statements of income for the nine months ended
September 30, 2005, and are reflected as a decrease in
Owners net investment.
The condensed combined balance sheet as of December 31,
2004 and the unaudited condensed combined financial statements
for the third quarter and nine months ended September 30,
2004 (the historical combined financial statements) have been
derived from the accounting records of Alcan using the
historical results of operations and historical basis of assets
and liabilities of the businesses subsequently transferred to
us. Management believes the assumptions underlying the
historical combined financial statements, including the
allocations described below, are reasonable. However, the
historical combined financial statements included herein may not
necessarily reflect our results of operations, financial
position and cash flows or what our results of operations,
financial position and cash flows would have been had we been a
stand-alone company during the periods presented. Alcans
investment in the Novelis businesses, presented as Owners
net investment in the condensed consolidated and combined and
historical combined financial statements, includes the
accumulated earnings of the businesses as well as cash transfers
related to cash management functions performed by Alcan.
As we were not a stand-alone company and operated as a part of
Alcan prior to 2005, the historical combined financial
statements include allocations of certain Alcan expenses, assets
and liabilities, including the items described below.
General Corporate Expenses |
Alcan allocated general corporate expenses to us based on
average head count and capital employed. Capital employed
represents Total assets less Total current liabilities
(excluding debt), Accrued post-retirement benefits, Deferred
credits and other liabilities, and Deferred income taxes. These
allocations are reflected in Selling, general and administrative
expenses in the historical combined financial statements for the
third quarter and nine months ended September 30, 2004.
The general corporate expense allocations are primarily for
human resources, legal, treasury, insurance, finance, internal
audit, strategy and public affairs and amounted to $6 and $23
for the third quarter and the nine months ended
September 30, 2004, respectively. Total corporate office
costs, including the amounts allocated, amounted to $11 and $31
for the third quarter and nine months ended September 30,
2004, respectively. The costs allocated are not necessarily
indicative of the costs that would have been incurred had we
performed these functions as a stand-alone company, nor are they
indicative of costs that will be charged or incurred in the
future. Subsequent to the spin-off, we perform the majority of
these functions using our own resources or purchased services;
however, for an interim period, certain services were provided
by Alcan. As of March 2006, all but three of the approximately
130 service agreements between us and Alcan have ended. It is
not practicable to estimate the amount of expenses we would have
incurred for the third quarter and nine months ended
September 30, 2004 had we been a stand-alone entity,
unaffiliated with Alcan.
9
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Pensions and Post-Retirement Benefits |
Prior to the spin-off, certain of our entities had pension
obligations primarily comprised of defined benefit plans in the
U.S. and the U.K., unfunded pension benefits in Germany and lump
sum indemnities payable upon retirement to employees of
businesses in France, Italy, Korea and Malaysia. These pension
benefits are managed separately and the related assets,
liabilities and costs are included in both the unaudited
condensed consolidated and combined and historical combined
financial statements.
Prior to the spin-off, Alcan managed defined benefit plans in
Canada, the U.S., the U.K. and Switzerland that include some of
our entities. Our share of these plans assets and
liabilities is not included in the accompanying combined balance
sheet as of December 31, 2004. The historical combined
financial statements for the third quarter and nine months ended
September 30, 2004, however, include an allocation of the
costs of the plans. The costs vary depending on whether the
entity was a subsidiary or a division of Alcan at that time.
Pension costs of divisions of Alcan that were transferred to us
were allocated based on the following methods: service costs
were allocated based on a percentage of payroll costs; interest
costs, the expected return on assets, and amortization of
actuarial gains and losses were allocated based on a percentage
of the projected benefit obligation (PBO); and prior service
costs were allocated based on headcount. The total allocation of
such pension costs amounted to $3 and $9 for the third quarter
and nine months ended September 30, 2004, respectively.
Pension costs of subsidiaries of Alcan that were transferred to
us were accounted for on the same basis as a multi-employer
pension plan whereby the subsidiaries contributions for
the period were recognized as net periodic pension cost. There
were no contributions by the subsidiaries for the third quarter
and nine months ended September 30, 2004.
Prior to the spin-off, Alcan provided post-retirement benefits
in the form of unfunded healthcare and life insurance benefits
to retired employees in Canada and the U.S. that include
retired employees of some of our businesses. Our share of these
plans liabilities is included in the historical combined
balance sheet as of December 31, 2004 and our share of
these plans costs is included in the historical combined
statements of income for the third quarter and nine months ended
September 30, 2004.
Subsequent to the spin-off, certain changes were made to the
Alcan plans covering our employees and we also established new
pension plans, as described in Note 6
Post-Retirement Benefits. Refer to Note 2
Accounting Policies for our accounting policies related to the
new pension plans.
Income Taxes |
Income taxes for 2004 were calculated as if all of our
operations had been separate tax paying legal entities, each
filing a separate tax return in its local tax jurisdiction. For
jurisdictions where there was no tax sharing agreement, amounts
currently payable were included in Owners net investment.
Cash Management |
Cash and cash equivalents in the combined balance sheet as of
December 31, 2004 are comprised of the cash and cash
equivalents of our businesses, primarily in South America, Asia
and parts of Europe, that perform their own cash management
functions.
Historically, Alcan performed cash management functions on
behalf of certain of our businesses primarily in North America,
the U.K., and other parts of Europe. Cash deposits from these
businesses were transferred to Alcan on a regular basis. As a
result, none of Alcans cash and cash equivalents was
allocated to us in the historical combined financial statements.
Transfers to and from Alcan were netted against Owners net
investment. Subsequent to the spin-off, we are responsible for
our own cash management functions.
10
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Interest Expense |
We obtain short and long-term financing from third parties and,
prior to the spin-off, from related parties. Interest is charged
on all short and long-term debt and is included in Interest
expense in the accompanying unaudited condensed consolidated and
combined statements of income.
Historically, Alcan provided certain financing to us and
incurred third party debt at the parent level. This financing is
reflected in the combined balance sheet as of December 31,
2004 within the amounts due to Alcan and is interest-bearing as
described in Note 5 Related Party Transactions.
As a result of this arrangement, the historical combined
financial statements for the third quarter and nine months ended
September 30, 2004 do not include an allocation of
additional interest expense. Our interest expense as a
stand-alone company is higher than that recognized in the
historical combined financial statements for the third quarter
and nine months ended September 30, 2004.
Derivatives |
During 2004, we entered into derivative contracts, primarily
with Alcan, to manage some of our foreign currency and commodity
price risk. These contracts are reported at their fair value on
the balance sheet. Changes in the fair value of these
derivatives are recorded in the accompanying unaudited condensed
consolidated and combined statements of income in Other expenses
(income) net. The cash flows on the settlement of
these derivative contracts are reported as part of net cash
provided by operating activities in the condensed combined
statement of cash flows for periods prior to the spin-off.
Stock Options |
Stock option expense and other stock-based compensation expense
in the condensed combined statements of income for the quarter
and nine months ended September 30, 2004 includes the Alcan
expenses related to the fair value of awards held by certain
employees of Alcans Rolled Products businesses during the
periods presented as well as an allocation, calculated based on
the average of headcount and capital employed, for Alcans
corporate office employees. These expenses are not necessarily
indicative of what our expenses would have been had we been a
separate stand-alone entity in 2004.
Earnings Per Share |
Prior to the spin-off, we were not a separate legal entity with
common shares outstanding. Earnings per share for the 2004
periods have been presented using our common shares outstanding
and common share equivalents immediately after the completion of
the spin-off on January 6, 2005.
2. | ACCOUNTING POLICIES |
The unaudited condensed consolidated and combined financial
statements are based upon accounting policies and methods of
their application consistent with those used and described in
our annual financial statements as contained in our most recent
annual report, except for the accounting policies described
below and the recently adopted accounting policies described in
Note 3 Accounting Changes. Certain
reclassifications and revisions have been made to prior period
amounts to conform to the current period presentation. Operating
results for the third quarter and nine months ended
September 30, 2005 are not necessarily indicative of the
results for the year ended December 31, 2005.
11
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Cash and Cash Equivalents |
Cash and cash equivalents include cash, time deposits, and
readily marketable securities with maturities of three months or
less at the purchase date.
Principles of Consolidation |
The unaudited condensed consolidated and combined and historical
combined financial statements include the accounts of
subsidiaries that are controlled by Novelis, all of which are
majority owned, as well as a variable interest entity in which
we are the primary beneficiary. We use the equity method of
accounting for investments in entities over which we have
significant influence. Under the equity method of accounting,
our investment is increased or decreased by our share of the
undistributed net income or loss and deferred translation
adjustments since acquisition. Investments in joint ventures
over which we have an undivided interest in the assets and
liabilities are consolidated to the extent of our ownership or
participation in the assets and liabilities. All other
investments in joint ventures are accounted for using the equity
method. Other investments are accounted for using the cost
method. Under the cost method, dividends received are recorded
as income. Cost investments for which there is an active market
are accounted for as available-for-sale. Intercompany balances
and transactions, including profits in inventories, are
eliminated in the unaudited condensed consolidated and combined
and historical combined financial statements.
Debt Issuance Costs |
Debt issuance costs related to our senior secured credit
facilities are recorded in Deferred charges and other assets and
amortized over the life of the related borrowing in Interest
expense, using the effective interest amortization
method. Interest expense does not include a commitment fee on an
undrawn bridge financing facility, which is included in Other
expenses (income) net.
Dividend Policy |
Declaration of dividends will depend on, among other things, our
financial resources, cash flows generated by our business, cash
requirements, restrictions under the instruments governing our
indebtedness, and other relevant factors. There can be no
assurance that we will continue to pay dividends at the current
rate or at all.
Pensions and Post-Retirement Benefits |
Using appropriate actuarial methods and assumptions, we account
for our defined benefit pension plans in accordance with FASB
Statement No. 87, Employers Accounting for
Pensions. Other post-retirement benefits are accounted for
in accordance with FASB Statement No. 106,
Employers Accounting for Post-Retirement Benefits Other
than Pensions. Pension and post-retirement benefit
obligations are actuarially calculated using managements
best estimates and are based on expected service period, salary
increases and retirement ages of employees. Pension and
post-retirement 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. All net actuarial gains and
losses are amortized over the expected average remaining service
lives of the employees.
12
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Recently Issued Accounting Standards |
In December 2004, the FASB issued FASB Statement
No. 123(R), Share-Based Payment, (FASB 123(R)),
which is a revision to FASB Statement No. 123,
Accounting for Stock-Based Compensation (FASB 123). FASB
123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the
financial statements based on their fair values. We adopted the
fair value based method of accounting for share-based payments
effective January 1, 2004 using the retroactive restatement
method described in FASB Statement No. 148, Accounting
for Stock-Based Compensation Transition and
Disclosure. Currently, we use the Black-Scholes valuation
model to estimate the value of stock options granted to
employees. We expect to adopt FASB 123(R) on January 1,
2006, and expect to apply the modified prospective method upon
adoption. The modified prospective method requires companies to
record compensation cost beginning with the effective date based
on the requirements of FASB 123(R) for all share-based payments
granted after the effective date. All awards granted to
employees prior to the effective date of FASB 123(R) that remain
unvested at the adoption date will continue to be expensed over
the remaining service period in accordance with FASB 123.
In March 2005, the FASB issued FASB Interpretation No. 47
(FIN 47) Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143. FIN 47 clarifies that a conditional asset
retirement obligation is a legal obligation to perform an asset
retirement activity the timing or method of settlement of which
is conditional on a future event. FIN 47 also clarifies
that a conditional asset retirement obligation should be
recognized if its fair value is reasonably estimable and
provides guidance on when there is sufficient information to
reasonably estimate the fair value of an asset retirement
obligation. FIN 47 should be applied no later than the end
of the fiscal year 2005. The adoption of FIN 47 will not
have a material impact on our financial position, results of
operations or cash flows.
In May 2005, the FASB issued FASB Staff Position (FSP) No.
EITF 00-19-1,
Application of EITF Issue
No. 00-19 to
Freestanding Financial Instruments Originally Issued as Employee
Compensation. The FSP was issued to clarify the application
of EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock, to
freestanding financial instruments originally issued as employee
compensation that can be settled only by delivering registered
shares. This FSP clarifies that a requirement to deliver
registered shares, in and of itself, will not result in
liability classification for freestanding financial instruments
originally issued as employee compensation. This clarification
is consistent with the FASBs intent in issuing FASB
123(R). We will apply the guidance in this FSP in accordance
with the effective date and transition provisions of FASB 123(R).
In June 2005, the FASB ratified the consensus reached in EITF
Issue No. 05-5, Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms
Specified in Altersteilzeit Early Retirement Arrangements)
(EITF 05-5).
EITF 05-5
addresses the timing of recognition of salaries, bonuses and
additional pension contributions associated with certain early
retirement arrangements typical in Germany (as well as similar
programs). The EITF also specifies the accounting for government
subsidies related to these arrangements.
EITF 05-5 is
effective in fiscal years beginning after December 15,
2005. The adoption of
EITF 05-5 is not
expected to have a material impact on our financial position,
results of operations or cash flows.
In June 2005, the FASB issued Staff Position
(FSP) FAS 143-1,
Accounting for Electronic Equipment Waste Obligations.
FSP FAS 143-1
addresses the accounting for obligations associated with
Directive 2002/96/ EC on Waste Electrical and Electronic
Equipment (the Directive) of the European Union (EU) which
is subject to transformation into the respective national laws.
Under the Directive, the waste management obligation remains
with the commercial user until the historical waste equipment
(put
13
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
on the market before August 13, 2005) is replaced. At that
time the waste management obligation for the equipment may be
transferred to the producer of the replacement equipment
depending on the transformation of the Directive into national
law by the EU member country. If the commercial user does not
replace the equipment, the obligation remains with that user
until the equipment is disposed. FSP
FAS 143-1 requires
the commercial user to apply the provisions of FASB 143,
Accounting for Asset Retirement Obligations, to the
obligation associated with historical waste equipment. FSP
FAS 143-1 will
have to be applied in the first reporting period ending after
the date the law is adopted by the applicable EU member
countries. The adoption of FSP
FAS 143-1 did not
have a material impact on our financial position, results of
operations or cash flows.
In July 2005, the FASB issued FSP No. APB 18-1,
Accounting by an Investor for Its Proportionate Share of
Accumulated Other Comprehensive Income of an Investee Accounted
for under the Equity Method in Accordance with APB Opinion
No. 18 upon a Loss of Significant Influence, to provide
guidance on how an investor should account for its proportionate
share of an investees equity adjustments for other
comprehensive income (OCI) upon a loss of significant
influence. The FSP states that an investors proportionate
share of an investees equity adjustments for OCI should be
offset against the carrying value of the investment at the time
significant influence is lost. To the extent that the offset
results in a carrying value of the investment that is less than
zero, an investor should (a) reduce the carrying value of
the investment to zero and (b) record the remaining balance
in income. The guidance in this FSP is effective for us as of
the first reporting period beginning after July 12, 2005.
Upon adoption of this FSP, any amount of an investees
equity adjustments for OCI recorded in the shareholders
equity of the investor, relating to an investment for which the
reporting entity no longer has an ability to exercise
significant influence, should be offset against the carrying
value of the investment. The amount that is offset should not
include any items of accumulated OCI, relating to unrealized
gains and losses recorded in accordance with FASB Statement
No. 115 (FASB 115), Accounting for Certain Investments
in Debt and Equity Securities, that are recorded by an
investor for an investment that is accounted for as an
available-for-sale security in accordance with FASB 115 upon
adoption of this FSP. If comparative financial statements are
provided for earlier periods, those financial statements shall
be retrospectively adjusted to reflect application of the
provisions of this FSP. There is no impact on our consolidated
financial position, results of operations or cash flows from
this FSP.
In September 2005, the FASB ratified Emerging Issues Task Force
Issue No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty
(EITF 04-13).
EITF 04-13
discusses whether inventory purchase and sales transactions with
the same counterparty that are entered into in contemplation of
one another should be combined and treated as a nonmonetary
exchange and addresses (a) under what circumstances should
two or more transactions with the same counterparty
(counterparties) be viewed as a single nonmonetary
transaction within the scope of APB Opinion No. 29,
Accounting for Nonmonetary Transactions
(APB 29) and Financial Accounting Standard
No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB 29 (FAS 153) and (b) if nonmonetary
transactions within the scope of APB 29 and FAS 153
involve inventory, are there any circumstances under which the
transactions should be recognized at fair value. The
pronouncement is effective for new inventory arrangements
entered into, or modifications or renewals of existing inventory
arrangements occurring in interim or annual reporting periods
beginning after March 15, 2006. We do not expect that this
pronouncement will have a material effect on our financial
position, results of operations or cash flows.
We have determined that all other recently issued accounting
pronouncements do not apply to us.
14
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
3. | ACCOUNTING CHANGES |
Stock Options and Other Stock-Based Compensation |
Effective January 1, 2004, Alcan retroactively adopted the
fair value recognition provisions of FASB 123 for stock options
granted to employees. Both the unaudited condensed consolidated
and combined and historical combined financial statements
include the compensation cost for options granted to certain of
our employees. In addition, the historical combined financial
statements include an allocation of expenses for Alcans
corporate office employees. Beginning January 1, 1999, all
periods were restated to reflect compensation cost as if the
fair value method had been applied for awards issued to these
employees after January 1, 1995. We apply the fair value
recognition provisions of FASB 123 to our new stock option plans
as described in Note 19 Stock Options and Other
Stock-Based Compensation.
Consolidation of Variable Interest Entities |
Effective January 1, 2004, Alcan adopted the provisions of
FASB Interpretation No. 46(R) (FIN 46(R), revised
December 2003), Consolidation of Variable Interest
Entities. In 2004, Alcan determined it was the primary
beneficiary of Logan Aluminum Inc. (Logan), a variable interest
entity. As a result, both the unaudited condensed consolidated
and combined and condensed combined balance sheets include the
assets and liabilities of Logan. Logan is a joint venture that
manages a tolling arrangement for us and an unrelated party. At
the date of adoption of FIN 46(R), Alcan recorded assets of
$38 and liabilities of $38 related to Logan that were previously
not recorded on its balance sheet. Prior periods were not
restated.
Our investment plus any unfunded pension liability related to
Logan totaled $37 as of December 31, 2004 and represents
our maximum exposure to loss. Creditors of Logan do not have
recourse to our general credit as a result of including Logan in
our unaudited condensed consolidated and combined financial
statements.
4. | RESTRUCTURING PROGRAMS |
2005 Restructuring Activities |
In 2006, we announced an agreement with Atlante Srla for the
sale of land in Borgofranco, Italy, that is currently occupied
by one of our casting alloy plants. We had previously announced
on November 3, 2005, our decision to close the facility by
the end of March 2006. Atlante Srla, a new Italian energy
company, plans to develop a business on the site and took
possession of approximately three-quarters of the land on
April 1, 2006, with the balance transferring at a later
date. We will retain responsibility for environmental
remediation of the site, including the elimination of any
remaining salt cake byproduct from the casting alloys operation.
In the third quarter of 2005, we recorded charges of $12 in
connection with the sale of Borgofranco. Approximately $6 is for
environmental remediation while the remainder is related to
asset write-downs and redundancies. We expect to record
additional charges of $2 in the fourth quarter of 2005 for asset
write-downs and a further charge of approximately $3 in the
first quarter of 2006 for redundancies and decommissioning.
2004 Restructuring Activities |
In line with our objective of value maximization, we undertook
various restructuring initiatives in 2004.
15
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Pechiney |
In the fourth quarter of 2004, we recorded liabilities of $23
for restructuring costs in connection with the exit of certain
operations of Pechiney and these costs were recorded in the
allocation of the purchase price of Pechiney as of
December 31, 2004. These costs relate to a plant closure in
Flemalle, Belgium (Novelis Europe) and comprise $19 of severance
costs and $4 of other charges. No further charges are expected
to be incurred in relation to this plant closure.
In 2005, we recorded recoveries of $4 in connection with the
operations of Pechiney. These recoveries were credited against
the Goodwill associated with the Pechiney acquisition.
Other 2004 Restructuring Activities |
In the third quarter of 2004, we incurred restructuring charges
of $19 relating to the consolidation of our U.K. aluminum
sheet-rolling activities in Rogerstone, Wales (Novelis Europe)
in order to improve competitiveness through better capacity
utilization and economies of scale. Production ceased at the
rolling mill in Falkirk, Scotland (Novelis Europe) in December
2004 and the facility was closed in the first quarter of 2005.
The charges of $19 include $6 of severance costs, $8 of asset
impairment charges, $2 of pension costs, $2 of decommissioning
and environmental costs and $1 of other charges, which were
recorded in Other expenses (income) net in the
historical combined statement of income.
In 2004, we incurred restructuring charges of $6 (Q1: nil; Q2:
nil; Q3: $1; Q4: $5), relating to the closure and restructuring
of corporate offices and a plant in Germany, comprised of $5
(Q1: nil; Q2: nil; Q3: $1; Q4: $4) for severance costs and $1
(Q1: nil; Q2: nil; Q3: nil; Q4: $1) related to costs to
consolidate facilities, which were recorded in Other expenses
(income) net in the historical combined statement of
income. No further charges are expected to be incurred in
relation to these restructuring activities.
In 2005, we recorded recoveries of $1 in connection with 2004
restructuring program activities in Nachterstedt, Germany (Q1:
$1; Q2: nil; Q3: nil).
2001 Restructuring Program |
In 2001, Alcan implemented a restructuring program, resulting in
a series of plant sales, closures and divestitures throughout
the organization. A detailed business portfolio review was
undertaken in 2001 to identify high cost operations, excess
capacity and non-core products. Impairment charges were
recognized as a result of negative projected cash flows and
recurring losses. These charges related principally to
buildings, machinery and equipment. This program was essentially
completed in 2003.
In 2004, we recorded recoveries related to the 2001
restructuring program comprised of $7 (Q1: $7; Q2: nil; Q3: nil;
Q4: nil) relating to a gain on the sale of assets related to the
closure of facilities in Glasgow, U.K. (Novelis Europe) and a
recovery of $1 (Q1: nil; Q2: $1; Q3: nil; Q4: nil) relating to a
provision in the U.S. (Novelis North America).
In 2005, we recorded recoveries of $2 in connection with 2001
restructuring program activities in Rogerstone, Wales (Q1: $1;
Q2: $1; Q3: nil).
16
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
The schedule provided below shows details of the provision
balances, related cash payments and recoveries for the
significant restructuring activities included in Other expenses
(income) net in the unaudited condensed consolidated
and combined statements of income:
Asset | ||||||||||||||||
Severance | Impairment | |||||||||||||||
Costs | Provisions | Other | Total | |||||||||||||
Provision balance as of January 1, 2004
|
19 | | 15 | 34 | ||||||||||||
Year Ended December 31, 2004 activity:
|
||||||||||||||||
Charges (recoveries) recorded in the statement of income
|
10 | 8 | (1 | ) | 17 | |||||||||||
Liabilities recorded in the allocation of the Pechiney purchase
price
|
19 | | 4 | 23 | ||||||||||||
Cash payments net
|
(14 | ) | | (5 | ) | (19 | ) | |||||||||
Non-cash charges (recoveries)
|
| (8 | ) | 6 | (2 | ) | ||||||||||
Provision balance as of December 31, 2004
|
34 | | 19 | 53 | ||||||||||||
Nine Months Ended September 30, 2005 activity:
|
||||||||||||||||
Charges (recoveries) recorded in the statement of
income
|
(4 | ) | 4 | 8 | 8 | |||||||||||
Recoveries credited against Goodwill
|
(4 | ) | | | (4 | ) | ||||||||||
Cash payments net
|
(16 | ) | | (6 | ) | (22 | ) | |||||||||
Non-cash recoveries
|
| (2 | ) | | (2 | ) | ||||||||||
Effect of exchange rate changes on ending provision
balances
|
(3 | ) | | (2 | ) | (5 | ) | |||||||||
Provision balance as of September 30, 2005
|
7 | 2 | 19 | 28 | ||||||||||||
Subsequent Events |
In connection with our 2004 restructuring activities, we
received $7 in proceeds from the sale of land at the closed
rolling mill in Falkirk, Scotland (Novelis Europe) in October
2005 resulting in a gain of $7.
In March 2006, we announced additional actions in the
restructuring of our European operations, with the sale of our
aluminum rolling mill in Annecy, France to private equity firm
American Industrial Acquisition Corporation and the
reorganization of our plants in Ohle and Ludenscheid, Germany,
including the closure of two non-core business lines located
within those facilities. We will record a pre-tax accounting
charge of approximately $14 in connection with the sale of the
Annecy plant, and a pre-tax accounting charge in the $10 to $12
range for the restructuring of the Ohle and Ludenscheid
operations for the first quarter of 2006. These charges include
redundancy costs and the write-off of assets on the balance
sheet.
17
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
5. | RELATED PARTY TRANSACTIONS |
The following table describes the nature and amounts of
transactions that we had with related parties during the quarter
and nine months ended September 30, 2005 and 2004. In 2004,
Alcan was considered a related party to Novelis. However,
subsequent to the spin-off, Alcan is no longer a related party
as defined in FASB Statement No. 57, Related Party
Disclosures, and accordingly, all transactions between
Novelis and Alcan are third party transactions.
Third | |||||||||||||||||
Quarter | Nine Months | ||||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Sales and operating revenues
|
|||||||||||||||||
Alcan(A)
|
| 107 | | 323 | |||||||||||||
Cost of sales and operating expenses
|
|||||||||||||||||
Alcan(A)
|
| 96 | | 288 | |||||||||||||
Research and development expenses
|
|||||||||||||||||
Alcan(B)
|
| 10 | | 28 | |||||||||||||
Interest expense
|
|||||||||||||||||
Alcan(C)
|
| 7 | | 24 | |||||||||||||
Other expenses (income) net
|
|||||||||||||||||
Service fee income(D)
|
| | | (27 | ) | ||||||||||||
Service fee expense(E)
|
| (2 | ) | | 17 | ||||||||||||
Interest income(F)
|
| (6 | ) | | (17 | ) | |||||||||||
Derivatives realized gains (losses)(G)
|
| 10 | | 2 | |||||||||||||
Derivatives unrealized gains (losses) on change in
market value and reclassifications(G)
|
| | | | |||||||||||||
Other
|
| (1 | ) | (1 | ) | 5 | |||||||||||
Total other expenses (income) net arising from
transactions with Alcan
|
| 1 | (1 | ) | (20 | ) | |||||||||||
Interest income from Aluminium Norf GmbH
|
| | | (1 | ) | ||||||||||||
Total other expenses (income) net arising from
transactions with all related parties
|
| 1 | (1 | ) | (21 | ) | |||||||||||
Purchase of inventory/tolling services
|
|||||||||||||||||
Aluminium Norf GmbH
|
52 | 51 | 154 | 147 | |||||||||||||
Alcan(H)
|
| 502 | | 1,485 | |||||||||||||
(A) | We purchase from and sell materials to Alcan in the ordinary course of business. | |
(B) | These expenses represent an allocation of research and development expenses incurred by Alcan on behalf of Novelis. |
18
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
(C) | As discussed further below and in Note 11 Short-Term Borrowings and Note 12 Long-Term Debt, we had various short-term borrowings and long-term debt payable to Alcan where interest was charged on both a fixed and a floating rate basis. | |
(D) | Service fee income arises from sales of research and development and other corporate services to Alcan. | |
(E) | Service fee expense arises from the purchase of corporate services from Alcan. | |
(F) | Represents interest income earned on outstanding advances and loans to Alcan. | |
(G) | Alcan was the counterparty to most of our metal and currency derivatives. | |
(H) | Alcan is our primary third party supplier of prime and sheet ingot. Refer to Note 14 Commitments and Contingencies. |
The table below describes the nature of and the period-end
balances that we have with related parties:
September 30, | December 31, | |||||||
As of | 2005 | 2004 | ||||||
Trade receivables
|
||||||||
Alcan(A)
|
| 87 | ||||||
Other receivables
|
||||||||
Alcan(B)
|
| 801 | ||||||
Aluminium Norf GmbH(C)
|
30 | 45 | ||||||
30 | 846 | |||||||
Long-term receivables
|
||||||||
Alcan
|
| 2 | ||||||
Aluminium Norf GmbH(C)
|
77 | 102 | ||||||
77 | 104 | |||||||
Current portion of long-term debt
|
||||||||
Alcan(D)
|
| 290 | ||||||
Short-term borrowings
|
||||||||
Alcan(E)
|
| 312 | ||||||
Accounts payable, trade
|
||||||||
Alcan(A)
|
| 356 | ||||||
Aluminium Norf GmbH(A)
|
38 | 45 | ||||||
38 | 401 | |||||||
Long-term debt, net of current portion
|
||||||||
Alcan(D)
|
| 2,307 | ||||||
(A) | We purchase from and sell materials to Alcan and we purchase services from an investee accounted for under the equity method, in the ordinary course of business. |
19
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
(B) | The balance at December 31, 2004 includes various short-term floating rate notes totaling Euro 266 million and $55 maturing within one year that were settled by Alcan in 2005 as part of our spin-off. | |
(C) | The balances represent current and non-current portions of a loan to an investee accounted for under the equity method. | |
(D) | We had various loans payable to Alcan as of December 31, 2004 as described in Note 12 Long-Term Debt that were repaid in the first quarter of 2005. | |
(E) | The balance at December 31, 2004 is comprised of loans due to Alcan in various currencies including Euro 193 million and GBP 20 million that were repaid in 2005 as part of our spin-off. |
6. | POST-RETIREMENT BENEFITS |
Our pension obligations relate to funded defined benefit pension
plans we have established in the United States, Canada and the
United Kingdom, unfunded pension benefits primarily in Germany,
and lump sum indemnities payable upon retirement to employees of
businesses in France, Korea, Malaysia and Italy. Pension
benefits are generally based on the employees service and
either on a flat dollar rate or on the highest average eligible
compensation before retirement. In addition, some of our
entities participate in defined benefit plans managed by Alcan
in the U.S., the U.K. and Switzerland.
In 2005, the following transactions transpired related to
existing Alcan pension plans covering our employees:
a) In the U.S., for our employees previously participating in the Alcancorp Pension Plan and the Alcan Supplemental Executive Retirement Plan, Alcan agreed to recognize up to one year of additional service in its plan as long as such employee worked for us and we paid to Alcan the normal cost (in the case of the Alcancorp Pension Plan) and the current service cost (in the case of the Alcan Supplemental Executive Retirement Plan); | |
b) In the U.K., the sponsorship of the Alusuisse Holdings U.K. Ltd Pension Plan was transferred from Alcan to us and renamed the Novelis U.K. Pension Plan. No new plan was established. Approximately 400 of our employees who previously participated in the British Alcan RILA Plan remained in that plan for 2005. We are responsible for remitting to Alcan both the employee and employer contributions as agreed with the trustees of the plan for the 2005 year; and | |
c) In Switzerland, we became a participating employer in the Alcan Swiss Pension Plans and our employees are participating in these plans for up to one year (or longer with Alcan approval) provided we make the required pension contributions. |
For the quarter and nine months ended September 30, 2005,
we contributed $4 and $11, respectively, to the Alcan sponsored
plans described above.
The following plans were newly established in 2005 to replace
the Alcan pension plans that previously covered our employees
(other Alcan pension plans covering our employees were assumed
by us):
Novelis Pension Plan (Canada) The Novelis
Pension Plan (Canada) provides for pensions calculated on
service (no cap) and eligible earnings which consist of the
average annual salary and the short-term incentive award up to
its target during the 36 consecutive months when they were the
greatest. The normal form of payment of pensions is a lifetime
annuity with either a guaranteed minimum of 60 monthly
payments or a 50% lifetime pension to the surviving spouse.
20
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Pension Plan for Officers The Pension Plan
for Officers (PPO) provides for pensions calculated on
service up to 20 years as an officer of Novelis or of Alcan
and eligible earnings which consist of the excess of the average
annual salary and target short-term incentive award during the
60 consecutive months when they were the greatest over eligible
earnings in the U.S. Plan or the U.K. Plan, as applicable.
The normal form of payment of pensions is a lifetime annuity.
Pensions will not be subject to any deduction for social
security or other offset amounts.
The board of directors reviewed managements
recommendations with respect to certain modifications of our
post-retirement benefit plans. On October 28, 2005, our
board of directors approved and adopted the following changes
related to post-retirement benefit plans:
a) New salaried employees (new as of January 1, 2005 in the U.S. and as of January 1, 2006 in Canada and the U.K.) will participate in Defined Contribution (DC) retirement plan arrangements rather than Defined Benefit (DB) plans. The Novelis board of directors also approved the adoption of the Novelis Savings and Retirement Plan effective December 1, 2005 replacing the Alcancorp Employees Savings Plan (for U.S. salaried employees) and adding a retirement account feature to the plan; | |
b) As a result of the spin-off, account balances in the Alcancorp Employees Savings Plans (Salaried Plan and Hourly Plan) were transferred to the new Novelis Savings and Retirement Plan (for salaried employees) and the new Novelis Hourly Savings Plan (for hourly union employees). To accomplish this transfer, a freeze was placed on all account activity including loan requests, withdrawals, distributions, fund exchanges (transfers), contribution allocation changes and account balance inquiries during the transition period. The freeze began on December 2, 2005 and ended during the week of December 11, 2005; and | |
c) Pursuant to the Employee Matters Agreement (EMA) between Alcan and Novelis, active Novelis transferred employees continue to participate in the Alcancorp Pension Plan (ACPP) until December 31, 2005. Effective October 28, 2005, the Novelis board of directors approved the adoption of Novelis DB pension arrangements (to be called the Novelis Pension Plan (NPP) in the U.S.) for employees who participated in a DB with Alcan. Under the terms of the EMA and subject to Internal Revenue Service (IRS) requirements, assets and liabilities will be transferred from ACPP to the new NPP. Similar, but not identical, actions will occur in Canada and the U.K. for pensions. |
These transfers of assets and liabilities may have a material
impact on our financial statements in 2006. We are unable to
determine the amount with certainty at this time, as the
relevant employee elections have not been made.
Alcan provides unfunded health care and life insurance benefits
to retired employees in Canada and the United States, which
include retired employees of some of our businesses. Our share
of these plans liabilities and costs are included in the
historical combined financial statements. We expect to pay
benefits of $6 in 2005 related to these plans from operating
cash flows.
21
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Components of net periodic benefit cost are shown in the table
below:
Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||
Third | Third | |||||||||||||||||||||||||||||||
Quarter | Nine Months | Quarter | Nine Months | |||||||||||||||||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
Service cost
|
5 | 4 | 14 | 14 | 1 | 1 | 3 | 2 | ||||||||||||||||||||||||
Interest cost
|
7 | 7 | 22 | 21 | (1 | ) | 1 | 5 | 4 | |||||||||||||||||||||||
Expected return on assets
|
(3 | ) | (5 | ) | (15 | ) | (17 | ) | | | | | ||||||||||||||||||||
Amortization
|
||||||||||||||||||||||||||||||||
actuarial losses
|
| 1 | 4 | 3 | 1 | | 1 | | ||||||||||||||||||||||||
prior service cost
|
| 1 | 2 | 3 | | | | | ||||||||||||||||||||||||
Curtailment/ settlement gains
|
| | | (19 | ) | | | | | |||||||||||||||||||||||
Net periodic benefit cost
|
9 | 8 | 27 | 5 | 1 | 2 | 9 | 6 | ||||||||||||||||||||||||
The expected long-term rate of return on plan assets is 7.5% in
2005.
In the quarter ended June 30, 2004, we recognized a $19
settlement gain on the
wind-up of the
Brazilian operations defined benefit plan.
Employer Contributions |
Our pension funding policy is to contribute the amount required
to provide for contractual benefits attributed to service to
date, and to amortize unfunded actuarial liabilities, for the
most part over periods of 15 years or less. We previously
disclosed in our historical combined financial statements for
the year ended December 31, 2004 that we expected to
contribute $10 to our funded pension plans in 2005. The
contributions are expected to be fully comprised of cash. As of
September 30, 2005, $14 has been contributed, and we expect
to contribute an additional $2 over the remainder of the year.
The additional contributions are necessary to fund pension plan
deficits in certain countries as well as new pension plans
created subsequent to our spin-off. We also expect to pay $9 of
unfunded pension benefits and lump sum indemnities from
operating cash flows in 2005.
We also participate in savings plans in Canada and the
U.S. as well as defined contribution pension plans in
Malaysia and Brazil. We expect to make contributions of $9 to
these plans in 2005 ($8 in 2004).
22
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
7. | OTHER EXPENSES (INCOME) NET |
The following table presents the components of Other expenses
(income) net:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Restructuring costs (recoveries) net
|
7 | 10 | 4 | 12 | ||||||||||||
Asset impairment provisions
|
4 | 9 | 5 | 9 | ||||||||||||
Gain on disposals of fixed assets(A)
|
| | (11 | ) | (6 | ) | ||||||||||
Interest income
|
(3 | ) | (6 | ) | (7 | ) | (19 | ) | ||||||||
Realized gains on monetization of cross-currency interest rate
swaps
|
| | (45 | ) | | |||||||||||
Realized losses (gains) on derivatives(B)
|
4 | | (11 | ) | | |||||||||||
Exchange losses (gains)
|
(4 | ) | 5 | 1 | 8 | |||||||||||
Unrealized gains on change in market value and reclassification
of derivatives(C)
|
(43 | ) | (21 | ) | | (36 | ) | |||||||||
Service fee expense net
|
| (11 | ) | | (10 | ) | ||||||||||
Bridge financing commitment fee
|
| | 11 | | ||||||||||||
Provisions for legal and environmental reserves
|
7 | | 13 | | ||||||||||||
Other
|
1 | 15 | 1 | 29 | ||||||||||||
(27 | ) | 1 | (39 | ) | (13 | ) | ||||||||||
(A) | Included in the nine months ended September 30, 2005 is a gain on the sale of land in Asia of ($11). | |
(B) | Includes metal, natural gas and energy derivatives. | |
(C) | Included in the nine months ended September 30, 2005 is $43 in pre-tax unrealized losses ($29 after-tax) on the change in market value of derivative contracts, primarily with Alcan, for the period from January 1 to January 5, 2005, as described in Note 1 Background and Basis of Presentation. |
8. | INCOME TAXES |
The provision (benefit) for income taxes is comprised of the
following:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Current
|
6 | 38 | 73 | 89 | ||||||||||||
Deferred
|
31 | 7 | (6 | ) | 22 | |||||||||||
37 | 45 | 67 | 111 | |||||||||||||
The effective tax rates for the nine months ended
September 30, 2005 and 2004 were 60% and 42%, respectively,
compared to the Canadian statutory rate of 33% for both periods.
For the nine months ended
23
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
September 30, 2005, the reconciliation of income taxes at
the Canadian statutory rates to our effective rate is as follows:
Nine Months | |||||||||
2005 | |||||||||
Tax Rate | |||||||||
Period ended September 30 | 2005 | Component | |||||||
Income before income taxes and other items
|
112 | ||||||||
Income taxes at statutory rate
|
37 | 33 | % | ||||||
Adjustments to the statutory rate:
|
|||||||||
Difference in effective tax rates of foreign subsidiaries
|
1 | 1 | % | ||||||
Unrealized benefit on losses
|
8 | 7 | % | ||||||
Out-of-period adjustments
|
(7 | ) | (6 | )% | |||||
Exchange translation items
|
24 | 22 | % | ||||||
Exchange on revaluation of deferred income taxes
|
6 | 5 | % | ||||||
Taxes relating to the spin-off transaction
|
(2 | ) | (2 | )% | |||||
Reduced-rate or tax-exempt items
|
(6 | ) | (5 | )% | |||||
Other net
|
6 | 5 | % | ||||||
Income taxes at effective rate
|
67 | 60 | % | ||||||
The 2004 historical combined financial statements were prepared
on a carve-out basis. A comparison of our nine months 2004
effective rate to the statutory rate would not be meaningful.
9. | EARNINGS PER SHARE |
We use the treasury stock method to calculate the dilutive
effect of stock options and other stock equivalents (dilutive
shares). The following table shows the information used in the
calculation of basic and diluted earnings per share:
Third | |||||||||||||||||
Quarter | Nine Months | ||||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Numerator:
|
|||||||||||||||||
Net income
|
10 | 34 | 32 | 148 | |||||||||||||
Denominator (number of common shares in millions):
|
|||||||||||||||||
Weighted average number of outstanding shares
|
74.00 | 73.99 | 73.99 | 73.99 | |||||||||||||
Effect of dilutive shares
|
0.38 | 0.44 | 0.25 | 0.44 | |||||||||||||
Adjusted number of outstanding shares
|
74.38 | 74.43 | 74.24 | 74.43 | |||||||||||||
Earnings per share basic (in US$)
|
0.14 | 0.47 | 0.43 | 2.01 | |||||||||||||
Earnings per share diluted (in US$)
|
0.14 | 0.47 | 0.43 | 2.00 | |||||||||||||
Options to purchase an aggregate of 2,707,171 of our common
shares were held by our employees as of September 30, 2005.
Of these, 2,696,070 options to purchase common shares at an
average exercise price of $21.57 per share were dilutive
for the third quarter ended September 30, 2005. For the
nine months ended September 30, 2005, 1,366,028 options to
purchase common shares at an average exercise
24
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
price of $19.43 per share are dilutive. These dilutive
stock options are equivalent to 342,493 of our common shares for
the third quarter and 203,052 for the nine months ended
September 30, 2005. Additionally, there are
41,652 Director Deferred Share Units (DDSUs) (see
Note 19 Stock Options and Other Stock-Based
Compensation) for the third quarter and nine months ended
September 30, 2005 that were included as dilutive shares.
The number of anti-dilutive Novelis options held by our
employees for the third quarter and nine months ended
September 30, 2005 was 11,101 and 1,341,143, respectively.
For both the third quarter and the nine months ended
September 30, 2004 under rules applicable to carve-out
statements, the effect of dilutive stock options was calculated
based on an aggregate of 1,356,735 Alcan common shares held by
Novelis employees. Of these, 685,285 options to purchase Alcan
common shares at an average exercise price of CAN$38.86
(US$29.96) per share were dilutive for both the third quarter
and nine months ended September 30, 2004. These dilutive
stock options were equivalent to 443,351 of Novelis common
shares for both the third quarter and nine months ended
September 30, 2004. The number of anti-dilutive Alcan
options held by Novelis employees as of September 30, 2004
was 671,450.
10. | SALES, FORFAITING AND FACTORING OF TRADE ACCOUNTS RECEIVABLES |
Prior to the spin-off, we transferred third party trade
receivables to Alcan, a related party, which were then
subsequently sold to a financial institution under Alcans
accounts receivable securitization program. Subsequent to the
spin-off, we have not securitized any of our third party 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 the accompanying unaudited condensed
consolidated and combined balance sheets.
The table below summarizes forfaiting activities for the periods
presented:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Receivables forfaited during the period
|
79 | 47 | 203 | 141 | ||||||||||||
Expense recognized due to forfaiting activities
|
1 | | 2 | 1 | ||||||||||||
As of | September 30, 2005 | December 31, 2004 | ||||||
Forfaited receivables outstanding
|
57 | 50 | ||||||
Our Brazilian operations accelerate their cash collections by
factoring, without recourse, trade receivables that are
unencumbered by pledge restrictions. Under this method,
customers are directed to pay 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 the
accompanying unaudited condensed
25
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
consolidated and combined balance sheets. The following table
summarizes our factoring activities for the periods presented:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Receivables factored during the period
|
43 | 6 | 64 | 24 | ||||||||||||
Expense recognized due to factoring activities
|
1 | | 1 | | ||||||||||||
As of | September 30, 2005 | December 31, 2004 | ||||||
Factored receivables outstanding
|
23 | | ||||||
11. | SHORT-TERM BORROWINGS |
As of December 31, 2004, our short-term borrowings were
$229 due to third parties and $312 due to Alcan. In order to
facilitate the separation of Novelis and Alcan, we executed
substantial and material debt restructuring and financing
transactions in early January and February of 2005, whereby we
effectively replaced all of our financing obligations to Alcan
and certain other third parties with new third party debt
aggregating $2,951 (see Note 12 Long-Term
Debt). Alcan, a related party at December 31, 2004, was
repaid in 2005, primarily as a related party, through both cash
and non-cash transactions. As of September 30, 2005,
short-term borrowings due to third parties totaled $35
consisting of $33 of borrowings in Korea through local banking
relationships not under a line of credit, and $2 under a line of
credit in Brazil. The carrying amount approximates fair value
because this debt has short periods to maturity, and market
rates of interest. As of September 30, 2005 the weighted
average interest rate on short-term borrowings was 4.15% (2004:
2.5%).
A contractual short-term line of credit in Brazil totaled $25 at
September 30, 2005, of which $23 was available. The senior
secured credit facility for $1,800 (see Note 12
Long-Term Debt) includes a $500 five-year multi-currency
revolving credit and letter of credit facility. As of
September 30, 2005, $1 of the $500 facility was utilized
for letters of credit.
26
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
12. | LONG-TERM DEBT |
September 30, | December 31, | |||||||
As of | 2005 | 2004 | ||||||
DUE TO RELATED PARTIES
|
||||||||
Total related party debt(A)
|
| 2,597 | ||||||
Less: current portion
|
| (290 | ) | |||||
Long-term related party debt, net of current portion
|
| 2,307 | ||||||
DUE TO THIRD PARTIES
|
||||||||
Novelis Inc.
|
||||||||
Floating rate Term Loan B, due 2012(B)
|
371 | | ||||||
7.25% Senior Notes, due 2015(D)
|
1,400 | | ||||||
Novelis Corporation
|
||||||||
Floating rate Term Loan B, due 2012(B)(C)
|
644 | | ||||||
Novelis Switzerland S.A.
|
||||||||
Capital lease obligation, due 2020 (Swiss Francs
(CHF) 62 million)(E)
|
48 | | ||||||
Novelis Korea Limited (F)
|
||||||||
Bank loan, due 2008
|
50 | | ||||||
Bank loan, due 2007
|
70 | 70 | ||||||
Bank loan, due 2007 (Korean won (KRW) 40 billion)
|
39 | 39 | ||||||
Bank loan, due 2007 (KRW 25 billion)
|
24 | 24 | ||||||
Bank loans, due 2005/2011 (KRW 2 billion)
|
2 | 2 | ||||||
Other
|
||||||||
Other debt, due 2009
|
2 | 5 | ||||||
Total third party debt
|
2,650 | 140 | ||||||
Less: current portion
|
(3 | ) | (1 | ) | ||||
Long-term third party debt, net of current portion
|
2,647 | 139 | ||||||
(A) | All of our related party debt of $2,597 as of December 31, 2004 was payable to Alcan and was fully repaid in the first quarter of 2005. The related party debt was comprised of a combination of fixed and floating rate debt of $1,392 and fixed rate promissory notes (Alcan Notes) obtained in December 2004 of $1,205. The Alcan Notes as of December 31, 2004, plus additional Alcan Notes of $170 issued in January 2005 comprised the $1,375 bridge financing provided by Alcan as a result of the spin-off transaction described in Note 1 Background and Basis of Presentation. The Alcan Notes were repaid in February 2005 with the net proceeds from the $1,400 10-year Senior Notes issued in February 2005 (note (D) below). | |
(B) | In connection with the spin-off transaction described in Note 1 Background and Basis of Presentation, we entered into senior secured credit facilities providing for aggregate borrowings of up to $1,800. These facilities consist of: (1) a $1,300 seven-year senior secured Term Loan B facility, bearing interest at LIBOR plus 1.75% (the effective rate at September 30, 2005 was 5.46% assuming the selection of 3-month LIBOR as our borrowing choice), all of which was borrowed on January 10, 2005, and (2) a $500 five-year multi-currency revolving credit facility. The Term Loan B facility |
27
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
consists of an $825 Term Loan B in the U.S. and a $475 Term Loan B in Canada. The proceeds of the Term Loan B facility were used in connection with the spin-off transaction to refinance our related party debt with Alcan and to pay related fees and expenses. Debt issuance costs incurred in relation to these facilities have been recorded in Deferred charges and other assets and are being amortized over the life of the related borrowing in Interest using the effective interest amortization method. | ||
The credit agreement relating to the senior secured credit facilities includes customary affirmative and negative covenants, as well as financial covenants relating to our maximum total leverage ratio, minimum interest coverage ratio, and minimum fixed charge coverage ratio. | ||
The credit agreement for the $1,800 facility requires that we deliver quarterly and audited annual financial statements to the lenders within a specified period of time. Due to the restatement of our unaudited condensed consolidated and combined financial statements for the quarter ended March 31, 2005 and the quarter and six months ended June 30, 2005, we sought and obtained the consent from our lenders to extend the financial statement filing and reporting deadlines under the credit agreement to June 15, 2006 for our Form 10-Q for the quarter ended September 30, 2005; to September 29, 2006 for our Form 10-K for the year ended December 31, 2005; to October 31, 2006 for our Form 10-Q for the quarter ended March 31, 2006; to November 30, 2006 for our Form 10-Q for the quarter ending June 30, 2006; and to December 29, 2006 for our Form 10-Q for the quarter ending September 30, 2006. | ||
As of March 31, 2006, we had $855 outstanding under the credit agreement. | ||
(C) | We have entered into interest rate swaps to fix the interest rate on $310 of the Novelis Corporation floating rate Term Loan B debt at an effective weighted average interest rate of 5.5% for periods of up to three years. | |
(D) | On February 3, 2005, we issued $1,400 aggregate principal amount of senior unsecured debt securities (Senior Notes). The Senior Notes, which were priced at par, bear interest at 7.25% and will mature on February 15, 2015. The net proceeds of the Senior Notes were used to repay the Alcan Notes. | |
Under the indenture that governs the Senior Notes, we are subject to certain restrictive covenants applicable to incurring additional debt and providing additional guarantees, paying dividends beyond certain amounts and making other restricted payments, sales and transfer of assets, certain consolidations or mergers and certain transactions with affiliates. | ||
The indenture governing the Senior Notes provides that we file a registration statement for registered notes to be exchanged for the notes privately placed to the original investors. The registration statement was declared effective by the SEC on September 27, 2005. Under the indenture and the related registration rights agreement, we were required to complete an exchange offer for the Senior Notes by November 11, 2005. We did not complete the exchange offer by that date. As a result, we began to accrue additional special interest at a rate of 0.25% from November 11, 2005. In addition, the indenture and the registration rights agreement provide that the rate of additional special interest increases 0.25% during each subsequent 90-day period until the exchange offer closes, with the maximum amount of additional special interest being 1.00% per year. The rate of additional special interest is currently 0.75%. If we do not complete the exchange offer by August 8, 2006, the rate of additional special interest will increase to 1.00%. We expect to file a post-effective amendment to the registration statement registering the Senior Notes being issued in the exchange offer and complete the exchange as soon as practicable following the date we are current on our reporting requirements. We will cease paying additional special interest once the exchange offer is completed. |
28
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Under the indenture, we are also required to deliver to the trustee a copy of our periodic reports filed with the SEC within time periods specified for filing by SEC rules. Our failure to timely file our quarterly report on Form 10-Q for the quarter ended September 30, 2005, our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly report on Form 10-Q for the quarter ended March 31, 2006 gave certain rights to the trustee and the noteholders under the indenture to accelerate maturity of the Senior Notes if they provided us notice and we do not cure the breach within 60 days. However, neither the trustee nor the noteholders have provided us such a notice to date. As a result, we continue to classify the Senior Notes as long-term. | ||
(E) | In connection with the spin-off, we entered into a fifteen-year capital lease agreement with Alcan for assets in Sierre, Switzerland, which has an implied interest rate of 7.5% and calls for fixed quarterly payments of $1 (1.7 million CHF). The following table presents future minimum payments under this capital lease in US$ as of September 30, 2005: |
Payments in Year Ended December 31 | ||||
Remainder of 2005
|
1 | |||
2006
|
5 | |||
2007
|
5 | |||
2008
|
5 | |||
2009
|
6 | |||
2010
|
6 | |||
Thereafter
|
51 | |||
Total payments
|
79 | |||
Less: interest portion
|
(31 | ) | ||
Total capital lease obligation included in long-term debt
|
48 | |||
(F) | In 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan Taihan Aluminium Limited, entered into a $70 floating rate long-term loan which was subsequently swapped for a 4.55% fixed rate KRW 73 billion loan and into two long-term floating rate loans of $39 (KRW 40 billion) and $24 (KRW 25 billion), which were then swapped for fixed rate loans of 4.80% and 4.45%, respectively. In 2005, interest on another loan for $2 (KRW 2 billion) ranged from 3.00% to 4.47% (2004: 3.00% to 5.50%). In February 2005, Novelis Korea entered into a $50 million floating rate long-term loan which was subsequently swapped for a 5.30% fixed rate KRW 51 billion loan. |
In 2004, we entered into a loan and corresponding deposit and
guarantee agreement for $90 which had a balance of $80 at
September 30, 2005. We do not include the amounts in our
unaudited condensed consolidated and combined financial
statements as the agreements include a legal right of setoff.
Based on rates of exchange at September 30, 2005, debt
repayment requirements for the remainder of fiscal 2005 and over
the next five years amount to $1 in 2005; $3 in 2006; $135 in
2007; $53 in 2008; $3 in 2009 and $5 in 2010. We made an
optional principal prepayment of $85 on our Term Loan on
March 31, 2005 and in the process, satisfied a 1% per
annum principal amortization requirement through fiscal year
2010. We made another optional principal prepayment of $90 on
our Term Loan B on June 30, 2005 and in the process,
satisfied some of our principal amortization requirements for
fiscal year 2011. We made an additional optional prepayment of
$110 on our Term Loan B on September 30, 2005, and in
the process satisfied some additional principal amortization
requirements for 2011. The senior secured credit facility (note
(B) above) also requires us potentially to prepay an
additional portion of our Term Loans
29
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
annually, based on a defined formula. This amount cannot be
determined in advance and has therefore not been included in the
future debt payment requirements shown above.
As of September 30, 2005, we were in compliance with all
the financial covenants in our debt agreements, but see the
discussion of the restatement effects on our debt agreements
above in notes (B) and (D).
13. | FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS |
In conducting our business, we use various derivative and
non-derivative instruments, including forward contracts, to
manage the risks arising from fluctuations in exchange rates,
interest rates, aluminum prices and other commodity prices. Such
instruments are used for risk management purposes only. Alcan is
the principal counterparty to our aluminum forward contracts and
some of our aluminum options. As described in
Note 5 Related Party Transactions, in 2004 and
prior years, Alcan was considered a related party to us.
However, subsequent to the spin-off, Alcan is no longer a
related party, as defined in FASB Statement No. 57,
Related Party Disclosures.
There have been no material changes in financial instruments and
commodity contracts during the first nine months of 2005, except
as noted below.
During the first quarter of 2005, we entered into
U.S. dollar interest rate swaps totaling $310 with respect
to the Term Loan B in the U.S., and $766 of cross-currency
interest rate swaps (Euro 475 million, GBP 62 million,
CHF 35 million) with respect to intercompany loans to
several European subsidiaries.
During the second quarter of 2005, we monetized the initial
cross-currency interest rate swaps and replaced them with new
cross-currency interest rate swaps maturing in 2015, totaling
$712 at September 30, 2005 (Euro 475 million, GBP
62 million, CHF 35 million). The aggregate fair value
of the U.S. dollar interest rate swaps and the new
cross-currency interest rate swaps was a liability of $34 as of
September 30, 2005.
During the third quarter of 2005, we entered into cross-currency
principal only swaps (Euro 89 million). The
U.S. notional amount of these swaps was $108 as of
September 30, 2005. These swaps mature within the next year
and are designated as cash flow hedging instruments. The
aggregate fair value of these swaps was a liability of $0.5 as
of September 30, 2005.
Financial Instruments Fair Value |
On September 30, 2005, the book value of our long-term debt
totals $2,650 (2004: $2,737). The 7.25% Senior Notes, due
2015, total $1,400 of this amount and have a fair value of
$1,323 based on available market prices. For the remainder of
our debt and all other financial assets and liabilities, book
value approximates fair value because the variable interest
rates on the debt re-set to market rates periodically.
14. | COMMITMENTS AND CONTINGENCIES |
As described in Note 5 Related Party
Transactions, Alcan is our primary supplier of prime and sheet
ingot. Purchases from Alcan for the third quarter and nine
months ended September 30, 2005 represented 49% and 49% of
total prime and sheet ingot third party purchases, respectively
(2004: 51% and 51%).
In connection with our separation from Alcan, we assumed a
number of liabilities, commitments and contingencies mainly
related to our historical rolled products operations, including
liabilities in respect of
30
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
legal claims and environmental matters. As a result, we may be
required to indemnify Alcan for claims successfully brought
against Alcan or for the defense of, or defend, legal actions
that arise from time to time in the normal course of our rolled
products business including commercial and contract disputes,
employee-related claims and tax disputes (including several
disputes with Brazils Ministry of Treasury regarding taxes
and social security contributions).
Legal Proceedings |
The Reynolds Boat Case described below is our largest known
non-environmental legal claim that is currently active.
Reynolds Boat Case. We and Alcan are defendants in a case
in the United States District Court for the Western District of
Washington, in Tacoma, Washington, case number C04-0175RJB.
Trial before a jury began on May 1, 2006. Plaintiffs
Reynolds Metals Company and Alcoa, Inc. claim, under various
warranty, negligence, and contractual theories, that from 1998
to 2001 we and Alcan Inc. sold certain aluminum products that
were ultimately used for marine applications and were unsuitable
for such applications. Plaintiffs are claiming approximately $75
in damages, including approximately $15 in prejudgment interest.
We currently believe we have several defenses that will limit or
prevent the imposition of additional monetary liability on us.
As of April 2006, we have expended approximately $1 defending
this claim under our self-insured retention. The current range
of reasonably possible additional loss is $1 to $75. We also
currently believe that our remaining uninsured exposure is
approximately $1 and that insurance should be responsible for
any additional fees, costs or other monetary liability,
notwithstanding reservation of rights letters we and Alcan
received. While the ultimate resolution of, and liability and
costs related to, this case cannot be determined with certainty
or reasonably estimated due to the considerable uncertainties
that exist, if there is an adverse outcome not covered by
insurance, it could have a material impact on our financial
position, operating results or cash flows in the quarter in
which such liability is determined.
We may, in the future, be involved in, or subject to, other
disputes, claims and proceedings that arise in the ordinary
course of our business, including some that we assert against
others. Where appropriate, we have established reserves in
respect of these matters (or, if required, we have posted cash
guarantees). While the ultimate resolution of, and liability and
costs related to, these matters cannot be determined with
certainty due to the considerable uncertainties that exist, we
do not believe that any of these pending actions, individually
or in the aggregate, will have a material adverse effect on our
business, financial condition or liquidity.
Environmental Matters |
The following describes certain environmental matters relating
to our business for which we assumed liability as a result of
our separation from Alcan. None of the environmental matters
include government sanctions of one-hundred thousand dollars or
more.
We are involved in proceedings under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, also
known as Superfund, or analogous state provisions regarding
liability arising from the usage, storage, treatment or disposal
of hazardous substances and wastes at a number of sites in the
United States, as well as similar proceedings under the laws and
regulations of the other jurisdictions in which we have
operations, including Brazil and certain countries in the
European Union. Such laws typically impose joint and several
liability, without regard to fault or the legality of the
original conduct, for the costs of environmental remediation,
natural resource damages, third party claims, and other
expenses, on those persons who contributed to the release of a
hazardous substance into the environment.
31
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
In addition, we are, from time to time, subject to environmental
reviews and investigations by relevant governmental authorities.
As described further in the following paragraph, we have
established procedures for regularly evaluating environmental
loss contingencies, including those arising from such
environmental reviews and investigations and any other
environmental remediation or compliance matters. We believe we
have a reasonable basis for evaluating these environmental loss
contingencies, and we believe we have made reasonable estimates
of the costs that are likely to be borne by us for these
environmental loss contingencies. Accordingly, we have
established reserves based on our reasonable estimates for the
currently anticipated costs associated with these environmental
matters. We estimate that the undiscounted remaining
clean-up costs related
to environmental matters will be in the range of $46 to $60. A
liability of $53 has been recorded on the unaudited condensed
consolidated and combined balance sheets at September 30,
2005, in Deferred credits and other liabilities. Management has
reviewed the environmental matters for which we assumed
liability as a result of our separation from Alcan. As a result
of this review, management has determined that the currently
anticipated costs associated with these environmental matters
will not, individually or in the aggregate, have a material
adverse effect on our business, financial condition or liquidity.
With respect to environmental loss contingencies, we record a
loss contingency on a non-discounted basis whenever such
contingency is probable and reasonably estimable. The evaluation
model includes all asserted and unasserted claims that can be
reasonably identified. Under this evaluation model, the
liability and the related costs are quantified based upon the
best available evidence regarding actual liability loss and cost
estimates. Except for those loss contingencies where no estimate
can reasonably be made, the evaluation model is fact-driven and
attempts to estimate the full costs of each claim. Management
reviews the status of, and estimated liability related to,
pending claims and civil actions on a quarterly basis. The
estimated costs in respect of such reported liabilities are not
offset by amounts related to cost-sharing between parties,
insurance, indemnification arrangements or contribution from
other potentially responsible parties unless otherwise noted.
Oswego North Ponds. Oswego North Ponds is currently our
largest known single environmental loss contingency. In the late
1960s and early 1970s, Novelis Corporation (a wholly-owned
subsidiary of ours and formerly known as Alcan Aluminum
Corporation, or Alcancorp.) in Oswego, New York used an oil
containing polychlorinated biphenyls (PCBs) in its re-melt
operations. At the time, Novelis Corporation utilized a
once-through cooling water system that discharged through a
series of constructed ponds and wetlands, collectively referred
to as the North Ponds. In the early 1980s, low levels of PCBs
were detected in the cooling water system discharge and Novelis
Corporation performed several subsequent investigations. The
PCB-containing hydraulic oil, Pydraul, which was eliminated from
use by Novelis Corporation in the early 1970s, was identified as
the source of contamination. In the mid-1980s, the Oswego North
Ponds site was classified as an inactive hazardous waste
disposal site and added to the New York State Registry.
Novelis Corporation ceased discharge through the North Ponds in
mid-2002.
In cooperation with the New York State Department of
Environmental Conservation (NYSDEC) and the New York State
Department of Health, Novelis Corporation entered into a consent
decree in August 2000 to develop and implement a remedial
program to address the PCB contamination at the Oswego North
Ponds site. A remedial investigation report was submitted in
January 2004. The current estimated cost associated with this
remediation is approximately $19. In addition, NYSDEC held a
public hearing on the remediation plan on March 13, 2006
and we believe that our estimate of $19 is reasonable and that
the remediation plan will be approved and implemented in 2006.
32
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Borgofranco. As of September 30, 2005, we had
recorded an aggregate reserve of $18 with respect to
environmental matters at our Borgofranco, Italy plant. A
stockpile of salt cake, a by-product of the production process
at our Borgofranco, Italy plant, has accumulated over several
years. A reserve of approximately $8 has been provided for its
processing and disposal. Further, tests on the soil at the
Borgofranco site discovered additional contamination. A reserve
of approximately $4 was established to cover the expected
remediation required. In the third quarter of 2005, we announced
the closure of business. Additional land remediation reserves of
$1.5 and additional salt cake reserves of $4.5 were taken
following the closure announcement.
Judicial Deposits |
Primarily as a result of legal proceedings with Brazils
Ministry of Treasury regarding certain taxes in South America,
as of September 30, 2005, we had made cash deposits of $16
(including $7 deposited in 2004) into judicial depository
accounts pending finalization of the related cases. These
amounts are included in Deferred charges and other assets on our
balance sheets. The depository accounts are in the name of the
Brazilian government and will be expended towards these legal
proceedings or released to us, depending on the outcome of the
legal cases.
Guarantees for Trade Payables to Third Parties |
Novelis Inc. issues indirect guarantees for trade payables to
third parties. These guarantees are effective over the supply
period of the contracts which currently expire between
December 31, 2006 and December 31, 2007, but are
subject to renewal. Each of these contracts may be terminated
30 days after written notice is provided to the supplier.
Under the supply agreements, Novelis Inc. does not have recourse
against the third parties based on triggering events or other
contractual provisions.
The estimated fair market values for these guarantees are listed
in the table below. These values are derived from the estimated
letter of credit fee a major bank would charge to guarantee
payment of the associated maximum potential future payments.
The following table discloses obligations under indirect
guarantees of indebtedness as of September 30, 2005:
Maximum | ||||||||||||||||
Potential Future | Liability | Fair Market | Assets Held for | |||||||||||||
Type of Entity | Payment | Carrying Value | Value | Collateral | ||||||||||||
Wholly-Owned Subsidiaries
|
11 | 3 | | | ||||||||||||
Aluminium Norf GmbH
|
12 | | | |
Although there is a possibility that liabilities may arise in
other instances for which no accruals have been made, we do not
believe that it is probable that any losses in excess of accrued
amounts would have a material adverse effect on our business,
financial condition, or liquidity, absent unusual circumstances.
In addition, see references to income taxes in
Note 8 Income Taxes and debt repayments in
Note 12 Long-Term Debt.
33
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
15. | COMPREHENSIVE INCOME (LOSS) |
The following table summarizes the components of Comprehensive
income (loss):
Third | |||||||||||||||||
Quarter | Nine Months | ||||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income
|
10 | 34 | 32 | 148 | |||||||||||||
Other comprehensive income (loss):
|
|||||||||||||||||
Net change in deferred translation adjustments
|
| (9 | ) | (146 | ) | (53 | ) | ||||||||||
Net change in minimum pension liability (net of taxes of nil and
($7)), respectively, for the third quarter and nine months ended
September 30, 2005 (2004: nil and nil))
|
1 | | (12 | ) | | ||||||||||||
Comprehensive income (loss)
|
11 | 25 | (126 | ) | 95 | ||||||||||||
The following table summarizes the components of Accumulated
other comprehensive income (loss):
As of | September 30, 2005 | December 31, 2004 | ||||||
Deferred translation adjustments
|
(26 | ) | 120 | |||||
Minimum pension liability
|
(44 | ) | (32 | ) | ||||
Accumulated other comprehensive income (loss)
|
(70 | ) | 88 | |||||
16. | INFORMATION BY OPERATING SEGMENTS |
The following presents selected information by operating
segment, viewed on a stand-alone basis. The operating management
structure is comprised of four operating segments. The four
operating segments are Novelis North America, Novelis Europe,
Novelis Asia and Novelis South America. Subsequent to our
spin-off from Alcan in 2005, we, as a stand-alone entity,
measure the profitability of our operating segments based on
Regional Income. Prior periods presented have been recast.
Regional Income comprises earnings before interest, income
taxes, equity income, minority interests, depreciation and
amortization and excludes certain items, such as corporate,
restructuring costs, impairment and other rationalization
charges. These items are managed by our corporate head office,
which focuses on strategy development and oversees corporate
governance, policy, legal compliance, human resources, and
finance matters. The change in market value of derivatives, with
the exception of unrealized gains or losses on certain cash flow
hedges, is removed from individual Regional Income and is shown
on a separate line. We believe that this presentation provides a
portrayal of our underlying regional group results that is in
line with our portfolio approach to risk management.
Prior to the spin-off, profitability of the operating segments
was measured based on business group profit (BGP). BGP was
similar to Regional Income, except for the following:
a) BGP excluded restructuring costs related only to major corporate-wide acquisitions or initiatives whereas Regional Income excludes all restructuring costs; | |
b) BGP included pension costs based on the normal current service cost with all actuarial gains, losses and other adjustments being included in Intersegment and other. Regional Income includes all these pension costs in the applicable operating segment; and |
34
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
c) BGP excluded certain corporate non-operating costs incurred by an operating segment and included such costs in Intersegment and other. Under the current management structure, these costs remain in the operating segment. |
Transactions between operating segments are conducted on an
arms-length basis and reflect market prices.
The accounting principles used to prepare the information by
operating segment are the same as those used to prepare our
unaudited condensed consolidated and combined financial
statements, except the operating segments include our
proportionate share of joint ventures (including joint ventures
accounted for using the equity method) as they are managed
within each operating segment, with the adjustments for
equity-accounted joint ventures shown on a separate line in the
reconciliation to Income before taxes and other items.
The operating segments are described below:
Novelis North America |
Headquartered in Cleveland, Ohio, this segment manufactures
aluminum sheet and light gauge products and operates 12 plants,
including two recycling facilities, in two countries.
Novelis Europe |
Headquartered in Zurich, Switzerland, this segment manufactures
aluminum sheet and light gauge products and operates 16 plants,
including two recycling facilities, in six countries. This
segment ceased operations in Falkirk, Scotland in December 2004
and Flemalle, Belgium in May 2005.
Novelis Asia |
Headquartered in Seoul, South Korea, this segment manufactures
aluminum sheet and light gauge products and operates three
plants in two countries.
Novelis South America |
Headquartered in Sao Paulo, Brazil, this segment comprises
bauxite mining, alumina refining, smelting operations, power
generation, carbon products, aluminum sheet and light gauge
products and operates five plants in Brazil. The Brazilian
bauxite, alumina and smelting assets are included in the group
because they are integrated with the Brazilian rolling
operations.
Corporate |
This classification is not an operating segment; it includes all
costs incurred by our corporate offices in Atlanta, Georgia, and
Toronto, Ontario, Canada.
Risk Concentration |
All four operating segments recorded revenues from Rexam Plc
(Rexam), a third party, during 2005 and 2004. Revenues from
Rexam totaled $282 and $792 for the third quarter and nine
months ended September 30, 2005, respectively, (2004: $220
and $654) and represented approximately 14% and 12% of total
revenues for the third quarter and nine months ended
September 30, 2005, respectively (2004: 11% and 11%).
35
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Selected Segment Operating Information |
The following table presents intersegment Sales and operating
revenues by operating segment:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Sales and operating revenues
intersegment
|
||||||||||||||||
Novelis North America
|
1 | | 2 | 5 | ||||||||||||
Novelis Europe
|
2 | 13 | 30 | 26 | ||||||||||||
Novelis Asia
|
1 | 3 | 6 | 7 | ||||||||||||
Novelis South America
|
7 | 16 | 37 | 43 | ||||||||||||
Eliminations
|
(11 | ) | (32 | ) | (75 | ) | (81 | ) | ||||||||
| | | | |||||||||||||
The following table presents total Sales and operating revenues
by operating segment:
Third Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Sales and operating revenues
|
||||||||||||||||
Novelis North America
|
836 | 810 | 2,500 | 2,229 | ||||||||||||
Novelis Europe
|
737 | 766 | 2,376 | 2,289 | ||||||||||||
Novelis Asia
|
328 | 292 | 1,025 | 858 | ||||||||||||
Novelis South America
|
157 | 134 | 448 | 369 | ||||||||||||
Equity-accounted joint ventures adjustments
|
(5 | ) | (2 | ) | (12 | ) | (6 | ) | ||||||||
2,053 | 2,000 | 6,337 | 5,739 | |||||||||||||
36
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
The following table presents Regional Income by operating
segment and reconciles Total Regional Income to Income before
income taxes and other items as presented in our statements of
income:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Regional Income
|
||||||||||||||||
Novelis North America
|
54 | 67 | 141 | 208 | ||||||||||||
Novelis Europe
|
52 | 64 | 161 | 162 | ||||||||||||
Novelis Asia
|
23 | 19 | 80 | 62 | ||||||||||||
Novelis South America
|
24 | 34 | 86 | 106 | ||||||||||||
Total Regional Income
|
153 | 184 | 468 | 538 | ||||||||||||
Corporate
|
(17 | ) | (11 | ) | (11 | ) | (31 | ) | ||||||||
Depreciation and amortization
|
(56 | ) | (60 | ) | (173 | ) | (178 | ) | ||||||||
Adjustments for equity-accounted joint ventures
|
(11 | ) | (11 | ) | (33 | ) | (32 | ) | ||||||||
Change in market value of derivatives
|
43 | 15 | 1 | 37 | ||||||||||||
Restructuring, rationalization and impairment recoveries (costs)
|
(10 | ) | (20 | ) | 2 | (15 | ) | |||||||||
Interest expense
|
(48 | ) | (17 | ) | (142 | ) | (55 | ) | ||||||||
Income before income taxes and other items
|
54 | 80 | 112 | 264 | ||||||||||||
The following table presents Total assets by operating segment
and other:
September 30, | December 31, | |||||||
As of | 2005 | 2004 | ||||||
Novelis North America
|
1,388 | 1,406 | ||||||
Novelis Europe
|
2,129 | 2,885 | ||||||
Novelis Asia
|
971 | 954 | ||||||
Novelis South America
|
780 | 779 | ||||||
Corporate, eliminations and other adjustments
|
(4 | ) | (70 | ) | ||||
5,264 | 5,954 | |||||||
17. | SUPPLEMENTARY INFORMATION |
The following table summarizes selected financial information
not presented within the unaudited condensed consolidated and
combined financial statements:
Third | ||||||||||||||||
Quarter | Nine Months | |||||||||||||||
Periods ended September 30 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Interest paid
|
76 | 18 | 119 | 56 | ||||||||||||
Income taxes paid
|
7 | 51 | 35 | 87 |
37
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
18. | PREFERRED AND COMMON SHARES |
Authorized and Outstanding Share Capital |
We may issue an unlimited number of common and preferred shares
from time to time upon approval by our board of directors for
such consideration as the board of directors decides
appropriate, without the need for further shareholder
authorization. The terms of any preferred shares, including
dividend rates, conversion and voting rights, if any, redemption
prices and similar matters will be determined by the board of
directors prior to issuance.
The table below reflects our share capital structure based on
the number of outstanding shares, assuming no exercise of
outstanding options.
Outstanding as of | ||||||||||||
Authorized | September 30, 2005 | December 31, 2004 | ||||||||||
Preferred Shares
|
Unlimited | None | None | |||||||||
Common Shares
|
Unlimited | 74,005,649 | None |
Description of Preferred Shares |
Our board of directors may, from time to time, fix the number of
shares in, and determine the designation, rights, privileges,
restrictions and conditions attaching to, each series of
preferred shares subject to the limitations in our articles of
incorporation. Holders of preferred shares are not entitled to
receive notice of, or to attend, any meeting of shareholders and
are not entitled to vote at any such meeting, except to the
extent otherwise provided in our articles of incorporation in
respect of preferred shares. Holders of our preferred shares are
entitled to receive dividends in such amounts and at such
intervals as may be determined by the board of directors.
Description of Common Shares |
Our common shares have no nominal or par value and are subject
to the rights, privileges, restrictions and conditions attaching
to any of our preferred shares and shares of any other class
ranking senior to the common shares we may issue in the future.
Holders of our common shares are entitled to one vote per common
share at all meetings of shareholders, to participate ratably in
any dividends which may be declared on our common shares by the
board of directors and, in the event of our dissolution, to our
remaining property. Our common shares have no pre-emptive,
redemption or conversion rights.
The provisions of the Canada Business Corporations Act require
that the amendment of certain rights of holders of any class of
shares, including the common shares, must be approved by not
less than two-thirds of the votes cast by the holders of such
shares. A quorum for any meeting of the holders of common shares
is 25% of the common shares then outstanding. Therefore, it is
possible for the rights of the holders of common shares to be
changed other than by the affirmative vote of the holders of the
majority of the outstanding common shares. In circumstances
where certain rights of holders of common shares may be amended,
however, holders of common shares will have the right, under the
Canada Business Corporations Act, to dissent from such amendment
and require us to pay them the then fair value of their common
shares.
Shareholders are also entitled to rights and privileges under
the shareholder rights plan summarized below.
38
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Shareholder Rights Plan |
In 2004, our initial board of directors approved a plan whereby
each of our common shares carries one right to purchase
additional common shares. The rights expire in 2014, subject to
re-confirmation at the annual meetings of shareholders in 2008
and 2011. The rights under the plan are not currently
exercisable. The rights may become exercisable upon the
acquisition by a person or group of affiliated or associated
persons (Acquiring Person) of beneficial ownership of 20% or
more of our outstanding voting shares or upon the commencement
of a takeover bid. Holders of rights, with the exception of an
Acquiring Person or bidding party, in such circumstances will be
entitled to purchase from us, upon payment of the exercise price
(currently $200.00 U.S. per right), such number of common
shares as can be purchased for twice the exercise price, based
on the market value of our common shares at the time the rights
become exercisable.
The plan has a permitted bid feature which allows a takeover bid
to proceed without the rights becoming exercisable, provided
that the bid meets specified minimum standards of fairness and
disclosure, even if our board of directors does not support the
bid. The rights may be redeemed by our board of directors prior
to the expiration or re-authorization of the rights agreement,
with the prior consent of the holders of rights or common
shares, for $0.01 U.S. per right. In addition, under
specified conditions, our board of directors may waive the
application of the rights.
19. | STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION |
Stock Options |
On January 5, 2005, our board of directors adopted the
Novelis Conversion Plan of 2005 to allow for all Alcan stock
options held by employees of Alcan who became our employees
following the spin-off to be replaced with options to purchase
our common shares. On January 6, 2005, 1,372,663 Alcan
options representing options granted under the Alcan executive
stock option plan held by our employees who were Alcan employees
immediately prior to the spin-off were replaced with options to
purchase our common shares under the Novelis Conversion Plan of
2005. The new options cover 2,723,914 common shares at a
weighted average exercise price per share of $21.57. All
converted options that were vested on the spin-off date continue
to be vested. Any that were unvested will vest in four equal
installments on the anniversary of the spin-off date in each of
the next four years. As of September 30, 2005, 2,707,171
options were outstanding at a weighted average exercise price of
$21.60, of which 296,364 options were exercisable at a weighted
average price of $20.11.
As described in Note 3 Accounting Changes, we
retroactively adopted FASB Statement No. 123, Accounting
for Stock-Based Compensation. We use the Black-Scholes
valuation model to determine the fair value of the options
granted. For the third quarter and nine months ended
September 30, 2005 stock-based compensation expense was $1
and $2, respectively (2004: $1 and $2) and is included in
Selling, general and administrative expenses. The fair value of
each option grant is estimated on the date of grant using the
following weighted average assumptions:
2005 | 2004 | |||||||
Dividend yield(%)
|
1.56 | 1.85 | ||||||
Expected volatility(%)
|
30.30 | 27.87 | ||||||
Risk-free interest rate(%)
|
3.73 | 4.56 | ||||||
Expected life (years)
|
5.47 | 6.00 |
39
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
Compensation To Be Settled in Cash |
Stock Price Appreciation Unit Plan |
A small number of Alcan employees held Alcan stock price
appreciation units (SPAUs) that entitled them to receive cash in
an amount equal to the excess of the market value of an Alcan
common share on the date of exercise of a SPAU over the market
value of an Alcan common share as of its grant date. On
January 6, 2005, 211,035 Alcan SPAUs held by our employees
who were Alcan employees immediately prior to the spin-off were
replaced with our SPAUs, consisting of 418,777 SPAUs at a
weighted average exercise price of $22.04. As of
September 30, 2005, 14,315 SPAUs were exercisable at a
weighted average price of $16.59.
Total Shareholder Returns Performance Plan |
Certain of our employees were entitled to receive cash awards
under the Alcan Total Shareholder Returns Performance Plan (TSR
Plan), a cash incentive plan which provides performance awards
to eligible employees based on the relative performance of
Alcans common share price and cumulative dividend yield
performance compared to other corporations included in the
Standard & Poors Industrials Index measured over
three-year periods commencing on October 1, 2002 and 2003.
On January 6, 2005, our employees who were Alcan employees
immediately prior to the spin-off and who were eligible to
participate in the Alcan TSR Plan ceased to actively participate
in and accrue benefits under the TSR Plan. The current
three-year performance periods, namely 2002 to 2005 and 2003 to
2006, were truncated as of the date of the spin-off. The accrued
award amounts for each participant in the TSR Plan were
converted into 452,667 of our restricted share units (RSUs). At
the end of each performance period, each holder of RSUs will
receive the net proceeds based on our common share price at that
time, including declared dividends. As of September 30,
2005, 338,734 RSUs were vested and an additional 119,191 RSUs
and related dividends will vest on September 30, 2006. On
October 15, 2005, an aggregate of $7 was paid to employees
who held RSUs that had vested on September 30, 2005.
Deferred Share Unit Plan For Non-Executive Directors |
On January 5, 2005, we established the Deferred Share Unit
Plan for Non-Executive Directors under which non-executive
directors receive 50% of their compensation payable in the form
of directors deferred share units (DDSUs) and the other
50% in the form of either cash, additional DDSUs or a
combination of these two (at the individual election of each
non-executive director). The number of DDSUs is determined by
dividing the quarterly amount payable, as elected, by the
average closing prices of a common share on the TSX and NYSE on
the last five trading days of each quarter. Additional DDSUs
representing the equivalent of dividends declared on common
shares are credited to each holder of DDSUs. The DDSUs are
redeemable in cash and/or in shares of our common stock
following retirement from the board. The redemption amount is
calculated by multiplying the accumulated balance of DDSUs by
the average closing price of a common share on the TSX and NYSE
on the last five trading days prior to the redemption date.
During the third quarter ended September 30, 2005, 12,759
DDSUs were granted and none were redeemed. As of
September 30, 2005, 26,836 DDSUs were outstanding. On
October 1, 2005, 14,816 additional DDSUs were granted for
the quarter ended September 30, 2005, resulting in 41,652
DDSUs outstanding as of October 1, 2005.
Novelis Founders Performance Awards |
In March 2005, we established a plan whereby certain key
executives will be eligible to receive an award of Performance
Share Units (PSUs) if certain Novelis share price improvement
targets are
40
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS
(unaudited) (Continued)
(in millions of US$, except where indicated)
achieved within prescribed time periods. There will be three
equal tranches of PSUs and each will have a specific share price
improvement target. For the first tranche, the target applies
for the period March 24, 2005 to March 23, 2008. For
the second tranche, the target applies for the period
March 24, 2006 to March 23, 2008. For the third
tranche, the target applies for the period March 24, 2007
to March 23, 2008. If awarded, a particular tranche will be
paid in cash on the later of six months from the date the
specific share price target is reached or twelve months after
the start of the performance period and will be based on the
average of the daily stock closing prices on the NYSE for the
last five trading days prior to the payment date. Upon the
occurrence of a termination as a result of retirement, death or
disability, all PSUs awarded prior to the termination will be
paid at the same time as for active participants. For any other
termination, all PSUs will be forfeited. The share price
improvement targets for the first tranche have been achieved and
180,350 PSUs were awarded on June 20, 2005. During the
quarter ended September 30, 2005, 1,650 PSUs were forfeited
and 178,700 remained outstanding as of September 30, 2005.
Subsequently, 46,850 PSUs were forfeited in March 2006. The
liability for this award was accrued over the term of the first
tranche, was valued on March 24, 2006, and was paid in
April 2006. For the third quarter and nine months ended
September 30, 2005, expense for PSUs that can be settled in
cash was ($0.1) and $0.1, respectively (2004: nil and nil).
Deferred Share Agreements |
On January 6, 2005, 33,500 Alcan deferred shares held by
one of our executives who was an Alcan employee immediately
prior to the spin-off were replaced with the right to receive
66,477 Novelis shares. This obligation was paid in cash in lieu
of shares on August 3, 2005.
Compensation Cost |
For the third quarter and nine months ended September 30,
2005, stock-based compensation expense for arrangements that are
settled in cash was ($1) and $2, respectively (2004: $5 and $5)
including the amounts shown above for the Founders Performance
Awards and the portion of non-executive directors
compensation taken as cash. This was included in Selling,
general and administrative expenses.
20. | SUPPLEMENTAL GUARANTOR INFORMATION |
In connection with the issuance of our Senior Notes, certain of
our wholly-owned subsidiaries provided guarantees of the Senior
Notes. These guarantees are full and unconditional as well as
joint and several. The guarantor subsidiaries (the Guarantors)
comprise the majority of our businesses in Canada, the U.S., the
U.K., Brazil and Switzerland, as well as certain businesses in
Germany. Certain Guarantors may be subject to restrictions on
their ability to distribute earnings to Novelis Inc. (the
Parent). The remaining subsidiaries (the Non-Guarantors) of the
Parent are not guarantors of the Senior Notes.
The following information sets forth condensed consolidating
statements of income for the three and nine months ended
September 30, 2005 and 2004, condensed consolidating
balance sheets as of September 30, 2005 and
December 31, 2004, and condensed consolidating statements
of cash flows for the nine months ended September 30, 2005
and 2004 of the Parent, the Guarantors, and the Non-Guarantors.
Investments include investments in non-consolidated affiliates
as well as investments in net assets of divisions included in
the Parent and have been presented using the equity method of
accounting. General corporate expenses and stock option and
other stock-based compensation expenses allocated by Alcan to us
prior to the spin-off have also been included in the
Parents information.
41
Table of Contents
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
Third Quarter Ended September 30, 2005 | |||||||||||||||||||||
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
Sales and operating revenues
|
|||||||||||||||||||||
third parties
|
71 | 1,440 | 542 | | 2,053 | ||||||||||||||||
related parties
|
262 | 257 | 37 | (556 | ) | | |||||||||||||||
333 | 1,697 | 579 | (556 | ) | 2,053 | ||||||||||||||||
Costs and expenses
|
|||||||||||||||||||||
Cost of sales and operating expenses, excluding depreciation and
amortization noted below
|
|||||||||||||||||||||
third parties
|
59 | 1,265 | 509 | | 1,833 | ||||||||||||||||
related parties
|
262 | 257 | 37 | (556 | ) | | |||||||||||||||
Depreciation and amortization
|
3 | 39 | 14 | | 56 | ||||||||||||||||
Selling, general and administrative expenses
|
19 | 43 | 17 | | 79 | ||||||||||||||||
Research and development expenses
|
6 | 4 | | | 10 | ||||||||||||||||
Other expenses (income) net
|
|||||||||||||||||||||
third parties
|
9 | (39 | ) | 3 | | (27 | ) | ||||||||||||||
related parties
|
(21 | ) | (2 | ) | (2 | ) | 25 | | |||||||||||||
Interest
|
|||||||||||||||||||||
third parties
|
32 | 13 | 3 | | 48 | ||||||||||||||||
related parties
|
1 | 19 | 5 | (25 | ) | | |||||||||||||||
370 | 1,599 | 586 | (556 | ) | 1,999 | ||||||||||||||||
Income (loss) before income taxes and other items
|
(37 | ) | 98 | (7 | ) | | 54 | ||||||||||||||
Income taxes (benefit)
|
3 | 43 | (9 | ) | | 37 | |||||||||||||||
Income (loss) before other items
|
(40 | ) | 55 | 2 | | 17 | |||||||||||||||
Equity in net income of non-consolidated affiliates
|
50 | 2 | | (50 | ) | 2 | |||||||||||||||
Minority interests in earnings of consolidated affiliates
|
| | (9 | ) | | (9 | ) | ||||||||||||||
Net income (loss)
|
10 | 57 | (7 | ) | (50 | ) | 10 | ||||||||||||||
42
Table of Contents
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
Nine Months Ended September 30, 2005 | |||||||||||||||||||||
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
Sales and operating revenues
|
|||||||||||||||||||||
third parties
|
180 | 4,429 | 1,728 | | 6,337 | ||||||||||||||||
related parties
|
780 | 789 | 107 | (1,676 | ) | | |||||||||||||||
960 | 5,218 | 1,835 | (1,676 | ) | 6,337 | ||||||||||||||||
Costs and expenses
|
|||||||||||||||||||||
Cost of sales and operating expenses, excluding depreciation and
amortization noted below
|
|||||||||||||||||||||
third parties
|
153 | 3,928 | 1,596 | | 5,677 | ||||||||||||||||
related parties
|
780 | 789 | 107 | (1,676 | ) | | |||||||||||||||
Depreciation and amortization
|
8 | 119 | 46 | | 173 | ||||||||||||||||
Selling, general and administrative expenses
|
52 | 142 | 49 | | 243 | ||||||||||||||||
Research and development expenses
|
19 | 9 | 1 | | 29 | ||||||||||||||||
Other expenses (income) net
|
|||||||||||||||||||||
third parties
|
(20 | ) | (24 | ) | 6 | | (38 | ) | |||||||||||||
related parties
|
(57 | ) | (7 | ) | (5 | ) | 68 | (1 | ) | ||||||||||||
Interest
|
|||||||||||||||||||||
third parties
|
91 | 41 | 10 | | 142 | ||||||||||||||||
related parties
|
1 | 54 | 13 | (68 | ) | | |||||||||||||||
1,027 | 5,051 | 1,823 | (1,676 | ) | 6,225 | ||||||||||||||||
Income (loss) before income taxes and other items
|
(67 | ) | 167 | 12 | | 112 | |||||||||||||||
Income taxes (benefit)
|
(10 | ) | 83 | (6 | ) | | 67 | ||||||||||||||
Income (loss) before other items
|
(57 | ) | 84 | 18 | | 45 | |||||||||||||||
Equity in net income of non-consolidated affiliates
|
89 | 6 | | (89 | ) | 6 | |||||||||||||||
Minority interests in earnings of consolidated affiliates
|
| | (19 | ) | | (19 | ) | ||||||||||||||
Net income (loss)
|
32 | 90 | (1 | ) | (89 | ) | 32 | ||||||||||||||
43
Table of Contents
THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
Third Quarter Ended September 30, 2004 | |||||||||||||||||||||
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
Sales and operating revenues
|
|||||||||||||||||||||
third parties
|
45 | 1,383 | 465 | | 1,893 | ||||||||||||||||
related parties
|
263 | 289 | 95 | (540 | ) | 107 | |||||||||||||||
308 | 1,672 | 560 | (540 | ) | 2,000 | ||||||||||||||||
Costs and expenses
|
|||||||||||||||||||||
Cost of sales and operating expenses, excluding depreciation and
amortization noted below
|
|||||||||||||||||||||
third parties
|
32 | 1,195 | 434 | | 1,661 | ||||||||||||||||
related parties
|
263 | 288 | 85 | (540 | ) | 96 | |||||||||||||||
Depreciation and amortization
|
3 | 40 | 17 | | 60 | ||||||||||||||||
Selling, general and administrative expenses
|
(9 | ) | 65 | 16 | | 72 | |||||||||||||||
Research and development expenses
|
|||||||||||||||||||||
third parties
|
| 3 | | | 3 | ||||||||||||||||
related parties
|
| 10 | | | 10 | ||||||||||||||||
Other expenses (income) net
|
|||||||||||||||||||||
third parties
|
1 | (1 | ) | | | | |||||||||||||||
related parties
|
10 | (9 | ) | (2 | ) | 2 | 1 | ||||||||||||||
Interest
|
|||||||||||||||||||||
third parties
|
| 6 | 4 | | 10 | ||||||||||||||||
related parties
|
| 7 | 2 | (2 | ) | 7 | |||||||||||||||
300 | 1,604 | 556 | (540 | ) | 1,920 | ||||||||||||||||
Income before income taxes and other items
|
8 | 68 | 4 | | 80 | ||||||||||||||||
Income taxes (benefit)
|
(2 | ) | 45 | 2 | | 45 | |||||||||||||||
Income before other items
|
10 | 23 | 2 | | 35 | ||||||||||||||||
Equity in net income of non-consolidated affiliates
|
24 | 1 | | (24 | ) | 1 | |||||||||||||||
Minority interests in earnings of consolidated affiliates
|
| | (2 | ) | | (2 | ) | ||||||||||||||
Net income
|
34 | 24 | | (24 | ) | 34 | |||||||||||||||
44
Table of Contents
THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
Nine Months Ended September 30, 2004 | |||||||||||||||||||||
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
Sales and operating revenues
|
|||||||||||||||||||||
third parties
|
131 | 3,839 | 1,446 | | 5,416 | ||||||||||||||||
related parties
|
716 | 941 | 161 | (1,495 | ) | 323 | |||||||||||||||
847 | 4,780 | 1,607 | (1,495 | ) | 5,739 | ||||||||||||||||
Costs and expenses
|
|||||||||||||||||||||
Cost of sales and operating expenses, excluding depreciation and
amortization noted below
|
|||||||||||||||||||||
third parties
|
92 | 3,311 | 1,341 | | 4,744 | ||||||||||||||||
related parties
|
717 | 915 | 151 | (1,495 | ) | 288 | |||||||||||||||
Depreciation and amortization
|
8 | 121 | 49 | | 178 | ||||||||||||||||
Selling, general and administrative expenses
|
32 | 110 | 40 | | 182 | ||||||||||||||||
Research and development expenses
|
|||||||||||||||||||||
third parties
|
| 13 | | | 13 | ||||||||||||||||
related parties
|
| 28 | | | 28 | ||||||||||||||||
Other expenses (income) net
|
|||||||||||||||||||||
third parties
|
4 | 4 | | | 8 | ||||||||||||||||
related parties
|
(37 | ) | 14 | | 2 | (21 | ) | ||||||||||||||
Interest
|
|||||||||||||||||||||
third parties
|
| 17 | 14 | | 31 | ||||||||||||||||
related parties
|
| 24 | 2 | (2 | ) | 24 | |||||||||||||||
816 | 4,557 | 1,597 | (1,495 | ) | 5,475 | ||||||||||||||||
Income before income taxes and other items
|
31 | 223 | 10 | | 264 | ||||||||||||||||
Income taxes (benefit)
|
(6 | ) | 113 | 4 | | 111 | |||||||||||||||
Income before other items
|
37 | 110 | 6 | | 153 | ||||||||||||||||
Equity in net income of non-consolidated affiliates
|
111 | 4 | | (111 | ) | 4 | |||||||||||||||
Minority interests in earnings of consolidated affiliates
|
| | (9 | ) | | (9 | ) | ||||||||||||||
Net income (loss)
|
148 | 114 | (3 | ) | (111 | ) | 148 | ||||||||||||||
45
Table of Contents
NOVELIS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)
As of September 30, 2005
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
ASSETS | |||||||||||||||||||||
Current assets
|
|||||||||||||||||||||
Cash and cash equivalents
|
2 | 82 | 40 | | 124 | ||||||||||||||||
Trade receivables
|
|||||||||||||||||||||
third parties
|
34 | 638 | 287 | | 959 | ||||||||||||||||
related parties
|
5 | 53 | 6 | (64 | ) | | |||||||||||||||
Other receivables
|
|||||||||||||||||||||
third parties
|
2 | 5 | 1 | | 8 | ||||||||||||||||
related parties
|
213 | 231 | 123 | (537 | ) | 30 | |||||||||||||||
Prepaid expenses
|
3 | 42 | 7 | | 52 | ||||||||||||||||
Inventories
|
|||||||||||||||||||||
Aluminum
|
43 | 609 | 289 | | 941 | ||||||||||||||||
Raw materials
|
| 19 | 1 | | 20 | ||||||||||||||||
Other supplies
|
6 | 79 | 41 | | 126 | ||||||||||||||||
49 | 707 | 331 | | 1,087 | |||||||||||||||||
Other current assets
|
52 | 91 | 38 | | 181 | ||||||||||||||||
Total current assets
|
360 | 1,849 | 833 | (601 | ) | 2,441 | |||||||||||||||
Deferred charges and other assets
|
35 | 139 | 45 | | 219 | ||||||||||||||||
Long-term receivables from related parties
|
1,114 | 88 | | (1,125 | ) | 77 | |||||||||||||||
Property, plant and equipment, net
|
117 | 1,284 | 769 | | 2,170 | ||||||||||||||||
Investments in non-consolidated affiliates and divisional net
assets
|
700 | 146 | | (746 | ) | 100 | |||||||||||||||
Intangible assets
|
| 27 | 2 | | 29 | ||||||||||||||||
Goodwill
|
| 26 | 202 | | 228 | ||||||||||||||||
Total assets
|
2,326 | 3,559 | 1,851 | (2,472 | ) | 5,264 | |||||||||||||||
46
Table of Contents
NOVELIS INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(unaudited) (Continued)
As of September 30, 2005
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | |||||||||||||||||||||
Current liabilities
|
|||||||||||||||||||||
Current portion of long-term debt
|
| 2 | 1 | | 3 | ||||||||||||||||
Short-term borrowings
|
|||||||||||||||||||||
third parties
|
| 2 | 33 | | 35 | ||||||||||||||||
related parties
|
40 | 434 | 63 | (537 | ) | | |||||||||||||||
Accounts payable, trade
|
|||||||||||||||||||||
third parties
|
12 | 454 | 286 | | 752 | ||||||||||||||||
related parties
|
9 | 54 | 39 | (64 | ) | 38 | |||||||||||||||
Accrued expenses
|
27 | 294 | 97 | | 418 | ||||||||||||||||
Interest payable
|
16 | 6 | | | 22 | ||||||||||||||||
Accrued income taxes
|
1 | 54 | 3 | | 58 | ||||||||||||||||
Other current liabilities
|
| 5 | 9 | | 14 | ||||||||||||||||
Total current liabilities
|
105 | 1,305 | 531 | (601 | ) | 1,340 | |||||||||||||||
Long-term debt, net of current portion
|
|||||||||||||||||||||
third parties
|
1,771 | 690 | 186 | | 2,647 | ||||||||||||||||
related parties
|
| 938 | 187 | (1,125 | ) | | |||||||||||||||
Accrued post-retirement benefits
|
8 | 216 | 83 | | 307 | ||||||||||||||||
Deferred credits and other liabilities
|
39 | 156 | 29 | | 224 | ||||||||||||||||
Deferred income taxes
|
(1 | ) | 181 | 11 | | 191 | |||||||||||||||
Commitments and contingencies
|
|||||||||||||||||||||
Minority interests in equity of consolidated affiliates
|
| | 151 | | 151 | ||||||||||||||||
Shareholders equity
|
|||||||||||||||||||||
Common shares
|
| | | | | ||||||||||||||||
Additional paid-in capital
|
433 | | | | 433 | ||||||||||||||||
Retained earnings
|
41 | | | | 41 | ||||||||||||||||
Other comprehensive income (loss)
|
(70 | ) | 115 | (23 | ) | (92 | ) | (70 | ) | ||||||||||||
Owners net investment
|
| (42 | ) | 696 | (654 | ) | | ||||||||||||||
Total shareholders equity
|
404 | 73 | 673 | (746 | ) | 404 | |||||||||||||||
Total liabilities and shareholders equity
|
2,326 | 3,559 | 1,851 | (2,472 | ) | 5,264 | |||||||||||||||
47
Table of Contents
THE NOVELIS GROUP
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)
As of December 31, 2004
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
ASSETS | |||||||||||||||||||||
Current assets
|
|||||||||||||||||||||
Cash and cash equivalents
|
| 12 | 19 | | 31 | ||||||||||||||||
Trade receivables
|
|||||||||||||||||||||
third parties
|
1 | 399 | 310 | | 710 | ||||||||||||||||
related parties
|
84 | 156 | 7 | (160 | ) | 87 | |||||||||||||||
Other receivables
|
|||||||||||||||||||||
third parties
|
| 4 | 1 | | 5 | ||||||||||||||||
related parties
|
45 | 849 | 30 | (78 | ) | 846 | |||||||||||||||
Prepaid expenses
|
2 | 10 | 24 | | 36 | ||||||||||||||||
Inventories
|
|||||||||||||||||||||
Aluminum
|
44 | 705 | 332 | | 1,081 | ||||||||||||||||
Raw materials
|
| 18 | 2 | | 20 | ||||||||||||||||
Other supplies
|
6 | 78 | 41 | | 125 | ||||||||||||||||
50 | 801 | 375 | | 1,226 | |||||||||||||||||
Other current assets
|
| 56 | 21 | | 77 | ||||||||||||||||
Total current assets
|
182 | 2,287 | 787 | (238 | ) | 3,018 | |||||||||||||||
Deferred charges and other assets
|
| 32 | 39 | | 71 | ||||||||||||||||
Long-term receivables from related parties
|
210 | 104 | | (210 | ) | 104 | |||||||||||||||
Property, plant and equipment, net
|
112 | 1,405 | 831 | | 2,348 | ||||||||||||||||
Investments in non-consolidated affiliates and divisional net
assets
|
1,242 | 168 | | (1,288 | ) | 122 | |||||||||||||||
Intangible assets
|
| 31 | 4 | | 35 | ||||||||||||||||
Goodwill
|
| 28 | 228 | | 256 | ||||||||||||||||
Total assets
|
1,746 | 4,055 | 1,889 | (1,736 | ) | 5,954 | |||||||||||||||
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Table of Contents
THE NOVELIS GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
(unaudited) (Continued)
As of December 31, 2004
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
LIABILITIES AND INVESTED EQUITY | |||||||||||||||||||||
Current liabilities
|
|||||||||||||||||||||
Current portion of long-term debt
|
|||||||||||||||||||||
third parties
|
| | 1 | | 1 | ||||||||||||||||
related parties
|
290 | | | | 290 | ||||||||||||||||
Short-term borrowings
|
|||||||||||||||||||||
third parties
|
| 122 | 107 | | 229 | ||||||||||||||||
related parties
|
| 231 | 152 | (71 | ) | 312 | |||||||||||||||
Accounts payable, trade
|
|||||||||||||||||||||
third parties
|
6 | 160 | 330 | | 496 | ||||||||||||||||
related parties
|
79 | 429 | 60 | (167 | ) | 401 | |||||||||||||||
Accrued expenses
|
16 | 213 | 110 | | 339 | ||||||||||||||||
Interest payable
|
| 1 | 1 | | 2 | ||||||||||||||||
Accrued income taxes
|
| | 1 | | 1 | ||||||||||||||||
Other current liabilities
|
| 4 | 17 | | 21 | ||||||||||||||||
Total current liabilities
|
391 | 1,160 | 779 | (238 | ) | 2,092 | |||||||||||||||
Long-term debt, net of current portion
|
|||||||||||||||||||||
third parties
|
| | 139 | | 139 | ||||||||||||||||
related parties
|
749 | 1,751 | 17 | (210 | ) | 2,307 | |||||||||||||||
Accrued post-retirement benefits
|
| 199 | 85 | | 284 | ||||||||||||||||
Deferred credits and other liabilities
|
8 | 174 | 6 | | 188 | ||||||||||||||||
Deferred income taxes
|
43 | 183 | 23 | | 249 | ||||||||||||||||
Commitments and contingencies
|
|||||||||||||||||||||
Minority interests in equity of consolidated affiliates
|
| | 140 | | 140 | ||||||||||||||||
Invested equity
|
|||||||||||||||||||||
Owners net investment
|
467 | 529 | 671 | (1,200 | ) | 467 | |||||||||||||||
Other comprehensive income
|
88 | 59 | 29 | (88 | ) | 88 | |||||||||||||||
Total invested equity
|
555 | 588 | 700 | (1,288 | ) | 555 | |||||||||||||||
Total liabilities and invested equity
|
1,746 | 4,055 | 1,889 | (1,736 | ) | 5,954 | |||||||||||||||
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Table of Contents
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, 2005
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
OPERATING ACTIVITIES
|
|||||||||||||||||||||
Net cash provided by (used in) operating activities
|
440 | 262 | (208 | ) | (128 | ) | 366 | ||||||||||||||
INVESTING ACTIVITIES
|
|||||||||||||||||||||
Capital expenditures
|
(12 | ) | (67 | ) | (25 | ) | | (104 | ) | ||||||||||||
Proceeds from sales of fixed assets and investments
|
1 | | 8 | | 9 | ||||||||||||||||
Proceeds from (payments on) loans receivable net
|
|||||||||||||||||||||
third parties
|
| 4 | 15 | | 19 | ||||||||||||||||
related parties
|
(1,019 | ) | (112 | ) | | 1,504 | 373 | ||||||||||||||
Premiums paid on purchased derivatives
|
| (26 | ) | | | (26 | ) | ||||||||||||||
Net proceeds from settlement of derivatives
|
| 96 | | | 96 | ||||||||||||||||
Net cash provided by (used in) investing activities
|
(1,030 | ) | (105 | ) | (2 | ) | 1,504 | 367 | |||||||||||||
FINANCING ACTIVITIES
|
|||||||||||||||||||||
Proceeds from issuance of new debt from third parties
|
1,875 | 2,000 | 379 | (1,504 | ) | 2,750 | |||||||||||||||
Principal repayments
|
(1,316 | ) | (1,512 | ) | (94 | ) | | (2,922 | ) | ||||||||||||
Short-term borrowings net
|
|||||||||||||||||||||
third parties
|
2 | (68 | ) | (71 | ) | | (137 | ) | |||||||||||||
related parties
|
| (304 | ) | 2 | | (302 | ) | ||||||||||||||
Proceeds from issuing preference shares
|
| | 32 | (32 | ) | | |||||||||||||||
Dividends common shareholders
|
(20 | ) | (158 | ) | (2 | ) | 160 | (20 | ) | ||||||||||||
Dividends minority interest
|
| | (7 | ) | | (7 | ) | ||||||||||||||
Net receipts from (payments to) Alcan
|
100 | (21 | ) | (7 | ) | | 72 | ||||||||||||||
Debt issuance costs paid
|
(49 | ) | (22 | ) | | | (71 | ) | |||||||||||||
Net cash provided by (used in) financing activities
|
592 | (85 | ) | 232 | (1,376 | ) | (637 | ) | |||||||||||||
Net increase in cash and cash equivalents
|
2 | 72 | 22 | | 96 | ||||||||||||||||
Effect of exchange rate changes on cash balances held in foreign
currencies
|
| (2 | ) | (1 | ) | | (3 | ) | |||||||||||||
Cash and cash equivalents beginning of period
|
| 12 | 19 | | 31 | ||||||||||||||||
Cash and cash equivalents end of period
|
2 | 82 | 40 | | 124 | ||||||||||||||||
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Table of Contents
THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, 2004
(in millions of US$)
Non- | |||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
OPERATING ACTIVITIES
|
|||||||||||||||||||||
Net cash provided by (used in) operating activities
|
(13 | ) | 161 | 144 | | 292 | |||||||||||||||
INVESTING ACTIVITIES
|
|||||||||||||||||||||
Capital expenditures
|
(3 | ) | (51 | ) | (41 | ) | | (95 | ) | ||||||||||||
Proceeds from sales of fixed assets and investments
|
| 8 | | | 8 | ||||||||||||||||
Proceeds from (payments on) loans receivable net
|
| 507 | (6 | ) | | 501 | |||||||||||||||
Net cash provided by (used in) investing activities
|
(3 | ) | 464 | (47 | ) | | 414 | ||||||||||||||
FINANCING ACTIVITIES
|
|||||||||||||||||||||
Proceeds from issuance of new debt from third parties
|
| 440 | 3 | | 443 | ||||||||||||||||
Principal repayments
|
| (845 | ) | (50 | ) | | (895 | ) | |||||||||||||
Short-term borrowings net
|
|||||||||||||||||||||
third parties
|
| (128 | ) | (5 | ) | | (133 | ) | |||||||||||||
related parties
|
| (19 | ) | 23 | | 4 | |||||||||||||||
Dividends common shareholders
|
(23 | ) | 29 | (6 | ) | | | ||||||||||||||
Dividends minority interest
|
| | (4 | ) | | (4 | ) | ||||||||||||||
Net receipts from (payments to) Alcan
|
39 | (100 | ) | (60 | ) | | (121 | ) | |||||||||||||
Net cash provided by (used in) financing activities
|
16 | (623 | ) | (99 | ) | | (706 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents
|
| 2 | (2 | ) | | | |||||||||||||||
Cash and cash equivalents beginning of period
|
| 8 | 19 | | 27 | ||||||||||||||||
Cash and cash equivalents end of period
|
| 10 | 17 | | 27 | ||||||||||||||||
51
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following information should be read together with our
unaudited condensed consolidated and combined financial
statements and accompanying notes included elsewhere in this
quarterly report for a more complete understanding of our
financial condition and results of operations. The following
discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ
materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed
below, particularly in SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND MARKET DATA.
OVERVIEW
We are the worlds leading aluminum rolled products
producer based on shipment volume in 2004. As of
September 30, 2005, we had operations on four continents,
North America, South America, Asia and Europe through 36
operating plants and three research facilities in 11 countries.
We are the only company of our size and scope focused solely on
aluminum rolled products markets and capable of the local supply
of technically sophisticated products in all of these geographic
regions.
The following table sets forth our key financial and operating
data for the three and nine months ended September 30, 2005
and September 30, 2004.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||||
2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Sales and operating revenues
|
2,053 | 2,000 | 3 | % | 6,337 | 5,739 | 10 | % | ||||||||||||||||
Regional Income(A)
|
153 | 184 | (17 | )% | 468 | 538 | (13 | )% | ||||||||||||||||
Net income
|
10 | 34 | (71 | )% | 32 | 148 | (78 | )% | ||||||||||||||||
Rolled products shipments (kt)(B)
|
725 | 722 | | 2,168 | 2,114 | 3 | % | |||||||||||||||||
Total assets
|
5,264 | 6,084 | (13 | )% | 5,264 | 6,084 | (13 | )% | ||||||||||||||||
Free cash flow(C)
|
84 | 164 | (49 | )% | 305 | 193 | 58 | % |
(A) | Regional Income comprises earnings before interest, income taxes, equity income, minority interests, depreciation and amortization and excludes certain items, such as corporate, restructuring costs, impairment and other rationalization charges. These items are managed by our corporate head office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. Regional Income is the measure by which management evaluates the profitability and financial performance of our operating segments. A discussion of Regional Income and a reconciliation of Regional Income to Income before income taxes and other items can be found under the caption Operating Segment Review Reconciliation. | |
Financial information for the regional groups includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the regional groups are managed. Under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile Regional Income to Income before income taxes and other items, the Regional Income attributable to these joint ventures is removed from Regional Income for us and the net after-tax results are reported as equity income. | ||
The change in the fair market value of derivatives, with the exception of unrealized gains or losses on certain cash flow hedges, has been removed from individual regional results and is shown on a separate line in the reconciliation between total Regional Income and Income before income taxes and other items. This presentation provides a portrayal of our underlying regional group results that is in line with our portfolio approach to risk management. | ||
(B) | Rolled product shipments include conversion of customer-owned metal (tolling) and are presented in kilotonnes (kt). One kt is equal to 1,000 metric tonnes. One metric tonne is the equivalent of 2,204.6 pounds. |
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Table of Contents
(C) | Free cash flow (which is a non-GAAP financial measure) consists of cash provided by operating activities plus or minus capital expenditures, premiums paid and net proceeds on derivatives and dividends. Dividends include those paid by our less than wholly-owned subsidiaries to their minority shareholders and dividends paid by us to our common shareholders. Management believes that free cash flow is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, free cash flow does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of free cash flow. Our method of calculating free cash flow may not be consistent with that of other companies. We believe the line on our unaudited condensed consolidated and combined statement of cash flows entitled Net cash provided by operating activities is the most directly comparable GAAP measure to free cash flow. A reconciliation of Cash provided by operating activities to free cash flow can be found under the caption Liquidity and Capital Resources Operating Activities. |
HIGHLIGHTS
Net Income. We reported third quarter of 2005 net
income of $10 million, or diluted earnings per share of
$0.14. Net income in the carve-out statements as a part of Alcan
for the three months ended September 30, 2004 was
$34 million, or diluted earnings per share of $0.47.
Shipments. Rolled product shipments of 725 kt for the
third quarter were comparable to the three months ended
September 30, 2004. This is attributable to strong market
demand, largely in South America and Asia as well as
improvements in the European beverage can market, which were
partially offset by weaker foil markets in Europe and lower
sales to industrial markets in North America, particularly the
automotive market.
Regional Income. Regional Income decreased by
$31 million, or 17%, for the third quarter of 2005 versus
the three months ended September 30, 2004, as increasing
conversion prices and continued emphasis on cost containment
were more than offset by higher energy and related costs such as
freight. The adverse impacts from metal prices on can contracts
with a price ceiling in North America limited our ability to
fully pass-through the impact of the metal price change, but at
the same time we experienced favorable metal timing differences
and benefited from the favorable impact of higher London Metal
Exchange (LME) prices on production from our South American
smelters. Therefore, the net metal impact was favorable by
approximately $8 million for the third quarter compared to
the three months ended September 30, 2004. Unfavorable
foreign currency movements, mainly in South America and Europe,
accounted for $15 million of the decrease.
Financing Activity. At the spin-off, we had
$2,951 million of long-term debt and capital lease
obligations after repaying various third party obligations that
were agreed upon with Alcan, which we reduced by
$169 million in the first half of 2005. With the continued
strength of our cash flows in the third quarter, we were able to
further reduce our total debt by $97 million to
$2,685 million as of September 30, 2005, for a total
year-to-date debt
reduction of $266 million or 9%.
Restatement. Concurrently with the filing of this
quarterly report on
Form 10-Q for the
period ended September 30, 2005, we are filing amendments
on Form 10-Q/ A to
our quarterly reports on
Form 10-Q for the
periods ended March 31, 2005 and June 30, 2005, to
reflect the restatement of our unaudited condensed consolidated
and combined financial statements for the quarter ended
March 31, 2005 and the quarter and six months ended
June 30, 2005, to correct errors for:
| the misapplication of GAAP related to liability recognition; | |
| income tax accounting; | |
| other miscellaneous items; and | |
| out-of-period adjustments. |
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Table of Contents
As discussed throughout under the caption Results of
Operations for the Nine Months Ended September 30, 2005
Compared to the Nine Months Ended September 30, 2004,
our results of operations for the nine months ended
September 30, 2005 were impacted by the
out-of-period
adjustments noted above. These
out-of-period
adjustments decreased our Net income by $2 million, net,
for the nine months ended September 30, 2005.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
The following discussion and analysis is based on our unaudited
condensed consolidated and combined statements of income, which
reflect our operations for the three month periods ended
September 30, 2005 and 2004, as prepared in conformity with
GAAP.
Net Income |
The comparison of Net income between the third quarter of 2005
and the third quarter of 2004 was heavily influenced by the
following items on an after-tax basis:
| Unrealized gains on the change in market value of derivatives of $28 million in 2005, compared to unrealized gains in 2004 of $16 million; | |
| Foreign currency balance sheet translation losses of $21 million in 2005, mainly in Canada and South America, compared to a loss of $8 million in 2004; | |
| Restructuring, rationalization and impairment charges of $12 million in 2005 relating mainly to the closure of the Borgofranco, Italy, recycling plant, compared to charges in 2004 of $13 million, mainly related to the closure of the Falkirk, U.K. plant; and | |
| As a stand-alone company, our interest expense was $20 million higher in 2005 than in the 2004 carve-out allocation of interest expense from Alcan. |
Foreign currency balance sheet translation effects, which are
primarily non-cash in nature, arise from translating monetary
items (principally deferred income taxes, operating working
capital and long-term liabilities) denominated in Canadian
dollars and Brazilian Real into U.S. dollars for reporting
purposes, as well as the deferred tax impact in local currency,
on the translation of U.S. debt in Canada and
South America.
Sales and Operating Revenues and Shipments |
Sales and operating revenues increased to $2,053 million
for the three months ended September 30, 2005 from
$2,000 million for the three months ended
September 30, 2004, an increase of $53 million,
or 3%. The major contributing factor to increases in both
sales and operating revenues and cost of sales was a rise in LME
aluminum metal prices, which were up approximately 8% compared
to the three months ended September 30, 2004. The higher
LME prices were partially offset by a decrease of total
shipments from 784 kt for the three months ended
September 30, 2004 to 771 kt for the three months ended
September 30, 2005, which resulted from reduced ingot
product shipments in Europe. During the third quarter of 2005,
sales and operating revenues were also impacted by the North
American can price ceiling. Sales contracts, currently
representing approximately 20% of our annual sales, provide for
a ceiling over which metal prices cannot contractually be passed
through to our customers. This resulted in the inability to pass
through the complete increase in metal prices sold under these
contracts. Although we attempt to mitigate this risk through the
purchase of metal options, this hedging policy was not
economically effective given the relatively high and sustained
metal prices since the fourth quarter of 2004. See Risks and
Uncertainties for a description of our policy on metal options.
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Table of Contents
Costs and Expenses |
Cost of sales and operating expenses increased to
$1,833 million for the three months ended
September 30, 2005 from $1,757 million for the three
months ended September 30, 2004, an increase of
$76 million or 4%. Cost of sales and operating expenses
represented 89% of Sales and operating revenues for the three
months ended September 2005 compared to the comparable 88% for
the three months ended September 30, 2004. The increase in
Cost of sales and operating expenses during the three months
ended September 30, 2005 in large part reflected the impact
of higher LME prices on metal input costs. Nearly all of our
products have a price structure with two components: (i) a
pass-through aluminum price based on the LME and local market
premiums, plus (ii) a margin over metal price
based on the conversion cost to produce the rolled product and
the competitive market conditions for that product. In some of
our contracts there is a timing difference between the metal
prices we pay under our purchase contracts and the metal prices
we charge our customers due to the fact that our contracts are
structured such that we are not able to pass along increases or
decreases in metal prices to our customers as we incur such
increases or decreases in our metal purchase costs. As a result,
changes in metal prices impact our results, since during such
periods we temporarily bear the additional cost or benefit of
metal price changes. Over a full economic cycle (the period it
takes for metal prices to return to a given level) the impact on
our results is expected to be close to nil. However, because a
full economic cycle may take years to complete, we may
experience such additional costs or benefits for certain periods
of time. As previously discussed, as of September 30, 2005,
approximately 20% of our volume has a metal price ceiling which
we attempt to mitigate through the purchase of call options.
This strategy was not economically effective in the third
quarter.
Depreciation and amortization of $56 million in the three
months ended September 30, 2005 was $4 million less
than the three months ended September 30, 2004 mainly due
to the closure of two plants in Europe and the $65 million
asset impairment charge taken in December 2004 on certain of our
fixed assets in Italy, which resulted in a lower depreciation
charge in 2005.
Selling, general and administrative expenses (SG&A) equaled
$79 million in the third quarter of 2005, an increase of
$7 million or 10% from $72 million in the third
quarter of 2004. During third quarter of 2005, we incurred
additional corporate office costs as a new stand-alone company.
Interest expense of $48 million in the third quarter of
2005 was significantly higher than the $17 million in
interest allocated from Alcan in the carve-out financial
statements for the third quarter of 2004. A comparison of
interest expense is not meaningful as the 2004 amount did not
reflect the level of debt, nor the associated interest costs
that we would have incurred had we operated on a stand-alone
basis in 2004.
Other expenses (income) net equaled income of
$27 million in the third quarter of 2005 compared to an
expense of $1 million in the third quarter of 2004. The
third quarter of 2005 included unrealized gains on the change in
market value of derivatives of $43 million compared to
gains of $21 million in the third quarter of 2004.
Additionally, the third quarter of 2005 included restructuring
and impairment provisions for the closure of the Borgofranco,
Italy, recycling facility amounting to $12 million as
compared to a $19 million restructuring and impairment
charge for the closure of the Falkirk, U.K. mill in the third
quarter of 2004.
Income Taxes |
The effective tax rate for the third quarter of 2005 was 69%
compared to the Canadian statutory rate of 33%. The effective
and statutory tax rates for the third quarters of 2004 were 56%
and 33%, respectively. The largest items causing the 2005 rate
difference were: (i) deferred tax liabilities of
$19 million on the translation of U.S. dollar
indebtedness into local currency for which there is no related
income in Canada and South America, in addition to translation
of deferred taxes payable; and (ii) the release of a
valuation allowance in the amount of $10 million on losses
carried forward in Novelis Asia.
55
Table of Contents
OPERATING SEGMENT REVIEW
Due in part to the regional nature of supply and demand of
aluminum rolled products, our activities are organized under
four regional operating segments and are managed on the basis of
geographical areas. The regional operating segments are Novelis
North America, Novelis Europe, Novelis Asia, and Novelis South
America.
Subsequent to our spin-off from Alcan Inc. in 2005, we measure
the profitability of our operating segments based on Regional
Income. Prior periods presented have been recast.
Prior to the spin-off, profitability of the operating segments
was measured using business group profit (BGP). BGP was similar
to Regional Income, except for the following:
a) BGP excluded restructuring costs related only to major corporate-wide acquisitions or initiatives whereas Regional Income excludes all restructuring costs; | |
b) BGP included pension costs based on the normal current service cost with all actuarial gains, losses and other adjustments being included in Intersegment and other. Regional Income includes all these pension costs in the applicable operating segment; and | |
c) BGP excluded certain corporate non-operating costs incurred by an operating segment and included such costs in Intersegment and other. Under the current management structure, these costs remain in the operating segment. |
Reconciliation |
The following table presents our Regional Income by operating
segment and reconciles our Regional Income to Income before
income taxes and other items:
Third | |||||||||||||
Quarter | |||||||||||||
2005 | 2004 | % Change | |||||||||||
($ in millions) | |||||||||||||
Regional Income
|
|||||||||||||
Novelis North America
|
54 | 67 | (19 | )% | |||||||||
Novelis Europe
|
52 | 64 | (19 | )% | |||||||||
Novelis Asia
|
23 | 19 | 21 | % | |||||||||
Novelis South America
|
24 | 34 | (29 | )% | |||||||||
Total Regional Income
|
153 | 184 | (17 | )% | |||||||||
Corporate
|
(17 | ) | (11 | ) | 55 | % | |||||||
Depreciation and amortization
|
(56 | ) | (60 | ) | (7 | )% | |||||||
Adjustments for equity-accounted joint ventures(A)
|
(11 | ) | (11 | ) | | ||||||||
Change in market value of derivatives
|
43 | 15 | 187 | % | |||||||||
Restructuring, rationalization and impairment costs
|
(10 | ) | (20 | ) | (50 | )% | |||||||
Interest expense
|
(48 | ) | (17 | ) | 182 | % | |||||||
Income before income taxes and other items
|
54 | 80 | (33 | )% | |||||||||
(A) | Our financial information for our segments includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the business groups are managed. However, under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile to Income before income taxes and other items, the Regional Income of these joint ventures is removed from our Regional Income and the net after-tax results are reported as equity income. |
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Novelis North America |
The following table sets forth key financial and operating data
for Novelis North America for the three months ended
September 30, 2005 and September 30, 2004:
Third | ||||||||||||
Quarter | ||||||||||||
North America | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
836 | 810 | 3 | % | ||||||||
Regional Income
|
54 | 67 | (19 | )% | ||||||||
Rolled product shipments (kt)
|
285 | 296 | (4 | )% | ||||||||
Regional Income per tonne ($/tonne)
|
189 | 226 | (16 | )% | ||||||||
Depreciation
|
18 | 18 | | |||||||||
Capital expenditures
|
14 | 3 | 367 | % | ||||||||
Total assets
|
1,388 | 1,975 | (30 | )% |
Sales and operating revenues of Novelis North America were
$836 million for the three months ended September 30,
2005, an increase of $26 million, or 3%, compared to the
three months ended September 30, 2004. This was due mainly
to higher LME metal prices that are largely passed through to
customers and, to a lesser degree, increases in conversion
prices, partially offset by lower shipments. The pass-through of
metal price increases to our customers was limited in cases when
metal price ceilings were exceeded or when there was a time lag
between metal price increases and the corresponding pass-through
to our customers.
Regional Income of Novelis North America was $54 million
for the third quarter of 2005, a decrease of $13 million,
or 19%, compared to the third quarter of 2004. This reduction
was mainly due to cost increases relating to freight, energy
costs and operating expenses partially offset by improved
conversion selling prices in most product lines and the release
of an environmental reserve. Movements in metal prices adversely
impacted Regional Income by $4 million, with the negative
effects from the can price ceiling being mostly offset by
favorable metal timing differences. In 2004, we earned
$4 million of interest income on loans to Alcan that were
collected as part of the spin-off transaction.
Shipments of rolled products by Novelis North America declined
4% in the third quarter of 2005 from the comparable 2004
quarter. Increased sales to the light gauge product sector were
offset by our decision to exit the third party semi-fabricated
commodity foil market in 2005 and lower distributor and
automotive sales.
Total assets of $1,388 as of September 30, 2005 decreased
by 30% compared to September 30, 2004. Alcan related party
receivables were repaid as a component of the Novelis spin-off.
Most of this decrease occurred during the third and fourth
quarters of 2004.
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Novelis Europe |
The following table sets forth key financial and operating data
for Novelis Europe for the three months ended September 30,
2005 and September 30, 2004:
Third | ||||||||||||
Quarter | ||||||||||||
Europe | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
737 | 766 | (4 | )% | ||||||||
Regional Income
|
52 | 64 | (19 | )% | ||||||||
Rolled product shipments (kt)
|
252 | 251 | | |||||||||
Regional Income per tonne ($/tonne)
|
206 | 255 | (19 | )% | ||||||||
Depreciation
|
23 | 27 | (15 | )% | ||||||||
Capital expenditures
|
17 | 19 | (11 | )% | ||||||||
Total assets
|
2,129 | 2,458 | (13 | )% |
Sales and operating revenues of Novelis Europe were
$737 million for the three month period ended
September 30, 2005, a decrease of $29 million, or 4%,
from the comparable 2004 period. Lower ingot product shipments
from our Borgofranco casting alloys business and higher tolling
of metal as a percentage of rolled product shipments were almost
offset by higher LME metal prices.
Regional Income of Novelis Europe was $52 million for the
third quarter of 2005, a decrease of $12 million, or 19%,
compared to the third quarter of 2004. This decrease was driven
by higher energy costs, lower ingot shipments and adverse
exchange impacts of $5 million on the translation of
intercompany debt and other net liabilities in currencies other
than the functional currencies of the businesses, partially
offset by positive metal related effects of $5 million.
Shipments of rolled products by Novelis Europe for the third
quarter of 2005 were comparable to the same quarter of 2004.
Higher shipments into the can market were offset by reduced
shipments in the foil and packaging markets. The growth in
shipments to the can market is attributable, in part, to growth
in new aluminum lines in Eastern Europe and line conversions
from steel to aluminum lines throughout Western Europe, largely
driven by the enactment of packaging waste legislation in the
European Union. The new legislation supports aluminum can usage
versus other beverage packages.
Novelis Asia |
The following table sets forth key financial and operating data
for Novelis Asia for the three months ended September 30,
2005 and September 30, 2004:
Third | ||||||||||||
Quarter | ||||||||||||
Asia | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
328 | 292 | 12 | % | ||||||||
Regional Income
|
23 | 19 | 21 | % | ||||||||
Rolled product shipments (kt)
|
119 | 111 | 7 | % | ||||||||
Regional Income per tonne ($/tonne)
|
193 | 171 | 13 | % | ||||||||
Depreciation and amortization
|
12 | 11 | 9 | % | ||||||||
Capital expenditures
|
5 | 9 | (44 | )% | ||||||||
Total assets
|
971 | 941 | 3 | % |
Sales and operating revenues of Novelis Asia were
$328 million for the three month period ended
September 30, 2005, an increase of $36 million, or
12%, over the comparable 2004 period. The increase in sales and
operating revenues was mainly due to higher LME metal prices
being passed through to customers and higher shipment volumes.
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Table of Contents
Regional Income of Novelis Asia was $23 million for the
third quarter of 2005, an increase of $4 million, or 21%,
compared to the third quarter of 2004. During the third quarter
of 2005, improved costs and increased shipments had positive
impacts on results. A $3 million adverse impact of foreign
currency exchange, resulting from the 12% strengthening of the
Korean Won during the third quarter of 2005 compared to 2004,
was partially offset by favorable metal related differences of
$2 million.
The 8 kt or 7% shipment increase of rolled products in Novelis
Asia in the third quarter of 2005 compared to the third quarter
of 2004 was due in a large part to can stock market share
advances in China and Southeast Asia. We were able to
participate in this growth through continuous improvement in
production quality, service performance and productivity
improvements in our production facilities, allowing us to
increase capacity and output levels without a corresponding
increase in our costs.
Novelis South America |
The following table sets forth key financial and operating data
for Novelis South America for the three months ended
September 30, 2005 and September 30, 2004:
Third | ||||||||||||
Quarter | ||||||||||||
South America | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
157 | 134 | 17 | % | ||||||||
Regional Income
|
24 | 34 | (29 | )% | ||||||||
Rolled product shipments (kt)
|
68 | 64 | 6 | % | ||||||||
Regional Income per tonne ($/tonne)
|
353 | 531 | (34 | )% | ||||||||
Depreciation and amortization
|
11 | 12 | (8 | )% | ||||||||
Capital expenditures
|
5 | 5 | | |||||||||
Total assets
|
780 | 804 | (3 | )% |
Sales and operating revenues of Novelis South America were
$157 million for the three months ended September 30,
2005, an increase of $23 million, or 17%, over the
comparable 2004 period due mainly to higher LME prices and
increased shipments.
Regional Income of Novelis South America was $24 million
for the third quarter of 2005, a decrease of $10 million,
or 29%, compared to the third quarter of 2004. The decrease in
Regional Income resulted mainly from higher energy and smelter
production costs. An $8 million unfavorable impact from the
strengthening of the Brazilian Real by 26% during the third
quarter of 2005 versus the comparable period in 2004 was largely
offset by the favorable metal related impacts of
$6 million, largely from higher LME prices on production
from our smelters.
Shipments of rolled products in Novelis South America increased
in the third quarter of 2005 from the comparable 2004 quarter,
due primarily to the growth in the local can market.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
The following discussion and analysis is based on our unaudited
condensed consolidated and combined statements of income, which
reflect our operations for the nine month periods ended
September 30, 2005 and 2004, as prepared in conformity with
GAAP.
Net Income |
The comparison of Net income between the first nine month
periods of 2005 and 2004 was heavily influenced by the following
items on an after-tax basis:
| Gain on the monetization of cross-currency interest swaps of intercompany debt amounting to $37 million in 2005; |
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| Gain on the sale of land in Asia of $11 million in 2005 while there was a gain on the sale of land in Europe of $5 million in 2004; | |
| Unrealized losses on the change in market value of derivatives of $1 million in 2005, compared to unrealized gains in 2004 of $24 million; | |
| Foreign currency balance sheet translation losses of $42 million in 2005, compared to $3 million in 2004; | |
| Start-up and spin-related costs amounting to $13 million in 2005; | |
| Restructuring, rationalization and impairment charges of $12 million in 2005 relating mainly to the closure of the Borgofranco, Italy, recycling plant, compared to charges in 2004 of $13 million, mainly related to the closure of the Falkirk, U.K. plant; | |
| Gain in 2004 of $13 million on a change in our South American pension plan; | |
| As a stand-alone company, our interest expense was $57 million higher in 2005 than the 2004 carve-out allocations from Alcan; and | |
| Out-of-period adjustments resulting in an increase to net income of $2 million. |
Foreign currency balance sheet translation effects, which are
primarily non-cash in nature, arise from translating monetary
items (principally deferred income taxes, operating working
capital and long-term liabilities) denominated in Canadian
dollars and Brazilian Real into U.S. dollars for reporting
purposes, as well as the deferred tax impact, in local currency,
on the translation of U.S. debt in Canada and South America.
Sales and Operating Revenues and Shipments |
Our sales and operating revenues increased to
$6,337 million for the nine months ended September 30,
2005 from $5,739 million for the comparable 2004 period, an
increase of $598 million, or 10%. The increase was
primarily the result of a 9% increase in LME metal pricing for
the first nine months, a 3% increase in total shipments from
2,275 kt to 2,342 kt and, to a lesser degree, the impact of the
stronger Euro on translation of Euro sales to U.S. dollars.
Costs and Expenses |
Cost of sales and operating expenses increased to
$5,677 million for the nine months ended September 30,
2005 from $5,032 million in the comparable 2004 period, an
increase of $645 million, or 13%. The increase in cost
of sales and operating expenses during the first nine months in
large part reflected the impact of higher LME prices on metal
input costs. Cost of sales and operating expenses represented
90% of Sales and operating revenues for the nine months ended
September 2005, compared to 88% for the comparable 2004 period.
The increase is mainly due to negative metal related impacts,
primarily in North America, foreign currency fluctuations in
Brazil and Korea, and higher energy and freight costs.
Depreciation and amortization of $173 million for the first
nine months of 2005 was $5 million less than the prior
comparable period due to the closure of two plants in Europe and
the $65 million asset impairment charge taken in December
2004 on our Italian fixed assets, which results in a lower
depreciation charge in 2005.
SG&A of $243 million in the first nine months of 2005
increased from $182 million in the first nine months of
2004, an increase of $61 million, or 34%. We incurred
additional corporate office costs as a stand-alone company and
$11 million in
start-up costs. The
2004 nine-month period included a $10 million benefit from
the change in the South American pension plan.
Interest expense in the first nine months of 2005 of
$142 million was significantly higher than the
$55 million in interest allocated from Alcan in the
carve-out financial statements for the first nine months
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of 2004. A comparison of interest expense is not meaningful as
the 2004 amount did not reflect the level of debt, nor the
associated interest costs, that we would have incurred had we
operated on a stand-alone basis in 2004.
Other expenses (income) net equaled income of
$39 million in the first nine months of 2005 compared to
income of $13 million in the first nine months of 2004.
Influencing factors included a realized gain of $45 million
in 2005 on the monetization of certain cross-currency interest
rate swaps that we put in place to hedge intercompany loans
denominated in currencies other than the U.S. dollar, an
$11 million gain in 2005 on the sale of land in Asia, as
well as restructuring and impairment provisions for the closure
of the Borgofranco, Italy, recycling facility amounting to
$12 million. Unrealized gains on the change in market value
of derivatives were nil in the 2005 period compared to
$36 million in the first nine months of 2004. In addition,
the first nine months of 2005 included foreign currency balance
sheet translation losses of $9 million and debt issue costs
of $11 million on undrawn credit facilities used to back up
the Alcan notes we received in January 2005 as part of our
separation from Alcan. The first nine months of 2004 included a
gain on asset sales of $6 million and a $19 million
restructuring charge for the closure of the Falkirk, U.K. mill.
Income Taxes |
The effective tax rate for the first nine months of 2005 was 60%
compared to a Canadian statutory rate of 33%. The effective and
statutory tax rates for the first nine months in 2004 were 42%
and 33%, respectively. The largest items causing the effective
rate difference for 2005 are: (i) $9 million pre-tax
exchange loss in 2005 on the translation of net monetary
liabilities denominated in local currency, for which there was
no related income tax recovery arising mainly in Brazil;
(ii) a deferred tax provision of $33 million in 2005
on the translation of U.S. dollar indebtedness and other
items into local currency for which there is no related income,
arising mainly in Canada and South America, as well as the
unfavorable impact of translating deferred income taxes payable;
(iii) the release of a valuation allowance in the amount of
$10 million on losses carried forward in Novelis Asia; and
(iv) favorable
out-of-period
adjustments of $7 million.
OPERATING SEGMENT REVIEW
The following table presents our Regional Income by operating
segment and reconciles our Total Regional Income to Income
before income taxes and other items as presented in our
statements of income for each of the nine month periods ended
September 30, 2005 and 2004:
Nine Months | |||||||||||||
2005 | 2004 | % Change | |||||||||||
($ in millions) | |||||||||||||
Regional Income
|
|||||||||||||
Novelis North America
|
141 | 208 | (32 | )% | |||||||||
Novelis Europe
|
161 | 162 | (1 | )% | |||||||||
Novelis Asia
|
80 | 62 | 29 | % | |||||||||
Novelis South America
|
86 | 106 | (19 | )% | |||||||||
Total Regional Income
|
468 | 538 | (13 | )% | |||||||||
Corporate(A)
|
(11 | ) | (31 | ) | (65 | )% | |||||||
Depreciation and amortization
|
(173 | ) | (178 | ) | (3 | )% | |||||||
Adjustments for equity-accounted joint ventures(B)
|
(33 | ) | (32 | ) | 3 | % | |||||||
Change in market value of derivatives
|
1 | 37 | (97 | )% | |||||||||
Restructuring, rationalization and impairment recoveries (costs)
|
2 | (15 | ) | (113 | )% | ||||||||
Interest expense
|
(142 | ) | (55 | ) | 158 | % | |||||||
Income before income taxes and other items
|
112 | 264 | (58 | )% | |||||||||
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(A) | Corporate includes the $45 million gain realized on the monetization of cross-currency interest rate swaps in the second quarter of 2005. | |
(B) | Our financial information for our segments includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the business groups are managed. However, under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile to income before income taxes and other items, the Regional Income of these joint ventures is removed from our Regional Income and the net after-tax results are reported as equity income. |
Novelis North America |
The following table sets forth key financial and operating data
for Novelis North America for the nine months ended
September 30, 2005 and September 30, 2004:
Nine Months | ||||||||||||
North America | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
2,500 | 2,229 | 12 | % | ||||||||
Regional Income
|
141 | 208 | (32 | )% | ||||||||
Rolled product shipments (kt)
|
852 | 859 | (1 | )% | ||||||||
Regional Income per tonne ($/tonne)
|
165 | 242 | (32 | )% | ||||||||
Depreciation and amortization
|
54 | 52 | 4 | % | ||||||||
Capital expenditures
|
37 | 20 | 85 | % | ||||||||
Total assets
|
1,388 | 1,975 | (30 | )% |
Sales and operating revenues of Novelis North America were
$2,500 million for the nine month period ended
September 30, 2005, an increase of $271 million, or
12%, over the comparable 2004 period. This was due to higher LME
metal prices that are passed through to customers, as well as
increases in conversion prices. The pass-through of metal price
increases to our customers was limited in cases when metal price
ceilings were exceeded or when there was a time lag between
metal price increases and the corresponding pass-through to our
customers.
Regional Income of Novelis North America was $141 million
for the first nine months of 2005, a decrease of
$67 million, or 32%, compared to the first nine months of
2004. Within this reduction, $37 million related to the
adverse impacts from metal price movements, almost all relating
to our inability to fully pass through metal price increases on
can contracts with a metal price ceiling. Improved conversion
selling prices in many product lines and continued improvements
in optimizing our product portfolio were largely offset by cost
increases relating to freight and energy costs of
$25 million. The first nine months of 2004 included
approximately $13 million of interest revenue on loans to
Alcan that were collected as part of the spin-off transaction.
Shipments of rolled products by Novelis North America declined
1% for the nine month period ended September 30, 2005 from
the comparable 2004 period, due primarily to lower shipments
into the industrial products sector, following our decision to
exit the semi-fabricated foil market, and lower automotive
shipments.
Total assets of $1,388 million as of September 30,
2005 decreased by 30% compared to September 30, 2004. Alcan
related party receivables were repaid as a component of the
Novelis spin-off. Most of this decrease occurred during the
third and fourth quarters of 2004.
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Novelis Europe |
The following table sets forth key financial and operating data
for Novelis Europe for the nine months ended September 30,
2005 and September 30, 2004:
Nine Months | ||||||||||||
Europe | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
2,376 | 2,289 | 4 | % | ||||||||
Regional Income
|
161 | 162 | (1 | )% | ||||||||
Rolled product shipments (kt)
|
768 | 756 | 2 | % | ||||||||
Regional Income per tonne ($/tonne)
|
210 | 214 | (2 | )% | ||||||||
Depreciation
|
74 | 79 | (6 | )% | ||||||||
Capital expenditures
|
39 | 51 | (24 | )% | ||||||||
Total assets
|
2,129 | 2,458 | (13 | )% |
Sales and operating revenues of Novelis Europe were
$2,376 million for the nine month period ended
September 30, 2005, an increase of $87 million, or 4%,
over the comparable 2004 period. The increase was due in large
part to higher LME metal prices and the translation of Euro
sales into U.S. dollars, up 3% due to a stronger Euro in
the first nine months of 2005 versus the comparable 2004 period.
Regional Income of Novelis Europe was $161 million for the
first nine months of 2005 compared to $162 million for the
2004 period. Continuing cost discipline in both operating and
SG&A costs as well as the benefits from restructuring
initiatives, together with higher rolled products shipments and
positive currency impacts of approximately $8 million, due
to the stronger Euro, were offset by negative product mix, lower
margins and higher energy costs.
Shipments of rolled products by Novelis Europe increased 2% for
the nine month period ended September 30, 2005 from the
comparable 2004 period, due primarily to higher shipments into
the lithographic and can markets. This was partly
counterbalanced by reduced shipments in the global foil and
packaging markets.
Novelis Asia |
The following table sets forth key financial and operating data
for Novelis Asia for the nine months ended September 30,
2005 and September 30, 2004:
Nine Months | ||||||||||||
Asia | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
1,025 | 858 | 19 | % | ||||||||
Regional Income
|
80 | 62 | 29 | % | ||||||||
Rolled product shipments (kt)
|
356 | 334 | 7 | % | ||||||||
Regional Income per tonne ($/tonne)
|
225 | 186 | 21 | % | ||||||||
Depreciation and amortization
|
37 | 34 | 9 | % | ||||||||
Capital expenditures
|
15 | 17 | (12 | )% | ||||||||
Total assets
|
971 | 941 | 3 | % |
Sales and operating revenues of Novelis Asia were
$1,025 million for the nine month period ended
September 30, 2005, an increase of $167 million, or
19%, over the comparable 2004 period. The increase in sales and
operating revenues was mainly due to higher LME metal prices
being passed through to customers as well as higher shipment
volumes.
Regional Income of Novelis Asia was $80 million for the
first nine months of 2005, an increase of $18 million, or
29%, compared to the first nine months of 2004. Higher unit
selling prices, improved shipping volumes and lower non-aluminum
metal related costs more than offset the unfavorable impact of
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metal related differences of $3 million and negative
currency effects of $6 million caused by the 14%
strengthening of the Korean Won during the first nine months of
2005 compared to 2004.
Shipments of rolled products by Novelis Asia increased 7% for
the nine month period ended September 30, 2005 from the
comparable 2004 period, due in a large part to can stock market
share advances in China and Southeast Asia. We believe China
experienced an improved per capita gross domestic product which
resulted in changes in consumer purchasing behavior. We were
able to participate in this growth through continuous
improvement in production quality, service performance and
output levels.
Novelis South America |
The following table sets forth key financial and operating data
for Novelis South America for the nine months ended
September 30, 2005 and September 30, 2004:
Nine Months | ||||||||||||
South America | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Sales and operating revenues
|
448 | 369 | 21 | % | ||||||||
Regional Income
|
86 | 106 | (19 | )% | ||||||||
Rolled product shipments (kt)
|
191 | 165 | 16 | % | ||||||||
Regional Income per tonne ($/tonne)
|
450 | 642 | (30 | )% | ||||||||
Depreciation and amortization
|
33 | 36 | (8 | )% | ||||||||
Capital expenditures
|
13 | 12 | 8 | % | ||||||||
Total assets
|
780 | 804 | (3 | )% |
Sales and operating revenues of Novelis South America were
$448 million for the nine months ended September 30,
2005, an increase of $79 million, or 21%, over the
comparable 2004 period due mainly to higher shipment volumes and
the pass-through of higher LME metal costs.
Regional Income of Novelis South America was $86 million
for the first nine months of 2005, a decrease of
$20 million, or 19%, compared to the first nine months of
2004. The decrease resulted from a $25 million negative
impact from the strengthening of the Brazilian Real against the
U.S. dollar (20%) during the nine month 2005 period. Just
under half of the Brazilian Real foreign currency impact
resulted from the effects of foreign currency balance sheet
translation, which has no immediate cash impact on the business.
The operating results of the business remained sound with
Regional Income benefiting from higher shipment volumes and
conversion prices, as well as positive metal related impact of
$14 million due to higher LME prices on production from our
smelters. In the 2004 comparison period, we also recognized a
$19 million gain from the conversion to a defined
contribution pension plan.
Shipments of rolled products of Novelis South America increased
16% for the nine months ended September 30, 2005 from the
comparable 2004 period, due primarily to the growth in the local
can market, as well as growth in our industrial products and
export businesses.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and available capital resources are impacted by
three components: (1) operating activities,
(2) investing activities and (3) financing activities.
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Operating Activities |
The following table sets forth information regarding our cash
flow for the nine months ended September 30, 2005 and 2004:
Nine Months | ||||||||
Free Cash Flow | 2005 | 2004 | ||||||
($ in millions) | ||||||||
Net income
|
32 | 148 | ||||||
Unrealized losses (gains) on derivatives
|
| (36 | ) | |||||
Other non-cash income items(A)
|
87 | 206 | ||||||
Increase (decrease) in interest payable
|
19 | (1 | ) | |||||
Increase (decrease) in accrued income taxes
|
59 | (18 | ) | |||||
Other changes in assets and liabilities(B)
|
169 | (7 | ) | |||||
Net cash provided by operating activities
|
366 | 292 | ||||||
Dividends
|
(27 | ) | (4 | ) | ||||
Premiums paid and net proceeds on derivatives
|
70 | | ||||||
Capital expenditures
|
(104 | ) | (95 | ) | ||||
Free cash flow(C)
|
305 | 193 | ||||||
Ending cash balance
|
124 | 27 | ||||||
(A) | Other non-cash income items comprise: Depreciation and amortization, Deferred income taxes, Write-off and amortization of debt issue costs, Provision for uncollectible accounts, Gains from sale of fixed assets, Equity in net income of non-consolidated affiliates, Provision for asset impairments, Stock option compensation and realized losses (gains) on derivatives. | |
(B) | Other changes in assets and liabilities comprise: increases or decreases in Accounts receivable (third and related parties), Prepaid expenses, Inventories, Other current assets, Accounts payable trade (third and related parties), Accrued expenses, Deferred charges and other assets, Deferred credits and other liabilities and other items net. | |
(C) | Free cash flow (which is a non-GAAP measure) consists of cash provided by operating activities plus or minus capital expenditures, premiums paid and net proceeds on derivatives and dividends. Dividends include those paid by our less than wholly-owned subsidiaries to their minority shareholders and dividends to our common shareholders. Management believes that free cash flow is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, free cash flow does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of free cash flow. We believe the line on our unaudited condensed consolidated and combined statement of cash flows entitled Cash provided by operating activities is the most directly comparable measure to free cash flow. Our method of calculating free cash flow may not be consistent with that of other companies. |
Our cash flow provided by operating activities was
$366 million for the nine months ended September 30,
2005 compared to $292 million in the same period in 2004, a
25% increase. Other changes in assets and liabilities improved
in the nine months ended September 30, 2005 largely due to
improvements in operating working capital, mainly inventory and
accounts receivable, despite rising aluminum prices. Other
positive factors impacting cash provided by operating activities
included the timing of income tax payments and an increase in
interest payable. These factors were more than sufficient to
offset lower Regional Income as well as higher interest and
corporate costs resulting from our position as a stand-alone
company in 2005. Interest on Senior Notes is paid only twice per
year on
August 15th and
February 15th.
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Dividends include $7 million paid mainly to minority
shareholders of Novelis Korea and dividends on our common shares
declared only since our spin-off as a separate legal entity on
January 6, 2005.
Investing Activities |
The following table sets forth information regarding our capital
expenditures and depreciation for the nine months ended
September 30, 2005 and September 30, 2004:
Nine Months | ||||||||||||
Capital Expenditures and Depreciation | 2005 | 2004 | % Change | |||||||||
($ in millions) | ||||||||||||
Capital expenditures
|
104 | 95 | 9 | % | ||||||||
Depreciation and amortization expense
|
173 | 178 | (3 | )% | ||||||||
Capital reinvestment rate(A)
|
60 | % | 53 | % | ||||||||
(A) | Capital expenditures as a percentage of depreciation and amortization expense. |
In the nine months ended September 30, 2005, our capital
expenditures were $104 million, representing a capital
reinvestment rate of 60%. During the same period in 2004, our
capital expenditures were $95 million, representing a
reinvestment rate of 53%. The majority of our capital
expenditures for the first nine months of 2005 were spent on
projects devoted to product quality, technology and productivity
enhancements, and small projects to increase capacity.
Typically, our capital expenditures are disproportionately
higher in the fourth quarter of the year, as plants plan capital
equipment installation and upgrades during periods of planned
year-end manufacturing and customer downtime.
Financing Activities |
At the spin-off from Alcan, we had $2,951 million of
short-term borrowings, long-term debt, and capital lease
obligations which we reduced by $169 million in the first
half of 2005. With the strength of our cash flows in the third
quarter of 2005, we further reduced our debt position by
$97 million to $2,685 million as of September 30,
2005, for a total
year-to-date debt
reduction of $266 million, or 9%.
All of our related party debt of $2,597 million as of
December 31, 2004 was payable to Alcan and was fully repaid
in the first quarter of 2005. The related party debt was
comprised of a combination of fixed and floating rate debt of
$1,392 million and fixed rate promissory notes (Alcan
Notes) obtained in December 2004 of $1,205 million. The
Alcan Notes as of December 31, 2004 plus additional Alcan
Notes of $170 million issued in January 2005 comprise the
$1,375 million bridge financing provided by Alcan to us as
a result of the spin-off transaction. The Alcan Notes were
repaid with the net proceeds of the $1,400 million
10-year Senior Notes
issued in February 2005, discussed below.
In connection with the spin-off transaction described in
Note 1 Background and Basis of Presentation
above to our unaudited condensed consolidated and combined
financial statements, we entered into senior secured credit
facilities providing for aggregate borrowings of up to
$1,800 million. These facilities consist of a
$1,300 million seven-year senior secured Term Loan B
facility, bearing interest at LIBOR plus 1.75% (the effective
rate at September 30, 2005 was 5.46%, assuming the
selection of 3-month
LIBOR as our borrowing choice), all of which was borrowed on
January 10, 2005, and a $500 million five-year
multi-currency revolving credit facility. The Term Loan B
facility consists of an $825 million Term Loan B in
the U.S. and a $475 million Term Loan B in Canada. The
proceeds of the Term Loan B facility were used in
connection with the spin-off transaction to refinance our
related party debt with Alcan and to pay related fees and
expenses. Debt issuance costs incurred in relation to these
facilities have been recorded in Deferred charges and other
assets and are being amortized over the life of the related
borrowing in Interest using the effective interest
amortization method.
The credit agreement relating to the senior secured credit
facilities includes customary affirmative and negative
covenants, as well as financial covenants relating to our
maximum total leverage ratio, minimum interest coverage ratio,
and minimum fixed charge coverage ratio.
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On February 3, 2005, we issued $1,400 million
aggregate principal amount of senior unsecured debt securities.
The Senior Notes, which were priced at par, bear interest at
7.25% and will mature on February 15, 2015. The net
proceeds of the Senior Notes were used to repay the Alcan Notes.
Under the indenture that governs the Senior Notes, we are
subject to certain restrictive covenants applicable to incurring
additional debt and providing additional guarantees, paying
dividends beyond certain amounts and making other restricted
payments, sales and transfer of assets, certain consolidations
or mergers and certain transactions with affiliates.
We have entered into interest rate swaps to fix the interest
rate on $310 million of the floating rate Term Loan B
debt at an effective weighted average interest rate of 5.5% for
periods of up to three years. As of September 30, 2005, our
fixed to variable rate debt ratio was 73:27.
In 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan
Taihan Aluminium Limited, entered into a $70 million
floating rate long-term loan which was subsequently swapped for
a 4.55% fixed rate KRW 73 billion loan and into two
long-term floating rate loans of $39 million (KRW
40 billion) and $24 million (KRW 25 billion),
which were then swapped for fixed rate loans of 4.80% and 4.45%,
respectively. In 2005, interest on another loan for
$2 million (KRW 2 billion) ranged from 3.00% to 4.47%
(2004: 3.00% to 5.50%). In February 2005, Novelis Korea entered
into a $50 million floating rate long-term loan which was
subsequently swapped for a 5.30% fixed rate KRW 51 billion
loan.
In connection with the spin-off, we entered into a fifteen-year
Swiss Francs (CHF) 62 million capital lease agreement
with Alcan for assets in Sierre, Switzerland, which has an
implied interest rate of 7.5% and calls for fixed quarterly
payments of CHF 1.7 million.
As of September 30, 2005, we were in compliance with all
the financial covenants in our debt agreements, but see the
discussion under the caption Restatement Effects on Debt
Agreements below.
Financing activities relating to the separation from Alcan are
discussed in more detail in our Annual Report on
Form 10-K for the
year ended December 31, 2004, filed with the SEC under
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Financing
Activities.
Restatement Effects on Debt Agreements |
As a result of the restatement of our unaudited condensed
consolidated and combined financial statements for the quarters
ended March 31, 2005 and June 30, 2005, we delayed the
filing of this quarterly report on
Form 10-Q for the
quarter ended September 30, 2005, our annual report on
Form 10-K for the
year ended December 31, 2005 and our quarterly report on
Form 10-Q for the
quarter ending March 31, 2006. These delays have resulted
in us taking a number of remedial steps in connection with our
outstanding debt.
The credit agreement governing our senior secured credit
facilities requires that we deliver quarterly and audited annual
financial statements to the lenders within a specified period of
time. As a result of the restatement process, we sought and
obtained the consent from our lenders to extend the financial
statement filing and reporting deadlines under the credit
agreement to June 15, 2006 for our
Form 10-Q for the
quarter ended September 30, 2005; to September 29,
2006 for our
Form 10-K for the
year ended December 31, 2005; to October 31, 2006 for
our Form 10-Q for
the quarter ended March 31, 2006; to November 30, 2006
for our Form 10-Q
for the quarter ending June 30, 2006; and to
December 29, 2006 for our
Form 10-Q for the
quarter ending September 30, 2006.
As of March 31, 2006, we had $855 million outstanding
under the credit agreement.
The indenture governing the Senior Notes and the related
registration rights agreement provided that we were required to
file a registration statement for registered notes to be
exchanged for the notes privately placed to the original
investors. The registration statement was declared effective by
the SEC on September 27, 2005. Under the indenture and the
related registration rights agreement, we were required to
complete an exchange offer for the Senior Notes by
November 11, 2005. We did not complete the
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exchange offer by that date. As a result, we began to accrue
special interest at a rate of 0.25% from November 11, 2005.
In addition, the indenture and the registration rights agreement
provide that the rate of special interest increases 0.25% during
each subsequent 90-day
period until the exchange offer closes, with the maximum amount
of additional special interest being 1.00% per year. The
rate of special interest is currently 0.75%. If we do not
complete the exchange offer by August 8, 2006, the rate of
special interest will increase to 1.00%. We expect to file a
post-effective amendment to the registration statement
registering the Senior Notes being issued in the exchange offer
and complete the exchange as soon as practicable following the
date we are current on our reporting requirements. We will cease
paying additional interest once the exchange offer is completed.
Under the indenture, we are required to deliver to the trustee a
copy of our periodic reports filed with the SEC within time
periods specified for filing by SEC rules. Our failure to timely
file our quarterly report on
Form 10-Q for the
quarter ended September 30, 2005, our annual report on
Form 10-K for the
year ended December 31, 2005 and our quarterly report on
Form 10-Q for the
quarter ended March 31, 2006 gave certain rights to the
trustee and the noteholders under the indenture to accelerate
maturity of the Senior Notes if they give us notice and we do
not cure the breach within 60 days. However, neither the
trustee nor the noteholders have given us such a notice to date.
As a result, we continue to classify the Senior Notes as
long-term.
COMMODITY PRICE RISKS
Most aluminum rolled products are priced in two components:
(i) an aluminum price component based on the LME quotation
and a local market premium, plus (ii) a margin over
metal or conversion charge based on the competitive market
price of the product. As a consequence, the aluminum price risk
exposure is largely absorbed by the customer. In situations
where we offer customers fixed prices for future delivery of our
products, we may enter into hedging contracts for the metal
inputs in order to protect the profit on the conversion margin
of the product. In addition, sales contracts currently
representing approximately 20% of our total annual sales provide
for a ceiling over which metal prices cannot contractually be
passed through to our customers. We attempt to mitigate the risk
of this metal price exposure through the purchase of metal
hedging contracts or options.
For the fourth quarter of 2005, we established metal positions
such that our maximum ceiling price metal exposure impacting
Regional Income in the fourth quarter is expected to be less
than $5 million.
For the first half of 2006, we managed our metal price ceiling
exposure through the purchase of call options positioned to
cover the exposure at the ceiling price.
For the second half of 2006, our metal price ceiling exposure
(above our internal hedge position) has now been hedged with
call option positions at various strike prices. As a result, our
maximum potential metal price ceiling exposure impacting
Regional Income (above our internal hedge position) is expected
to be approximately $45 million beyond the cost of the
options, assuming the effectiveness of our used beverage can and
smelter hedges in this unusually high and sustained metal price
environment.
CONTRACTUAL OBLIGATIONS
We have future obligations under various contracts relating to
debt payments, capital and operating leases, long-term purchase
arrangements, pensions and other post-employment benefits, and
guarantees. At September 30, 2005, debt payment
requirements were: less than 1 year: $1 million;
1-3 years: $138 million; 3-5 years:
$56 million; and greater than 5 years:
$2,455 million. Included in the debt payments are capital
lease principal payments of approximately $2 million each
year with $40 million payable in greater than 5 years.
Interest payments of the above debt were: less than 1 year:
$58 million; 1-3 years: $505 million;
3-5 years:
$332 million; and greater than 5 years:
$455 million.
There were no other material changes in our contractual
obligations in the third quarter of 2005 from the amounts
reported in our most recent
Form 10-K, other
than the above-mentioned items.
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ACCOUNTING POLICIES
As previously discussed, we were formed through a spin-off
transaction from Alcan in January 2005. In presenting our
unaudited condensed consolidated and combined financial
statements in conformity with generally accepted accounting
principles, we are required to make estimates and assumptions
that affect the amounts reported therein. Several of the
estimates and assumptions that we are required to make pertain
to matters that are inherently uncertain as they relate to
future events. Presented in Managements Discussion
and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates of our Annual Report on
Form 10-K for the
year ended December 31, 2004 are accounting policies that
we believe require subjective and/or complex judgments that
could potentially affect reported results. There were no
significant changes to our critical accounting policies and
estimates during the nine months ended September 30, 2005.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123(R),
Share-Based Payment, (FASB 123(R)), which is a revision
to FASB Statement No. 123, Accounting for Stock-Based
Compensation(FASB 123). FASB 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. We adopted the fair value based method of
accounting for share-based payments effective January 1,
2004 using the retroactive restatement method described in FASB
Statement No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
Currently, we use the Black-Scholes valuation model to estimate
the value of stock options granted to employees. We expect to
adopt FASB 123(R) on January 1, 2006, and expect to apply
the modified prospective method upon adoption. The modified
prospective method requires companies to record compensation
cost beginning with the effective date based on the requirements
of FASB 123(R) for all share-based payments granted after the
effective date. All awards granted to employees prior to the
effective date of FASB 123(R) that remain unvested at the
adoption date will continue to be expensed over the remaining
service period in accordance with FASB 123.
In March 2005, the FASB issued FASB Interpretation No. 47
(FIN 47) Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143. FIN 47 clarifies that a conditional asset
retirement obligation is a legal obligation to perform an asset
retirement activity the timing or method of settlement of which
is conditional on a future event. FIN 47 also clarifies
that a conditional asset retirement obligation should be
recognized if its fair value is reasonably estimable and
provides guidance on when there is sufficient information to
reasonably estimate the fair value of an asset retirement
obligation. FIN 47 should be applied no later than the end
of the fiscal year 2005. The adoption of FIN 47 will not
have a material impact on our financial position, results of
operations or cash flows.
In May 2005, the FASB issued FASB Staff Position (FSP) No.
EITF 00-19-1,
Application of EITF Issue
No. 00-19 to
Freestanding Financial Instruments Originally Issued as Employee
Compensation. The FSP was issued to clarify the application
of EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock, to
freestanding financial instruments originally issued as employee
compensation that can be settled only by delivering registered
shares. This FSP clarifies that a requirement to deliver
registered shares, in and of itself, will not result in
liability classification for freestanding financial instruments
originally issued as employee compensation. This clarification
is consistent with the FASBs intent in issuing FASB
123(R). We will apply the guidance in this FSP in accordance
with the effective date and transition provisions of FASB 123(R).
In June 2005, the FASB ratified the consensus reached in EITF
Issue No. 05-5, Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms
Specified in Altersteilzeit Early Retirement Arrangements)
(EITF 05-5).
EITF 05-5
addresses the timing of recognition of salaries, bonuses and
additional pension contributions associated with certain early
retirement arrangements typical in Germany (as well as similar
programs). The EITF also specifies the accounting for government
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subsidies related to these arrangements.
EITF 05-5 is
effective in fiscal years beginning after December 15,
2005. The adoption of
EITF 05-5 is not
expected to have a material impact on our financial position,
results of operations or cash flows.
In June 2005, the FASB issued Staff Position
(FSP) FAS 143-1,
Accounting for Electronic Equipment Waste Obligations.
FSP FAS 143-1
addresses the accounting for obligations associated with
Directive 2002/96/ EC on Waste Electrical and Electronic
Equipment (the Directive) of the European Union (EU) which
is subject to transformation into the respective national laws.
Under the Directive, the waste management obligation remains
with the commercial user until the historical waste equipment
(put on the market before August 13, 2005) is replaced. At
that time the waste management obligation for the equipment may
be transferred to the producer of the replacement equipment
depending on the transformation of the Directive into national
law by the EU member country. If the commercial user does not
replace the equipment, the obligation remains with that user
until the equipment is disposed. FSP
FAS 143-1 requires
the commercial user to apply the provisions of FASB 143,
Accounting for Asset Retirement Obligations, to the
obligation associated with historical waste equipment. FSP
FAS 143-1 will
have to be applied in the first reporting period ending after
the date the law is adopted by the applicable EU member
countries. The adoption of FSP
FAS 143-1 did not
have a material impact on our financial position, results of
operations or cash flows.
In July 2005, the FASB issued FSP No. APB 18-1,
Accounting by an Investor for Its Proportionate Share of
Accumulated Other Comprehensive Income of an Investee Accounted
for under the Equity Method in Accordance with APB Opinion
No. 18 upon a Loss of Significant Influence, to provide
guidance on how an investor should account for its proportionate
share of an investees equity adjustments for other
comprehensive income (OCI) upon a loss of significant
influence. The FSP states that an investors proportionate
share of an investees equity adjustments for OCI should be
offset against the carrying value of the investment at the time
significant influence is lost. To the extent that the offset
results in a carrying value of the investment that is less than
zero, an investor should (a) reduce the carrying value of
the investment to zero and (b) record the remaining balance
in income. The guidance in this FSP is effective for us as of
the first reporting period beginning after July 12, 2005.
Upon adoption of this FSP, any amount of an investees
equity adjustments for OCI recorded in the shareholders
equity of the investor, relating to an investment for which the
reporting entity no longer has an ability to exercise
significant influence, should be offset against the carrying
value of the investment. The amount that is offset should not
include any items of accumulated OCI, relating to unrealized
gains and losses recorded in accordance with FASB
Statement 115 (FASB 115), Accounting for Certain
Investments in Debt and Equity Securities, that are recorded
by an investor for an investment that is accounted for as an
available-for-sale security in accordance with FASB 115 upon
adoption of this FSP. If comparative financial statements are
provided for earlier periods, those financial statements shall
be retrospectively adjusted to reflect application of the
provisions of this FSP. There is no impact on our financial
position, results of operations, or cash flows from this FSP.
In September 2005, the FASB ratified Emerging Issues Task Force
Issue No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty
(EITF 04-13).
EITF 04-13
discusses whether inventory purchase and sales transactions with
the same counterparty that are entered into in contemplation of
one another should be combined and treated as a nonmonetary
exchange and addresses (a) under what circumstances should
two or more transactions with the same counterparty
(counterparties) be viewed as a single nonmonetary
transaction within the scope of APB Opinion No. 29,
Accounting for Nonmonetary Transactions
(APB 29) and Financial Accounting Standard
No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB 29 (FAS 153) and (b) if nonmonetary
transactions within the scope of APB 29 and FAS 153
involve inventory, are there any circumstances under which the
transactions should be recognized at fair value. The
pronouncement is effective for new inventory arrangements
entered into, or modifications or renewals of existing inventory
arrangements occurring in interim or annual reporting periods
beginning after March 15, 2006. We do not expect that this
pronouncement will have a material effect on our financial
position, results of operations or cash flows.
We have determined that all other recently issued accounting
pronouncements do not apply to us.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND
MARKET DATA
This quarterly report 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. 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. 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.
All market position data relating to us is based on information
from Commodity Research Unit International Limited, or CRU, and
management estimates. This information and these estimates
reflect various assumptions and are not independently verified.
Therefore, they should be considered in this context. 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, data
concerning production capacity, product shipments and share of
production. Actual market results may differ from those
predicted. While we do not know what impact any of these
differences may have on our business, our results of operations,
or our financial condition, the market price of our securities
may be materially adversely affected. Factors that could cause
actual results or outcomes to differ from the results expressed
or implied by forward-looking statements include, among other
things:
| continuing obligations and other relationships resulting from our spin-off from Alcan; | |
| the level of our indebtedness and our ability to generate cash; | |
| relationships with, and financial and operating conditions of, our customers and suppliers; | |
| changes in the prices and availability of aluminum (or premiums associated with such price) or other 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 for future capital requirements; | |
| changes in the relative values of various currencies; | |
| factors affecting our operations, such as litigation, labor relations and negotiations, breakdown of equipment and other events; | |
| economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; | |
| competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials; | |
| changes in general economic conditions; | |
| changes to and volatility of metal prices; | |
| our ability to improve and maintain effective internal control over financial reporting and disclosure controls and procedures in the future; | |
| our ability to properly account for adjustments made to arrive at our opening balance sheet as of January 6, 2005; |
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| changes in market value of derivatives; | |
| the effectiveness of our hedging activities, including our internal used beverage can (UBC) and smelter hedges; | |
| cyclical demand and pricing within the principal markets for our products as well as seasonality in certain of our customers industries; and | |
| changes in government regulations, particularly those affecting environmental, health or safety compliance. |
The above list of factors is not exhaustive. Some of these and
other factors are discussed in more detail under Risk
Factors in our registration statement on
Form S-4, as
amended and filed with the SEC.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
(in millions of US$, except foreign currency denominations
and LME prices)
Changes in interest rates, foreign exchange rates and the market
price of aluminum are among the factors that can impact our cash
flows. See risk factors discussed above in SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET
DATA.
Interest Rates
We are subject to interest rate risk related to the outstanding
balance on the variable rate Term Loan B debt we incurred
in connection with the spin-off transaction described in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Financing
Activities in our Annual Report on
Form 10-K for the
year ended December 31, 2004. We have entered into interest
rate swaps to fix the interest rate on $310 of the variable rate
Term Loan B debt at an effective weighted average interest
rate of 5.5% for periods of up to three years. For every
12.5 basis point change in the interest rates on the $705
of variable rate Term Loan B debt that has not been swapped
into fixed interest rates as of September 30, 2005, our
annual net income would be impacted by $0.9. As of
September 30, 2005, the fair market value of these swaps
was $2.5 million.
We are also subject to interest rate risk related to the
outstanding balance on various variable rate bank loans entered
into by Novelis Korea Limited. As of September 30, 2005,
Novelis Korea Limited had two variable rate bank loans
denominated in U.S. currency totaling $50 and $70,
respectively. We entered into agreements to swap these floating
rate loans for fixed rate loans denominated in Korean won at
rates of 5.30% and 4.55%, respectively. As of September 30,
2005, Novelis Korea Limited had three variable rate loans
denominated in Korean won totaling $65. Two of the variable rate
loans totaling KRW 40 billion and KRW 25 billion were
swapped for fixed rate loans of 4.80% and 4.45%, respectively.
Interest on the remaining variable rate loan totaling KRW
2 billion ranged from 3.00% to 4.47% in the nine months of
2005.
During the first quarter we entered into $766 of cross-currency
interest rate swaps (Euro 475 million, GBP 62 million,
CHF 35 million) with respect to intercompany loans to
several European subsidiaries.
During the second quarter we monetized the initial
cross-currency interest rate swaps and replaced them with new
cross-currency interest rate swaps (Euro 475 million, GBP
62 million, CHF 35 million). The aggregate fair value
of these derivatives as of September 30, 2005 was ($36),
and the notional amount of these swaps was $712.
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During the third quarter we entered into $108 (Euro
89 million) of cross-currency swaps with respect to
intercompany loans from several European subsidiaries. The
aggregate fair value of these swaps was a liability of $0.5 as
of September 30, 2005.
For accounting policies for interest rate swaps used to hedge
interest costs on certain debt, see Note 3
Summary of Significant Accounting Policies in our Annual Report
on Form 10-K for
the year ended December 31, 2004.
We do not currently intend to refinance our fixed rate debt
prior to maturity. Transactions in interest rate financial
instruments for which there is no underlying interest rate
exposure to us are prohibited by the senior secured credit
facilities.
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Foreign Currency Derivatives
The schedule below presents fair value information about our
currency derivatives categorized according to the expected
maturity dates of our foreign currency derivatives outstanding
as of September 30, 2005. Certain amounts have been
restated.
2009 | Total | ||||||||||||||||||||||||||||
and | Notional | Fair | |||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | Beyond | Amount | Value | |||||||||||||||||||||||
(Notional amounts in millions of US$) | |||||||||||||||||||||||||||||
FORWARD CONTRACTS
|
|||||||||||||||||||||||||||||
To purchase USD against the foreign currency | |||||||||||||||||||||||||||||
CHF Notional Amount
|
5 | 11 | 2 | 2 | 1 | 21 | (1 | ) | |||||||||||||||||||||
Average contract rate
|
1.31 | 1.35 | 1.29 | 1.26 | 1.24 | ||||||||||||||||||||||||
To sell USD against the foreign currency | |||||||||||||||||||||||||||||
CHF Notional Amount
|
21 | | | | | 21 | | ||||||||||||||||||||||
Average contract rate
|
1.29 | | | | | ||||||||||||||||||||||||
KRW Notional Amount
|
58 | | | | | 58 | | ||||||||||||||||||||||
Average contract rate
|
1,029.2 | | | | | ||||||||||||||||||||||||
To purchase EUR against the foreign currency | |||||||||||||||||||||||||||||
GBP Notional Amount
|
13 | 5 | 5 | | 33 | 56 | | ||||||||||||||||||||||
Average contract rate
|
0.69 | 0.70 | 0.71 | | 0.74 | ||||||||||||||||||||||||
USD Notional Amount
|
4 | | | | | 4 | | ||||||||||||||||||||||
Average contract rate
|
1.21 | | | | |