UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark one)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to .
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Commission file number:
001-32312
Novelis Inc.
(Exact name of registrant as
specified in its charter)
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Canada
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98-0442987
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification number)
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3399 Peachtree Road NE,
Suite 1500
Atlanta, Georgia
(Address of principal
executive offices)
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30326
(Zip
Code)
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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 þ No o
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 in
Rule 12b-2
of the Exchange Act.
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 October 31, 2006, the registrant had 74,014,691
common shares outstanding.
TABLE OF
CONTENTS
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FINANCIAL
INFORMATION
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Financial
Statements
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Condensed
Consolidated and Combined Statements of Operations and
Comprehensive Income (Loss) (unaudited)
Three Months and Nine Months Ended September 30, 2006 and
September 30, 2005
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2
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Condensed
Consolidated Balance Sheets (unaudited)
As of September 30, 2006 and December 31,
2005
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3
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Condensed
Consolidated and Combined Statements of Cash Flows
(unaudited)
Nine Months Ended September 30, 2006 and September 30,
2005
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4
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Condensed
Consolidated Statement of Shareholders Equity
(unaudited)
Nine Months Ended September 30, 2006
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6
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Notes to the
Condensed Consolidated and Combined Financial Statements
(unaudited)
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7
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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43
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Quantitative and
Qualitative Disclosures About Market Risk
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72
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Controls and
Procedures
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76
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OTHER
INFORMATION
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Legal
Proceedings
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78
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Exhibits
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78
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EX-31.1 WILLIAM T. MONAHAN, INTERIM CHEIF EXECUTIVE OFFICER SECTION 302 CERTIFICATION |
EX-31.2 RICK DOBSON, CHIEF FINANCIAL OFFICER, SECTION 302 CERTIFICATION |
EX-32.1 WILLIAM T. MONAHAN, INTERIM CHIEF EXECUTIVE OFFICER, SECTION 906 CERTIFICATION |
EX-32.2 RICK DOBSON, CHEIF FINANCIAL OFFICER, SECTION 906 CERTIFICATION |
1
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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Novelis
Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS) (unaudited)
(in millions, except per share amounts)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2006
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2005
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2006
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2005
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Net sales
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$
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2,494
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$
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2,053
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$
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7,377
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$
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6,337
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Cost of goods sold (exclusive of
depreciation and amortization shown below)
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2,389
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1,834
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6,931
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5,678
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Selling, general and
administrative expenses
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103
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90
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293
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260
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Depreciation and amortization
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57
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56
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174
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173
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Research and development expenses
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10
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10
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29
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29
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Restructuring charges
net
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10
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7
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13
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4
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Impairment charges on long-lived
assets
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4
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5
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Interest expense and amortization
of debt issuance costs net
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52
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46
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149
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148
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Equity in net income of
non-consolidated affiliates
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(5
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)
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(2
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)
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(12
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)
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(6
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)
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Other (income)
expenses net
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34
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(48
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)
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(62
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)
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(72
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)
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2,650
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1,997
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7,515
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6,219
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Income (loss) before provision
(benefit) for taxes on income (loss) and minority
interests share
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(156
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)
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56
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(138
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)
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118
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Provision (benefit) for taxes on
income (loss)
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(52
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)
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37
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30
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67
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Income (loss) before minority
interests share
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(104
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)
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19
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(168
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)
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51
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Minority interests share
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2
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(9
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(2
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(19
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Net income (loss)
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(102
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)
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10
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(170
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32
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Other comprehensive income
(loss) net of tax
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Currency translation adjustment
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11
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105
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(146
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)
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Change in fair value of effective
portion of hedges net
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11
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(30
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)
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Change in minimum pension liability
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(1
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)
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1
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(4
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(12
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Other comprehensive income
(loss) net of tax
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21
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1
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71
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(158
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)
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Comprehensive income
(loss)
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$
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(81
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)
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$
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11
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$
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(99
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)
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$
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(126
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)
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Earnings (loss) per
share:
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Net income (loss) per
share basic
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$
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(1.38
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)
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$
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0.14
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$
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(2.30
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)
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$
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0.43
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Net income (loss) per
share diluted
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$
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(1.38
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)
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$
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0.14
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$
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(2.30
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)
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$
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0.43
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Dividends per common
share
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$
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0.01
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$
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0.09
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$
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0.19
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$
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0.27
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Supplemental information for
2005 only:
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Net income attributable to the
consolidated and combined results of Novelis from January 6 to
September 30, 2005 increase to Retained earnings
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$
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61
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Net loss attributable to the
combined results of Novelis from January 1 to January 5,
2005 decrease to Owners net investment
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(29
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)
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Net income
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$
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32
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The accompanying notes to the condensed consolidated and
combined financial statements
are an integral part of these condensed statements.
2
Novelis
Inc.
(in millions, except number of shares)
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September 30,
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December 31,
|
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2006
|
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2005
|
|
|
ASSETS
|
Current assets
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Cash and cash equivalents
|
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$
|
71
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$
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100
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|
Accounts receivable (net of
allowances of $29 in 2006 and $26 in 2005)
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third parties
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1,241
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1,098
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related parties
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22
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|
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33
|
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Inventories
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1,309
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1,128
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Prepaid expenses and other current
assets
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|
72
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|
|
|
66
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|
Current portion of fair value of
derivative instruments
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107
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|
|
|
194
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|
Deferred income tax assets
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19
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|
|
|
8
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
2,841
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|
|
|
2,627
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Property, plant and
equipment net
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2,130
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|
|
2,160
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|
Goodwill
|
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|
228
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|
|
|
211
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|
Intangible assets net
|
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20
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|
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21
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|
Investment in and advances to
non-consolidated affiliates
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155
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|
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144
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|
Fair value of derivative
instruments net of current portion
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|
55
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|
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|
90
|
|
Deferred income tax assets
|
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|
67
|
|
|
|
45
|
|
Other long-term assets
|
|
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|
|
|
|
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|
third parties
|
|
|
123
|
|
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|
107
|
|
related parties
|
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61
|
|
|
|
71
|
|
|
|
|
|
|
|
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Total assets
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|
$
|
5,680
|
|
|
$
|
5,476
|
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LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
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|
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Current portion of long-term debt
|
|
$
|
4
|
|
|
$
|
3
|
|
Short-term borrowings
|
|
|
113
|
|
|
|
27
|
|
Accounts payable
|
|
|
|
|
|
|
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third parties
|
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|
1,188
|
|
|
|
866
|
|
related parties
|
|
|
38
|
|
|
|
38
|
|
Accrued expenses and other current
liabilities
|
|
|
702
|
|
|
|
641
|
|
Deferred income tax liabilities
|
|
|
86
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
2,131
|
|
|
|
1,601
|
|
Long-term debt net of
current portion
|
|
|
2,329
|
|
|
|
2,600
|
|
Deferred income tax liabilities
|
|
|
143
|
|
|
|
186
|
|
Accrued post-retirement benefits
|
|
|
335
|
|
|
|
305
|
|
Other long-term liabilities
|
|
|
264
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,202
|
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
156
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
unlimited number of first preferred and second preferred shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
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Common stock, no par value;
unlimited number of shares authorized; 74,006,375 shares
issued and outstanding as of September 30, 2006
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
427
|
|
|
|
425
|
|
(Accumulated deficit) Retained
earnings
|
|
|
(92
|
)
|
|
|
92
|
|
Accumulated other comprehensive loss
|
|
|
(13
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
322
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
5,680
|
|
|
$
|
5,476
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the condensed consolidated and
combined financial statements
are an integral part of these condensed balance sheets.
3
Novelis
Inc.
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(170
|
)
|
|
$
|
32
|
|
Adjustments to determine net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
174
|
|
|
|
173
|
|
Net gain on change in fair value
of derivative instruments
|
|
|
(58
|
)
|
|
|
(87
|
)
|
Deferred income taxes
|
|
|
(29
|
)
|
|
|
(6
|
)
|
Amortization of debt issuance costs
|
|
|
7
|
|
|
|
16
|
|
Provision for uncollectible
accounts receivable
|
|
|
3
|
|
|
|
2
|
|
Equity in net income of
non-consolidated affiliates
|
|
|
(12
|
)
|
|
|
(6
|
)
|
Dividends from non-consolidated
affiliates
|
|
|
4
|
|
|
|
|
|
Minority interests share
|
|
|
2
|
|
|
|
19
|
|
Stock-based compensation
|
|
|
2
|
|
|
|
2
|
|
(Gain) loss on sales of
businesses, investments and assets net
|
|
|
16
|
|
|
|
(11
|
)
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
5
|
|
Changes in assets and liabilities
(net of effects from acquisitions and divestitures):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
third parties
|
|
|
(112
|
)
|
|
|
(44
|
)
|
related parties
|
|
|
1
|
|
|
|
|
|
Inventories
|
|
|
(149
|
)
|
|
|
118
|
|
Prepaid expenses and other current
assets
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Other long-term assets
|
|
|
(13
|
)
|
|
|
(11
|
)
|
Accounts payable
|
|
|
|
|
|
|
|
|
third parties
|
|
|
287
|
|
|
|
39
|
|
related parties
|
|
|
(2
|
)
|
|
|
(7
|
)
|
Accrued expenses and other current
liabilities
|
|
|
16
|
|
|
|
90
|
|
Accrued post-retirement benefits
|
|
|
23
|
|
|
|
21
|
|
Other long-term liabilities
|
|
|
18
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
6
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(77
|
)
|
|
|
(104
|
)
|
Disposal of business
net
|
|
|
(7
|
)
|
|
|
|
|
Cash advance received on pending
transfer of rights
|
|
|
15
|
|
|
|
|
|
Proceeds from sales of assets
|
|
|
3
|
|
|
|
9
|
|
Proceeds from loans
receivable net
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
19
|
|
related parties
|
|
|
27
|
|
|
|
373
|
|
Changes in investment in and
advances to non-consolidated affiliates
|
|
|
4
|
|
|
|
|
|
Premiums paid to purchase
derivative instruments
|
|
|
(2
|
)
|
|
|
(26
|
)
|
Net proceeds from settlement of
derivative instruments
|
|
|
227
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
190
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
4
Novelis
Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued) (in millions)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
$
|
20
|
|
|
$
|
2,750
|
|
Principal repayments
|
|
|
|
|
|
|
|
|
third parties
|
|
|
(297
|
)
|
|
|
(1,742
|
)
|
related parties
|
|
|
|
|
|
|
(1,180
|
)
|
Short-term borrowings
net
|
|
|
|
|
|
|
|
|
third parties
|
|
|
84
|
|
|
|
(137
|
)
|
related parties
|
|
|
|
|
|
|
(302
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
common
shareholders
|
|
|
(14
|
)
|
|
|
(20
|
)
|
minority
interests
|
|
|
(14
|
)
|
|
|
(7
|
)
|
Net receipts from Alcan
|
|
|
|
|
|
|
72
|
|
Debt issuance costs
|
|
|
(9
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(230
|
)
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(34
|
)
|
|
|
96
|
|
Effect of exchange rate changes
on cash balances held in foreign currencies
|
|
|
5
|
|
|
|
(3
|
)
|
Cash and cash
equivalents beginning of period
|
|
|
100
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of period
|
|
$
|
71
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of
cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
179
|
|
|
$
|
119
|
|
Income taxes paid
|
|
|
24
|
|
|
|
35
|
|
Principal payments on capital
lease obligations (included above in principal
repayments third parties)
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of
non-cash investing and financing activities relating to the
spin-off transaction and post-closing adjustments (2005
only):
|
|
|
|
|
|
|
|
|
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 to the condensed consolidated and
combined financial statements
are an integral part of these condensed statements.
5
Novelis
Inc.
(in millions, except number of common shares, which is in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Loss
|
|
|
Total
|
|
|
Balance as of December 31,
2005
|
|
|
74,006
|
|
|
$
|
|
|
|
$
|
425
|
|
|
$
|
92
|
|
|
$
|
(84
|
)
|
|
$
|
433
|
|
Activity for the Nine Months
Ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
(170
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Currency translation
adjustment net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
105
|
|
Change in fair value of effective
portion of hedges net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Dividends on common shares
($0.19 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2006
|
|
|
74,006
|
|
|
$
|
|
|
|
$
|
427
|
|
|
$
|
(92
|
)
|
|
$
|
(13
|
)
|
|
$
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the condensed consolidated and
combined financial statements are an integral part of this
condensed statement.
6
Novelis
Inc.
COMBINED
FINANCIAL STATEMENTS (unaudited)
|
|
1.
|
Business
and Summary of Significant Accounting Policies
|
Organization
and Description of Business
Novelis Inc., formed in Canada on September 21, 2004, and
its subsidiaries, is the worlds leading aluminum rolled
products producer based on shipment volume. We produce aluminum
sheet and light gauge products 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, 2006, we had operations on four continents:
North America; Europe; Asia and South America, through 34
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,
primary aluminum smelting and power generation facilities that
are integrated with our rolling plants in Brazil.
References herein to Novelis, the
Company, we, our, or
us refer to Novelis Inc. and its subsidiaries unless
the context specifically indicates otherwise. References herein
to Alcan refer to Alcan, Inc.
The accompanying unaudited condensed consolidated and combined
financial statements should be read in conjunction with our
audited consolidated and combined financial statements and
accompanying notes in our Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the United
States Securities and Exchange Commission (SEC) on
August 25, 2006, as amended on October 20, 2006.
Unless otherwise specifically identified as our original
Form 10-K,
any references to our
Form 10-K
made throughout this document shall refer to our Annual Report
on
Form 10-K
for the year ended December 31, 2005 filed with the SEC on
August 25, 2006, as amended.
The accompanying (a) consolidated balance sheet as of
December 31, 2005, which has been derived from audited
financial statements, and (b) unaudited condensed
consolidated and combined financial statements have been
prepared pursuant to SEC
Rule 10-01
of
Regulation S-X.
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.
The unaudited results of operations for the interim periods
shown in these financial statements are not necessarily
indicative of operating results for the entire year. In the
opinion of management, the accompanying unaudited 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,
2006 and December 31, 2005; the results of our operations
for the three months and nine months ended September 30,
2006 and 2005; our cash flows for the nine months ended
September 30, 2006 and 2005; and changes in our
shareholders equity for the nine months ended
September 30, 2006.
Certain reclassifications of prior periods amounts have
been made to conform to the presentation adopted for the current
period.
Recently
Issued Accounting Standards
In September 2006, the Staff of the SEC issued Staff Accounting
Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB No. 108
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. We will adopt SAB No. 108 as
of December 31, 2006. We do not expect the adoption of
SAB No. 108 to have a material impact on our
consolidated financial position, results of operations and cash
flows.
7
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
In September 2006, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, which requires a company that sponsors one or more
single-employer defined benefit pension and other postretirement
benefit plans (benefit plans) to recognize in its balance sheet
the funded status of a benefit plan, which is the difference
between the fair value of plan assets and the benefit
obligation, as a net asset or liability, with an offsetting
adjustment to accumulated other comprehensive income in
shareholders equity. FASB Statement No. 158 requires
additional financial statement disclosure regarding certain
effects on net periodic benefit cost. FASB Statement
No. 158 requires prospective application and the
recognition and disclosure requirements are effective for fiscal
years ending after December 15, 2006. We will adopt FASB
Statement No. 158 as of December 31, 2006. We are
currently evaluating the impact of the adoption of FASB
Statement No. 158 on our consolidated financial position,
results of operations and cash flows.
In addition, FASB Statement No. 158 requires that a company
measure defined benefit plan assets and obligations at its
year-end balance sheet date. We currently use our year-end
balance sheet date as our measurement date and, as a result,
that new requirement will not affect us.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. FASB
Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently
evaluating the potential impact, if any, of the adoption of FASB
Statement No. 157 on our consolidated financial position,
results of operations and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which is
effective for fiscal years beginning after December 15,
2006. FASB Interpretation No. 48 clarifies the accounting
for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FASB Interpretation No. 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We are currently evaluating the potential impact, if
any, of the adoption of FASB Interpretation No. 48 on our
consolidated financial position, results of operations and cash
flows.
We have determined that all other recently issued accounting
pronouncements will not have a material impact on our
consolidated financial position, results of operations and cash
flows, or do not apply to our operations.
8
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
2.
|
Restructuring
Programs
|
All restructuring provisions and recoveries are included in
Restructuring charges net in the accompanying
condensed consolidated and combined statements of operations
unless otherwise stated below. The following table summarizes
the changes in our restructuring liabilities during the nine
months ended September 30, 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
North America
|
|
|
Total
|
|
|
|
|
|
|
Other Exit
|
|
|
|
|
|
Other Exit
|
|
|
|
|
|
Other Exit
|
|
|
|
Severance
|
|
|
Related
|
|
|
Severance
|
|
|
Related
|
|
|
Severance
|
|
|
Related
|
|
|
Balance as of December 31,
2005
|
|
$
|
9
|
|
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
19
|
|
Provisions net
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Cash payments
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Adjustments other
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2006
|
|
|
8
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
19
|
|
Provisions net
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Cash payments
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Adjustments other
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2006
|
|
|
8
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
18
|
|
Provisions net
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
2
|
|
Cash payments
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Adjustments other
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2006
|
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2006, we announced a restructuring of our European
central management and administration activities in Zurich,
Switzerland, to reduce overhead costs and streamline support
functions. In addition, we are exiting our Neuhausen research
and development center in Switzerland. These programs have begun
and through September 30, 2006, we have incurred costs of
approximately $3 million. We expect to incur total costs of
approximately $6 million related to these programs.
In July 2006, we announced additional restructuring actions at
our Goettingen facility in Germany to reduce overhead
administrative costs and streamline functions. We incurred
approximately $3 million related to severance costs during
the three months ended September 30, 2006.
In March 2006, we announced additional actions in the
restructuring of our European operations, with the
reorganization of our plants in Ohle and Ludenscheid, Germany,
including the closing of two non-core business lines located
within those facilities. In connection with the reorganization
of our Ohle and Ludenscheid plants, we incurred costs of
approximately $3 million during the nine months ended
September 30, 2006, and expect to incur additional costs of
$3 million (primarily severance) by the end of 2007.
In November 2005, we announced our intent to close our casting
alloy facility in Borgofranco, Italy during March 2006. In 2005,
we recognized charges of $5 million for asset impairments
and $9 million for other exit related costs, including
$6 million for environmental remediation expenses relating
to this plant closing. We have incurred additional costs of
approximately $2 million through September 30, 2006
and expect all activities (including environmental remediation)
to be complete by 2009.
9
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
3.
|
Loss on
Disposal of Business
|
In March 2006, we disposed of our aluminum rolling mill in
Annecy, France (Annecy) for consideration in the amount of one
Euro. We recorded a pre-tax charge of $15 million in
connection with the sale, which is included in Other (income)
expenses net in the accompanying condensed
consolidated statement of operations for the nine months ended
September 30, 2006. The charge was comprised primarily of
$8 million representing our investment in and advances to
Annecy, cash payments of $5 million we made in connection
with the disposal of the business, and other cash fees and
expenses we paid of an additional $2 million.
Inventories consist of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
Finished goods
|
|
$
|
393
|
|
|
$
|
313
|
|
Work in process
|
|
|
314
|
|
|
|
234
|
|
Raw materials
|
|
|
527
|
|
|
|
498
|
|
Supplies
|
|
|
123
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,357
|
|
|
|
1,168
|
|
Allowances
|
|
|
(48
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,309
|
|
|
$
|
1,128
|
|
|
|
|
|
|
|
|
|
|
In November 2004, the FASB issued FASB Statement No. 151,
Inventory Cost, which amends the guidance in Accounting
Research Bulletin (ARB) No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling
costs and wasted materials by requiring those items to be
recognized as current period charges. Additionally, FASB
Statement No. 151 requires that fixed production overheads
be allocated to conversion costs based on the normal capacity of
the production facilities. FASB Statement No. 151 is
effective prospectively for inventory costs incurred in fiscal
years beginning after June 15, 2005. We adopted FASB
Statement No. 151 on January 1, 2006, and its adoption
did not have a material effect on our consolidated financial
position, results of operations or cash flows.
|
|
5.
|
Property,
Plant and Equipment
|
Property, plant and equipment net, consists of the
following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
Land and property rights
|
|
$
|
96
|
|
|
$
|
90
|
|
Buildings
|
|
|
881
|
|
|
|
845
|
|
Machinery and equipment
|
|
|
4,616
|
|
|
|
4,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,593
|
|
|
|
5,342
|
|
Accumulated depreciation and
amortization
|
|
|
(3,557
|
)
|
|
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,036
|
|
|
|
2,023
|
|
Construction in progress
|
|
|
94
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,130
|
|
|
$
|
2,160
|
|
|
|
|
|
|
|
|
|
|
In August 2006, we entered into a preliminary agreement to
transfer our rights to develop and operate two hydroelectric
power plants in South America with generating capacity of 155
megawatts. We received an
10
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
advance cash payment of approximately $15 million upon
signing of the preliminary agreement, however no gain was
recognized at that time because the transfer was subject to
regulatory approval by the National Electric Energy Agency,
which we received in November 2006. Accordingly, we will
recognize a pre-tax gain of approximately $12 million
during the fourth quarter of 2006.
|
|
6.
|
Investment
in and Advances to Non-consolidated Affiliates and Related Party
Transactions
|
The following table summarizes the ownership structure and our
ownership percentage of the non-consolidated affiliates we
account for using the equity method. We have no material
investments in affiliates accounted for using the cost method.
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
Affiliate Name
|
|
Ownership Structure
|
|
Percentage
|
|
|
Aluminium Norf GmbH
|
|
Corporation
|
|
|
50
|
%
|
Consorcio Candonga
|
|
Unincorporated Joint Venture
|
|
|
50
|
%
|
Petrocoque S.A. Industria e
Comercio
|
|
Corporation
|
|
|
25
|
%
|
EuroNorca Partners
|
|
General Partnership
|
|
|
50
|
%
|
Deutsche Aluminium Verpackung
Recycling GmbH
|
|
Corporation
|
|
|
30
|
%
|
France Aluminium Recyclage
S.A.
|
|
Public Limited Company
|
|
|
20
|
%
|
We do not control these affiliates, but have the ability to
exercise significant influence over their operating and
financial policies. The following table summarizes the combined
results of operations of our equity method affiliates (on a 100%
basis, in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
144
|
|
|
$
|
125
|
|
|
$
|
420
|
|
|
$
|
361
|
|
Costs, expenses and provisions for
taxes on income
|
|
|
129
|
|
|
|
120
|
|
|
|
392
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15
|
|
|
$
|
5
|
|
|
$
|
28
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying condensed consolidated and combined
financial statements are transactions and balances arising from
business we conduct with these non-consolidated affiliates,
which we classify as related party transactions and balances.
The following table describes the nature and amounts of
transactions that we had with these non-consolidated related
parties during the three months and nine months ended
September 30, 2006 and 2005 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Purchases of tolling services,
electricity and inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminium Norf GmbH (A)
|
|
$
|
60
|
|
|
$
|
52
|
|
|
$
|
170
|
|
|
$
|
154
|
|
Consorcio Candonga (B)
|
|
|
3
|
|
|
|
2
|
|
|
|
10
|
|
|
|
6
|
|
Petrocoque S.A. Industria e
Comercio (C)
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminium Norf GmbH (D)
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
(A) |
|
We purchase tolling services (the conversion of customer-owned
metal) from Aluminium Norf GmbH. |
11
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
|
(B) |
|
We purchase electricity from Consorcio Candonga for our
operations in South America. |
|
(C) |
|
We purchase calcined-coke from Petrocoque S.A. Industria e
Comercio for use in our smelting operations in South America. |
|
(D) |
|
We earn interest income on a loan due from Aluminium Norf GmbH. |
The table below describes the period-end account balances that
we have with these non-consolidated affiliates, shown as related
party balances in the accompanying condensed consolidated
balance sheets (in millions). We have no other material related
party balances.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
Accounts receivable (A)
|
|
$
|
22
|
|
|
$
|
33
|
|
Other long-term assets (A)
|
|
|
61
|
|
|
|
71
|
|
Accounts payable (B)
|
|
|
38
|
|
|
|
38
|
|
|
|
|
(A) |
|
The balances represent current and non-current portions of a
loan due from Aluminium Norf GmbH. |
|
(B) |
|
We purchase tolling services from Aluminium Norf GmbH and
electricity from Consorcio Candonga. |
We entered into an agreement to sell the common and preferred
shares of our 25% interest in Petrocoque S.A. Industria e
Comercio (Petrocoque) to an existing shareholder of Petrocoque
for approximately $20 million. In November 2006, the sale
was consummated, and we will recognize a pre-tax gain of
approximately $14 million in the fourth quarter.
|
|
7.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
Accrued payroll
|
|
$
|
145
|
|
|
$
|
152
|
|
Accrued settlement of legal claim
|
|
|
39
|
|
|
|
71
|
|
Accrued interest payable
|
|
|
25
|
|
|
|
51
|
|
Accrued income taxes
|
|
|
68
|
|
|
|
55
|
|
Current portion of fair value of
derivative instruments
|
|
|
41
|
|
|
|
22
|
|
Other current liabilities
|
|
|
384
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
702
|
|
|
$
|
641
|
|
|
|
|
|
|
|
|
|
|
12
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Long-term debt consists of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Rates(A)
|
|
|
2006
|
|
|
2005
|
|
|
Novelis Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate Term Loan B,
due 2012
|
|
|
7.22
|
%(B)
|
|
$
|
260
|
|
|
$
|
342
|
|
7.25% Senior Notes, due 2015
|
|
|
7.25
|
%(C)
|
|
|
1,400
|
|
|
|
1,400
|
|
Novelis Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate Term Loan B,
due 2012
|
|
|
7.22
|
%(B)
|
|
|
451
|
|
|
|
593
|
|
Novelis Switzerland
S.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, due 2020
(Swiss francs (CHF) 58 million)
|
|
|
7.50
|
%
|
|
|
46
|
|
|
|
45
|
|
Capital lease obligation, due 2011
(CHF 4 million)
|
|
|
2.49
|
%
|
|
|
4
|
|
|
|
4
|
|
Novelis Korea Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan, due 2008
|
|
|
5.30
|
%
|
|
|
30
|
|
|
|
50
|
|
Bank loan, due 2008 (Korean won
(KRW) 30 billion)
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Bank loan, due 2007
|
|
|
4.55
|
%
|
|
|
70
|
|
|
|
70
|
|
Bank loan, due 2007 (KRW
40 billion)
|
|
|
4.80
|
%
|
|
|
42
|
|
|
|
40
|
|
Bank loan, due 2007 (KRW
25 billion)
|
|
|
4.45
|
%
|
|
|
27
|
|
|
|
25
|
|
Bank loans, due 2008 through 2011
(KRW 1 billion)
|
|
|
4.07
|
%(D)
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt, due 2006 through 2012
|
|
|
2.55
|
%(D)
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
2,333
|
|
|
|
2,603
|
|
Less: current portion
|
|
|
|
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt net
of current portion
|
|
|
|
|
|
$
|
2,329
|
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Interest rates are as of September 30, 2006 and exclude the
effects of any related interest rate swaps or amortization of
debt issuance costs. |
|
(B) |
|
The interest rate for the Term Loans does not include any
applicable margin discussed below. |
|
(C) |
|
The interest rate for the Senior Notes does not include
additional special interest discussed below. |
|
(D) |
|
Weighted average interest rate. |
Floating
Rate Term Loan B
In connection with our spin-off from Alcan, we entered into
senior secured credit facilities providing for aggregate
borrowings of up to $1.8 billion. These facilities consist
of: (1) a $1.3 billion seven-year senior secured Term
Loan B facility, bearing interest at London Interbank
Offered Rate (LIBOR) plus 1.75%, all of which was borrowed on
January 10, 2005; and (2) a $500 million
five-year multi-currency revolving credit and letters of credit
facility.
Unamortized debt issuance costs related to the senior secured
credit facilities are included in Other long-term assets
in the accompanying condensed and consolidated balance sheets,
and were $22 million as of September 30, 2006.
13
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Through September 30, 2006, we satisfied the 1% per
annum principal amortization requirement through fiscal year
2010, as well as $511 million of the principal amortization
requirement for 2011. No further minimum principal payments are
due until 2011. As of September 30, 2006, there was
$711 million outstanding under this facility.
Our senior secured credit facilities include 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.
On October 16, 2006, we amended the financial covenants to
our senior secured credit facilities. In particular, we amended
our maximum total leverage, minimum interest coverage, and
minimum fixed charge coverage ratios through the quarter ending
March 31, 2008. We also amended and modified other
provisions of the senior secured credit facilities to permit
more efficient ordinary-course operations, including increasing
the amounts of certain permitted investments and asset-backed
securitizations, permitting nominal quarterly dividends, and the
transfer of an intercompany loan to another subsidiary. In
return for these amendments and modifications, we paid aggregate
fees of approximately $3 million to lenders who consented
to the amendments and modifications, and agreed to continue
paying the higher applicable margins on our senior secured
credit facilities, and the higher unused commitment fees on our
revolving credit facilities that were instated with a prior
waiver and consent agreement in May 2006. Specifically, we
agreed to a 1.25% applicable margin for Term Loans maintained as
Base Rate Loans, a 2.25% applicable margin for Term Loans
maintained as Eurocurrency Rate Loans, a 1.50% applicable margin
for Revolver Loans maintained as Base Rate Loans, a 2.50%
applicable margin for Revolver Loans maintained as Eurocurrency
Rate Loans and a 62.5 basis point commitment fee on the
unused portion of the revolving credit facility, until such time
as the compliance certificate for the fiscal quarter ending
March 31, 2008 has been delivered.
The amended maximum total leverage, minimum interest coverage
and minimum fixed charge coverage ratios for the period ended
September 30, 2006 are 6.5 to 1; 2 to 1; and 0.8 to 1,
respectively. We were in compliance with these financial
covenants as of the period ended September 30, 2006. In
addition, as described below, we previously obtained waivers
from our lenders related to our inability to timely file our SEC
reports.
7.25% Senior
Notes
On February 3, 2005, we issued $1.4 billion aggregate
principal amount of senior unsecured debt securities (Senior
Notes). Unamortized debt issuance costs related to the Senior
Notes are included in Other long-term assets in the
accompanying condensed consolidated balance sheets and were
$25 million as of September 30, 2006.
Under the indenture that governs the Senior Notes, we are
subject to certain restrictive covenants applicable to incurring
additional debt and providing additional guarantees, paying
dividends beyond certain amounts and making other restricted
payments, sales and transfers of assets, certain consolidations
or mergers, and certain transactions with affiliates. We were in
compliance with these covenants as of September 30, 2006.
The indenture governing the Senior Notes and the related
registration rights agreement required us to file a registration
statement for the notes and exchange the original, privately
placed notes with registered notes. 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 the 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. The indenture and the registration
rights agreement provide that the rate of additional special
interest increases by 0.25% during each subsequent
90-day
period until the exchange offer closes, with the maximum amount
of additional special interest being
14
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
1.00% per year. On August 8, 2006, the rate of
additional special interest increased to 1.00%. On
October 17, 2006, we extended the offer to exchange the
Senior Notes to December 15, 2006. We expect to file a
post-effective amendment to the registration statement and
complete the exchange as soon as practicable. We will cease
paying additional special interest once the exchange offer is
completed.
Korean
Bank Loans
In December 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 into a 4.55% fixed rate KRW 73 billion
loan due in December 2007. In February 2005, Novelis Korea
entered into a $50 million floating rate long-term loan
which was subsequently swapped into a 5.30% fixed rate KRW
51 billion loan due in February 2008.
In the first quarter of 2006, we repaid our KRW 30 billion
($30 million) 5.75% fixed rate loan originally due October
2008. In May 2006, a portion of the $50 million (KRW
51 billion) 5.30% fixed rate loan was refinanced into a KRW
19 billion ($20 million) short-term floating rate
loan, which was paid in June 2006. In October 2006, the balance
of this loan was refinanced into two short-term floating rate
loans: (1) a KRW 10 billion ($11 million) loan,
which was repaid in October 2006 and (2) a KRW
20 billion ($21 million) loan due within six months.
We were in compliance with all debt covenants related to our
Novelis Korea bank loans as of September 30, 2006.
Interest
Rate Swaps
As of September 30, 2006, we had entered into interest rate
swaps to fix the
3-month
LIBOR interest rate on a total of $200 million of the
floating rate Term Loan B debt at effective weighted
average interest rates and amounts expiring as follows: 3.8% on
$100 million through February 3, 2007; and 3.9% on
$100 million through February 3, 2008. We are still
obligated to pay any applicable margin, as defined in our senior
secured credit facilities, as amended, in addition to these
interest rates. As of September 30, 2006, 78% of our debt
was fixed rate and 22% was variable rate.
Impact of
Late SEC Filings on our Debt Agreements
The restatement of our unaudited condensed consolidated and
combined financial statements for the quarters ended
March 31, 2005 and June 30, 2005 (filed on
May 16, 2006) resulted in delays in the filing of our
Quarterly Report on
Form 10-Q
for the period ended September 30, 2005 (filed on
May 16, 2006), our Annual Report on
Form 10-K
for the year ended December 31, 2005 (filed on
August 25, 2006 and amended on October 20, 2006), our
Quarterly Report on
Form 10-Q
for the period ended March 31, 2006 (filed on
September 15, 2006) and our Quarterly Report on
Form 10-Q
for the period ended June 30, 2006 (filed on
October 20, 2006).
The terms of our senior secured credit facilities require that
we deliver unaudited quarterly and audited annual financial
statements to our lenders within specified periods of time. Due
to the delays, we obtained a series of five waiver and consent
agreements from the lenders under the facility to extend the
various filing deadlines. Under the most recent waiver, we
extended the filing deadline for this
Form 10-Q
to the earlier of 30 days after the receipt of an effective
notice of default under the Senior Notes and December 29,
2006 (as applicable).
To date, fees related to the five waiver and consent agreements
total $6 million, including $1 million and
$5 million which were incurred during the three months and
nine months ended September 30, 2006, respectively. These
fees are being amortized over the remaining life of the related
borrowing in Interest expense and amortization of debt
issuance costs net using the effective
interest amortization method.
15
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Unamortized fees related to these waiver and consent agreements
are included in Other long-term assets in the
accompanying condensed consolidated balance sheets and total
$5 million as of September 30, 2006.
On July 26, 2006, we entered into a Commitment Letter with
Citigroup Global Markets Inc. for backstop financing facilities
in an amount up to $2.855 billion. We paid fees of
approximately $4 million in conjunction with this
commitment. The Commitment Letter was originally set to expire
on October 2, 2006; however, it was amended to and did
expire on October 31, 2006. Accordingly, during the fourth
quarter of 2006, we will charge the $4 million in fees to
Interest expense and debt issuance costs net.
Lines of
Credit /Short Term Borrowings
As of September 30, 2006, our short-term borrowings were
$113 million, consisting of (1) $70 million in
short-term loans in the United States and the United Kingdom
under our $500 million revolving credit facility;
(2) a $15 million unsecured short-term loan in Korea;
and (3) $28 million in bank overdrafts. As of
September 30, 2006, $17 million of our
$500 million revolving credit facility was utilized for
letters of credit. As of September 30, 2006, we had
approximately $413 million available under our
$500 million revolving credit facility, and the weighted
average interest rate on our short-term borrowings was 6.96%
(2.69% as of December 31, 2005).
Commitment fees related to the unused portion of the
$500 million revolving credit facility, prior to the fourth
waiver and consent agreement dated May 10, 2006, ranged
between 0.375% and 0.5% per annum, depending on certain
financial ratios we achieve. As discussed above, in connection
with the fourth waiver and consent agreement, these commitment
fees increased to 0.625%. Under the terms of the
October 16, 2006 amendment to our senior secured credit
facilities, these higher fees will remain in effect until such
time as the compliance certificate for the fiscal quarter ending
March 31, 2008 has been delivered.
As of September 30, 2006, all of our $25 million
unsecured line of credit facility in Brazil was available for
use.
|
|
9.
|
Other
Comprehensive Income (Loss)
|
A summary of the components of other comprehensive income (loss)
is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net change in foreign currency
translation adjustments
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
109
|
|
|
$
|
(146
|
)
|
Net change in fair value of
effective portion of hedges
|
|
|
11
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
Net change in minimum pension
liability
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
(loss) adjustments, before income tax effect
|
|
|
21
|
|
|
|
1
|
|
|
|
75
|
|
|
|
(151
|
)
|
Income tax effect
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss)
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
71
|
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Accumulated other comprehensive loss, net of income tax effects,
consists of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
Foreign currency translation
adjustments
|
|
$
|
70
|
|
|
$
|
(35
|
)
|
Fair value of effective portion of
hedges net
|
|
|
(30
|
)
|
|
|
|
|
Minimum pension liability
|
|
|
(53
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13
|
)
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Stock-Based
Compensation
|
On January 1, 2006, we adopted FASB Statement No. 123
(Revised), Share-Based Payment, which is a revision to
FASB Statement No. 123, Accounting for Stock-Based
Compensation. FASB Statement No. 123 (Revised) requires
the recognition of compensation expense for a share-based award
over an employees requisite service period based on the
awards grant date fair value, subject to adjustment.
We adopted FASB Statement No. 123 (Revised) using the
modified prospective method. The modified prospective method
requires companies to record compensation cost beginning with
the effective date based on the requirements of FASB Statement
No. 123 (Revised) for all share-based payments granted
after the effective date. All awards granted to employees prior
to the effective date of FASB Statement No. 123 (Revised)
that remain unvested at the adoption date will continue to be
expensed over the remaining service period.
The cumulative effect of the accounting change, net of tax, as
of January 1, 2006 was approximately $1 million, and
was not considered material as to require presentation as a
cumulative effect of accounting change in the accompanying
condensed consolidated and combined statements of operations.
Accordingly, the expense recognized as a result of adopting FASB
Statement No. 123 (Revised) was included in Selling,
general and administrative expenses in our condensed
consolidated statement of operations in the first quarter of
2006.
Prior to the adoption of FASB Statement No. 123 (Revised),
we presented all tax benefits of deductions resulting from the
exercise of stock options within operating cash flows in the
condensed consolidated and combined statements of cash flows.
Beginning on January 1, 2006, we changed our cash flow
presentation in accordance with FASB Statement No. 123
(Revised), which requires that the cash flows resulting from tax
benefits for deductions in excess of compensation cost
recognized be classified within financing cash flows. During the
three months and nine months ended September 30, 2006,
there were no tax payments made that were reduced by excess tax
benefits.
Compensation
to be Settled in Stock
Novelis
2006 Incentive Plan
At our annual shareholders meeting on October 26, 2006, our
shareholders approved the Novelis 2006 Incentive Plan (2006
Incentive Plan) to effectively replace the Novelis Conversion
Plan of 2005 (the Conversion Plan) and Stock Price Appreciation
Unit Plan (both described below). Under the 2006 Incentive Plan,
up to an aggregate number of 7,000,000 shares of Novelis
common stock are authorized to be issued in the form of stock
options, stock appreciation rights (SARs), restricted shares,
restricted share units, performance shares and other stock-based
incentives. Stock options and SARs expire seven years from their
grant date. SARs may be settled in cash, common shares or a
combination thereof, at the election of the holder. Any shares
that are subject to an award under the 2006 Incentive Plan other
than stock options and SARs will be counted against the
7,000,000 share limit as 1.75 shares for every one
share subject to the award. The number of annual awards issued
to any single employee or non-employee director is limited. The
Human Resources Committee of our board of directors has the
discretion to determine which employees and non-employee
directors receive awards and the type, number and terms and
conditions of such awards under
17
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
the 2006 Incentive Plan. Generally, all vested awards expire
90 days after termination of employment, except in the case
of death, disability or retirement, when the vested awards
expire after one year. All awards vest immediately upon a change
in control of the Company.
2006
Stock Options
On October 26, 2006, our board of directors authorized a
grant of an aggregate of 884,080 seven-year non-qualified stock
options under the 2006 Incentive Plan at an exercise price of
$25.53 to certain of our executive officers and key employees.
These options are comprised of two equal portions: premium and
non-premium options. Both the premium and non-premium options
vest ratably in 25% annual increments over the four year period
measured from October 26, 2006, and may be exercised, in
whole or in part, once vested. However, while the premium and
non-premium options carry the same exercise price of $25.53, in
no event may the premium options be exercised unless the fair
market value per share, as defined in the 2006 Incentive Plan,
on the business day preceding the exercise date equals or
exceeds $28.59. If the participant retires before
October 26, 2007, the options will be forfeited. If the
participant retires on or after October 26, 2007, the
options will continue to vest in accordance with the vesting
schedule, but must be exercised no later than the third
anniversary following the participants retirement date. In
the event of the participants death or disability, all of
the options will become immediately vested, but must be
exercised no later than the first anniversary following the
participants termination of employment. All of the options
become immediately vested and exercisable, without regard to the
per share price restriction on premium options, upon a change in
control of the Company.
Recognition
Agreements
On September 25, 2006, we entered into Recognition
Agreements (Agreements) with certain executive officers and
other key employees (Executives) to retain and reward them for
continued dedication towards corporate objectives. Under the
terms of the Agreements, Executives that remain continuously
employed by us through the vesting dates of December 31,
2007 and December 31, 2008 are entitled to receive one-half
of their total awards on each vesting date, payable in shares of
Novelis common stock.
The number of shares payable under the Agreements varies by
Executive. Currently, there are 145,800 shares subject to
award. In accordance with the provisions of FASB Statement
No. 123 (Revised), we valued these awards as of the
issuance date and will amortize their cost over the requisite
service period of the Executives. As of September 30, 2006,
there was approximately $1.7 million of unamortized
compensation expense related to each of the two vesting dates,
which is expected to be recognized over the next 1.25 years
and 2.25 years, respectively.
Novelis
Conversion Plan of 2005
On January 5, 2005, our board of directors adopted the
Novelis Conversion Plan of 2005 (the Conversion Plan) to allow
for all Alcan stock options held by employees of Alcan who
became our employees following our spin-off from Alcan to be
replaced with options to purchase our common shares. While new
options may be granted under the Conversion Plan, none have been
granted through September 30, 2006. All options expire ten
years from their date of grant. All converted options that were
vested on the spin-off date continued to be vested. Unvested
options as of the spin-off date vest in four equal annual
installments beginning on January 6, 2006, the first
anniversary of the spin-off date. However, in October 2006, we
amended the Conversion Plan to allow (1) the immediate
vesting of all options upon the death or retirement of the
optionee and (2) in the case of an unsolicited change of
control of Novelis, all options will vest immediately. The
amendment of the Conversion Plan will be accounted for as a
modification under FASB Statement No. 123 (Revised) and as
such, we will recognize additional compensation cost for the
excess, if any, of the fair value of the modified
18
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
options over the fair value of the original options immediately
before the terms were modified. We are currently in the process
of evaluating the impact, if any, of this modification on our
consolidated financial position, results of operations and cash
flows.
As of September 30, 2006, there were 2,644,665 options
outstanding at a weighted average exercise price of $21.62, and
871,246 of these options were exercisable at a weighted average
exercise price of $21.28.
The table below shows our stock option activity for the nine
months ended September 30, 2006 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Options outstanding as of
December 31, 2005
|
|
|
2,704,790
|
|
|
$
|
21.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,298
|
)
|
|
$
|
18.31
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(55,827
|
)
|
|
$
|
20.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of
September 30, 2006
|
|
|
2,644,665
|
|
|
$
|
21.62
|
|
|
|
6.5
|
|
|
$
|
10,497,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
September 30, 2006
|
|
|
871,246
|
|
|
$
|
21.28
|
|
|
|
6.1
|
|
|
$
|
3,752,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Black-Scholes valuation model to determine the fair
value of the options outstanding. The fair value of each option
was estimated using the weighted average assumptions shown
below. No new options have been issued since the adoption of the
Conversion Plan. Through September 30, 2006, we have not
changed the assumptions we use to measure the fair value of the
options.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
1.56%
|
|
|
|
1.56%
|
|
Expected volatility
|
|
|
30.30%
|
|
|
|
30.30%
|
|
Risk-free interest rate
|
|
|
3.73%
|
|
|
|
3.73%
|
|
Expected life
|
|
|
5.47 years
|
|
|
|
5.47 years
|
|
Total compensation cost recognized for stock options issued to
employees was $1 million for both of the three months ended
September 30, 2006 and 2005, and $2 million for both
of the nine months ended September 30, 2006 and 2005. These
amounts were included in Selling, general and administrative
expenses.
Compensation
to be Settled in Cash
Upon adoption of FASB Statement No. 123 (Revised), we
determined that all of our compensation plans settled in cash
are considered liability based awards. As such, liabilities for
awards under these plans are required to be measured at each
reporting date until the date of settlement. Various valuation
methods were used to determine the fair value of these awards,
as discussed below.
Prior to January 1, 2006, we applied the intrinsic value
based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for
stock-based compensation plans settled in cash. We incurred a
liability when the vesting of the award became probable under
the guidance provided by FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans. When variable
19
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
plan awards were granted, we measured compensation expense as
the amount by which the quoted market value of the shares of our
stock covered by the grant exceeded the option price or value
specified, by reference to a market price or otherwise, subject
to any appreciation limitations under the plan. Changes, either
increases or decreases, in the quoted market value of those
shares between the date of grant and the measurement date
resulted in a prospective change in the measurement of
compensation expense for the right or award.
Stock
Appreciation Rights
On October 26, 2006, our board of directors authorized a
grant of 381,090 Stock Appreciation Rights under the 2006
Incentive Plan at an exercise price of $25.53 to certain of our
executive officers and key employees (as discussed above). The
terms of the SARs are identical in all material respects to
those of the 2006 Stock Options, except that the incremental
increase in the value of the SARs is settled in cash rather than
shares of Novelis common stock at the time of exercise.
The SARs are comprised of two equal portions: premium and
non-premium SARs. Both the premium and non-premium SARs vest
ratably in 25% annual increments over the four year period
measured from October 26, 2006, and may be exercised, in
whole or in part, once vested. However, while the premium and
non-premium SARs carry the same exercise price of $25.53, in no
event may the premium award shares be exercised unless the fair
market value per share, as defined in the 2006 Incentive Plan,
on the business day preceding the exercise date equals or
exceeds $28.59. If the participant retires before
October 26, 2007, the SARs will be forfeited. If the
participant retires on or after October 26, 2007, SARs will
continue to vest in accordance with the vesting schedule, but
must be exercised no later than the third anniversary following
the participants retirement date. In the event of the
participants death or disability, all of the SARs will
become immediately vested, but must be exercised no later than
the first anniversary following the participants
termination of employment. All of the SARs will become
immediately vested and exercisable, without regard to the per
share price restriction on premium award shares, upon a change
in control of the Company.
Stock
Price Appreciation Unit Plan
Prior to the spin-off, some Alcan employees who later
transferred to Novelis held Alcan stock price appreciation units
(SPAUs). These units entitled them to receive cash equal to the
excess of the market value of an Alcan common share on the
exercise date of a SPAU over the market value of an Alcan common
share on its grant date. On January 6, 2005, these
employees received 418,777 Novelis SPAUs to replace their
211,035 Alcan SPAUs at a weighted average exercise price of
$22.04. None of the SPAUs have been exercised, but as of
September 30, 2006, 115,419 SPAUs were exercisable at a
weighted average exercise price of $21.53. As of
September 30, 2006, there was $2 million of
unamortized compensation cost related to non-vested SPAUs, which
is expected to be recognized over a remaining vesting period of
2.25 years.
Upon adoption of FASB Statement No. 123 (Revised), we
changed from the intrinsic value method to the Black-Scholes
valuation model to estimate the fair value of SPAUs granted to
employees.
20
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The table below shows our SPAU activity for the nine months
ended September 30, 2006 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
SPAUs
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
SPAUs outstanding as of
December 31, 2005
|
|
|
418,777
|
|
|
$
|
22.04
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPAUs outstanding as of
September 30, 2006
|
|
|
418,777
|
|
|
$
|
22.04
|
|
|
|
7.3
|
|
|
$
|
1,488,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPAUs exercisable as of
September 30, 2006
|
|
|
115,419
|
|
|
$
|
21.53
|
|
|
|
7.2
|
|
|
$
|
468,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each SPAU was estimated as of
September 30, 2006 using the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Range of
|
|
Average
|
|
|
|
Assumptions
|
|
Assumptions
|
|
|
Dividend yield
|
|
0.16%
|
|
|
0.16%
|
|
Expected volatility
|
|
38.10 to 42.40%
|
|
|
41.34%
|
|
Risk-free interest rate
|
|
4.56 to 4.68%
|
|
|
4.58%
|
|
Expected life
|
|
2.49 to 4.62 years
|
|
|
4.13 years
|
|
Total
Shareholder Returns Performance Plan
Some Alcan employees who later transferred to Novelis were
entitled to receive cash awards under the Alcan Total
Shareholder Returns Performance Plan (TSR). TSR was a cash
incentive plan which rewarded 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 starting on
October 1, 2002 and 2003. On January 6, 2005, these
employees immediately ceased participating in and accruing
benefits under the TSR. 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 awards for all of the
TSR participants were converted into 452,667 Novelis restricted
share units (RSUs). At the end of each performance period, each
holder of RSUs will receive net proceeds based on the price of
Novelis common shares at that time, including declared
dividends. In October 2005, an aggregate of $7 million was
paid to employees who held RSUs that had vested on
September 30, 2005. On September 30, 2006, there were
120,949 RSUs and related dividends outstanding, and these were
paid to employees in October 2006 in the aggregate amount of
$2.8 million. During the three months ended
September 30, 2006, $0.6 million of compensation cost
was expensed, of which $0.4 million was previously
unamortized.
21
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The table below shows our RSU activity for the nine months ended
September 30, 2006. RSUs granted represent the unit
equivalent of dividends earned during the period (all amounts
actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Redemption
|
|
|
Intrinsic
|
|
|
|
RSUs
|
|
|
Price
|
|
|
Value
|
|
|
RSUs outstanding as of
December 31, 2005
|
|
|
119,842
|
|
|
$
|
20.89
|
|
|
|
|
|
Granted
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs outstanding as of
September 30, 2006
|
|
|
120,949
|
|
|
$
|
23.68
|
|
|
$
|
2,864,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Share Unit Plan For Non-Executive Directors
On January 5, 2005, Novelis 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 Toronto Stock
Exchange (TSX) and New York Stock Exchange (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 the participants
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.
The table below shows our DDSU activity for the nine months
ended September 30, 2006 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Redemption
|
|
|
Intrinsic
|
|
|
|
DDSUs
|
|
|
Price
|
|
|
Value
|
|
|
DDSUs outstanding as of
December 31, 2005
|
|
|
41,862
|
|
|
$
|
20.94
|
|
|
|
|
|
Granted
|
|
|
45,726
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDSUs outstanding as of
September 30, 2006
|
|
|
87,588
|
|
|
$
|
23.68
|
|
|
$
|
2,074,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novelis
Founders Performance Awards
In March 2005, Novelis established a plan to reward certain key
executives with Performance Share Units (PSUs) if Novelis common
share price improvement targets were achieved within specific
time periods. There are three equal tranches of PSUs, and each
has a specific share price improvement target. For the first
tranche, the target applies for the period from March 24,
2005 to March 23, 2008. For the second tranche, the target
applies for the period from March 24, 2006 to
March 23, 2008. For the third tranche, the target applies
for the period from March 24, 2007 to March 23, 2008.
If awarded, a particular tranche will be paid in cash on the
22
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
later of six months from the date the specific common 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 common share closing prices on the NYSE for the last five
trading days prior to the payment date. Upon a
participants termination due to 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.
Upon adoption of FASB Statement No. 123 (Revised), we
changed our valuation technique to the Monte Carlo method due to
the fact that the PSUs contain a market condition for vesting of
the award. The Monte Carlo method utilizes multiple input
variables that determine the probability of satisfying the
market condition stipulated in the award and calculates the fair
market value of each award. Key assumptions used to determine
the fair value of PSUs as of September 30, 2006 were as
follows.
|
|
|
|
|
Weighted average expected stock
price volatility
|
|
|
40.00
|
%
|
Annual expected dividend yield
|
|
|
0.16
|
%
|
Risk-free interest rate
|
|
|
4.72
|
%
|
Weighted average expected stock price volatility is a weighted
measure of the historical volatility and the implied volatility
of the closest to
at-the-money
publicly traded Novelis call options, with weights determined by
the remaining life of the longest term call options. Due to
limited trading activity and the short contractual term of
Novelis call options, we did not give any weight to implied
volatility in the valuation of PSUs. The annual expected
dividend yield is based on historical and anticipated dividend
payments. The risk-free interest rate represents the
2-year daily
U.S. Treasury yield curve rate as of the valuation date.
The fair value of the PSUs is amortized over the derived service
period of each award, which is up to three years, subject to
acceleration in the event the vesting condition is met (as
defined above). The liability for the first tranche was accrued
over its term, was valued on March 24, 2006, and was paid
in April 2006 in the aggregate amount of $3 million. As of
September 30, 2006, there was approximately
$0.6 million of unamortized compensation expense related to
the second tranche, which is expected to be recognized over the
next three quarters, and approximately $0.8 million of
unamortized compensation expense related to the third tranche,
which is expected to be recognized over the next 1.5 years.
Compensation
Cost
For the three months and nine months ended September 30,
2006, stock-based compensation expense for arrangements that are
settled in cash, including amounts related to the cumulative
effect of an accounting change, net of tax, from adopting FASB
Statement No. 123 (Revised), was $3 million and
$7 million, respectively, and was included in Selling,
general and administrative expenses. Stock-based
compensation expense for arrangements that are settled in cash
for the three months and nine months ended September 30,
2005 was $1 million and $3 million, respectively.
23
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
11.
|
Post-Retirement
Benefit Plans
|
Components of net periodic benefit cost for all of our
significant plans are shown in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Post-Retirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
29
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Interest cost
|
|
|
11
|
|
|
|
7
|
|
|
|
32
|
|
|
|
22
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
5
|
|
Expected return on assets
|
|
|
(9
|
)
|
|
|
(3
|
)
|
|
|
(28
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial losses
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
prior service cost
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
13
|
|
|
$
|
9
|
|
|
$
|
39
|
|
|
$
|
27
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets is 7.6% in
2006 compared to 7.4% in 2005.
Employer
Contributions to Plans
For pension plans, our policy is to fund an amount required to
provide for contractual benefits attributed to service to date,
and amortize unfunded actuarial liabilities typically over
periods of 15 years or less.
We also participate in savings plans in Canada and the United
States as well as defined contribution pension plans in the
United Kingdom, Canada, Malaysia and Brazil.
We contributed the following amounts to our plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Funded pension plans
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
22
|
|
|
$
|
14
|
|
Unfunded pension plans
|
|
|
3
|
|
|
|
3
|
|
|
|
9
|
|
|
|
9
|
|
Savings and defined contribution
pension plans
|
|
|
3
|
|
|
|
3
|
|
|
|
8
|
|
|
|
7
|
|
We expect to contribute an additional $6 million to our
funded pension plans and $3 million to our unfunded pension
plans for the remainder of 2006.
We are also a participating employer in the Alcan Swiss Pension
Plan. We have contributed $2.7 million to this plan through
September 30, 2006 and expect to contribute an additional
$0.5 million for the remainder of 2006.
24
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
12.
|
Currency
Gains (Losses)
|
The following currency gains (losses) are included in Other
(income) expenses net in the accompanying
condensed consolidated and combined statements of operations (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net gain (loss) on change in fair
value of currency derivative instruments
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
(18
|
)
|
|
$
|
76
|
|
Net gain on translation of
monetary assets and liabilities
|
|
|
5
|
|
|
|
3
|
|
|
|
15
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11
|
|
|
$
|
6
|
|
|
$
|
(3
|
)
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following currency gains (losses) are included in
Accumulated other comprehensive loss (net of tax effect,
and in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Cumulative currency translation
adjustment beginning of period
|
|
$
|
59
|
|
|
$
|
(26
|
)
|
|
$
|
(35
|
)
|
|
$
|
120
|
|
Current period gain (loss) arising
from changes in foreign currency exchange rates net
|
|
|
11
|
|
|
|
|
|
|
|
105
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative currency translation
adjustment end of period
|
|
$
|
70
|
|
|
$
|
(26
|
)
|
|
$
|
70
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 energy prices. Such
instruments are used for risk management purposes only. We may
be exposed to losses in the future if the counterparties to the
contracts fail to perform. We are satisfied that the risk of
such non-performance is remote, based on our monitoring of
credit exposures.
In the first quarter of 2006, we implemented hedge accounting
for certain of our cross-currency interest rate swaps with
respect to intercompany loans to several European subsidiaries
and forward foreign exchange contracts. As of September 30,
2006, we had $712 million of cross-currency interest rate
swaps (Euro 475 million, British Pound (GBP)
62 million and Swiss Franc (CHF) 35 million) and
$114 million of forward foreign exchange contracts
(267 million Brazilian real (BRL)).
The Euro and GBP cross-currency interest rate swaps have been
designated as net investment hedges, while the CHF
cross-currency interest rate swaps and the BRL forward foreign
exchange contracts have been designated as cash flow hedges.
For contracts designated as net investment hedges and cash flow
hedges, we recognize the change in fair value of the ineffective
portion of the hedge as a gain or loss in our current period
results of operations. We include the change in fair value of
the effective and interest portions of these hedges in
Accumulated other comprehensive loss within
Shareholders equity in the accompanying condensed
consolidated balance sheet. During the three months and nine
months ended September 30 2006, the change in fair value of
the effective and interest portions of our net investment hedges
were gains of $8 million and losses of $34 million,
respectively. During the three months and nine months ended
September 30, 2006, the change in fair value of the
effective portion of our cash flow hedges were gains of
$3 million and $4 million, respectively.
25
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Accordingly, $30 million of cumulative pre-tax net losses
are included in Accumulated other comprehensive loss as
of September 30, 2006.
As of September 30, 2006, the amount of effective net gains
and losses expected to be realized during the next twelve months
is $3 million. No cash flow hedges were discontinued during
the nine months ended September 30, 2006. The maximum
period over which we have hedged our exposure to cash flow
variability is through February 2015.
The fair values of our financial instruments and commodity
contracts as of September 30, 2006, were as follows (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Net Fair
|
|
|
|
Maturity Dates
|
|
Assets
|
|
|
Liabilities
|
|
|
Value
|
|
|
Forward foreign exchange contracts
|
|
2006 through 2011
|
|
$
|
12
|
|
|
$
|
(11
|
)
|
|
$
|
1
|
|
Interest rate swaps
|
|
2007 through 2008
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Cross-currency interest rate swaps
|
|
2006 through 2015
|
|
|
|
|
|
|
(76
|
)
|
|
|
(76
|
)
|
Aluminum forward contracts
|
|
2006 through 2009
|
|
|
68
|
|
|
|
(21
|
)
|
|
|
47
|
|
Aluminum options
|
|
2006
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Fixed price electricity contract
|
|
2016
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
Embedded derivative instruments
|
|
2007
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
(108
|
)
|
|
|
54
|
|
Less: current portion (A)
|
|
|
|
|
107
|
|
|
|
(41
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55
|
|
|
$
|
(67
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The amounts of the current and long-term portions of fair values
under assets are each presented in the accompanying condensed
consolidated balance sheets. The amounts of the current and
long-term portions of fair values under liabilities are included
in Accrued expenses and other current liabilities and
Other long-term liabilities, respectively, in the
accompanying condensed consolidated balance sheets. |
The fair values of our financial instruments and commodity
contracts as of December 31, 2005, were as follows (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net Fair
|
|
|
|
Maturity Dates
|
|
Assets
|
|
|
Liabilities
|
|
|
Value
|
|
|
Forward foreign exchange contracts
|
|
2006 through 2011
|
|
$
|
15
|
|
|
$
|
(9
|
)
|
|
$
|
6
|
|
Interest rate swaps
|
|
2006 through 2008
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Cross-currency interest rate swaps
|
|
2006 through 2015
|
|
|
|
|
|
|
(24
|
)
|
|
|
(24
|
)
|
Aluminum forward contracts
|
|
2006 through 2009
|
|
|
87
|
|
|
|
(7
|
)
|
|
|
80
|
|
Aluminum options
|
|
2006
|
|
|
109
|
|
|
|
|
|
|
|
109
|
|
Fixed price electricity contract
|
|
2016
|
|
|
68
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
(40
|
)
|
|
|
244
|
|
Less: current portion (A)
|
|
|
|
|
194
|
|
|
|
(22
|
)
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90
|
|
|
$
|
(18
|
)
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
|
(A) |
|
The amounts of the current and long-term portions of fair values
under assets are each presented in the accompanying condensed
consolidated balance sheets. The amounts of the current and
long-term portions of fair values under liabilities are included
in Accrued expenses and other current liabilities and
Other long-term liabilities, respectively, in the
accompanying condensed consolidated balance sheets. |
|
|
14.
|
Other
(Income) Expenses Net
|
Other (income) expenses net is comprised of the
following (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
(Gain) loss on change in fair
value of derivative instruments net
|
|
$
|
37
|
|
|
$
|
(39
|
)
|
|
$
|
(58
|
)
|
|
$
|
(56
|
)
|
Loss on disposal of business
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
Exchange (gain) loss
net
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(15
|
)
|
|
|
1
|
|
Loss (gain) on disposals of
property, plant and equipment net
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
(11
|
)
|
Other income net
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34
|
|
|
$
|
(48
|
)
|
|
$
|
(62
|
)
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide for income taxes using the liability method in
accordance with FASB Statement No. 109, Accounting for
Income Taxes. In accordance with APB Opinion No. 28,
Interim Financial Reporting, and FASB Interpretation
No. 18, Accounting for Income Taxes in Interim
Periods, the provision for taxes on income recognizes our
estimate of the effective tax rate expected to be applicable for
the full fiscal year, adjusted for the impact of any discrete
events, which are reported in the period in which they occur.
Each quarter, we re-evaluate our estimated tax expense for the
year and make adjustments for changes in the estimated tax rate.
Additionally, we evaluate the realizability of our deferred tax
assets on a quarterly basis. Our evaluation considers all
positive and negative evidence and factors, such as the
scheduled reversal of temporary differences, historical and
projected future taxable income or losses, and prudent and
feasible tax planning strategies. As a result, the provision
(benefit) for taxes on income (loss) for the three months and
nine months ended September 30, 2006 and 2005 were based on
the estimated effective tax rates applicable for the years
ending December 31, 2006 and ended December 31, 2005,
respectively, after considering items specifically related to
the interim periods.
27
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
A reconciliation of the Canadian statutory tax rates to our
effective tax rates for the three months and nine months ended
September 30, 2006 and 2005 is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Pre-tax income (loss) before
equity in net income of non-consolidated affiliates and minority
interests share
|
|
$
|
(161
|
)
|
|
$
|
54
|
|
|
$
|
(150
|
)
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian statutory tax rate
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) at the
Canadian statutory tax rate
|
|
$
|
(54
|
)
|
|
$
|
18
|
|
|
$
|
(50
|
)
|
|
$
|
37
|
|
Increase (decrease) in tax rate
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange translation items
|
|
|
2
|
|
|
|
28
|
|
|
|
36
|
|
|
|
24
|
|
Exchange remeasurement of deferred
income taxes
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
2
|
|
|
|
6
|
|
Change in valuation allowances
|
|
|
12
|
|
|
|
(12
|
)
|
|
|
42
|
|
|
|
|
|
Expense/income items with no tax
effect net
|
|
|
|
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Tax rate differences on foreign
earnings
|
|
|
(11
|
)
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Out-of-period
adjustments net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Other net
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for taxes on
income (loss)
|
|
$
|
(52
|
)
|
|
$
|
37
|
|
|
$
|
30
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
32
|
%
|
|
|
69
|
%
|
|
|
(20
|
)%
|
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2006, our
effective tax rate is less than the benefit at the Canadian
statutory rate of 33% due primarily to (1) a
$12 million increase in valuation allowances primarily
related to tax losses in certain jurisdictions where we believe
it is more likely than not that we will not be able to utilize
those losses, mostly offset by (2) an $11 million
benefit from differences between the Canadian statutory and
foreign effective tax rates resulting from the application of an
annual effective tax rate to profit and loss entities in
different jurisdictions.
For the three months ended September 30, 2005, our
effective tax rate is greater than the Canadian statutory rate
of 33% due primarily to (1) $34 million of expense for
(a) pre-tax foreign currency gains or losses with no tax
effect, (b) the tax effect of U.S. dollar denominated
currency gains or losses with no pre-tax effect, and
(c) the remeasurement of deferred income taxes,
(2) $5 million of expense from differences between the
Canadian statutory and foreign effective tax rates resulting
from the application of an annual effective tax rate to profit
and loss entities in different jurisdictions, (3) a
$12 million reduction in valuation allowances primarily
related to a change in judgment regarding the realizability of
net operating losses, due to an expected increase in the
profitability of our operations in Asia, where we previously
believed it was more likely than not that we would not be able
to utilize such losses, and (4) a $10 million benefit
from expense/income items with no tax effect net.
For the nine months ended September 30, 2006, our effective
tax rate differs from the benefit at the Canadian statutory rate
of 33% due primarily to (1) a $42 million increase in
valuation allowances primarily related to tax losses in certain
jurisdictions where we believe it is more likely than not that
we will not be able to utilize those losses, and
(2) $38 million of expense for (a) pre-tax
foreign currency gains or losses with no tax effect,
(b) the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect and (c) the
remeasurement of deferred income taxes.
28
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
For the nine months ended September 30, 2005, our effective
tax rate is greater than the Canadian statutory rate of 33% due
primarily to (1) $30 million of expense for
(a) pre-tax foreign currency gains or losses with no tax
effect, (b) the tax effect of U.S. dollar denominated
currency gains or losses with no pre-tax effect, and
(c) the remeasurement of deferred income taxes.
The following table shows the information used in the
calculation of basic and diluted earnings (loss) per share (in
millions, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(102
|
)
|
|
$
|
10
|
|
|
$
|
(170
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
outstanding shares basic
|
|
|
74.01
|
|
|
|
74.00
|
|
|
|
74.01
|
|
|
|
73.99
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
0.38
|
|
|
|
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
outstanding shares diluted
|
|
|
74.01
|
|
|
|
74.38
|
|
|
|
74.01
|
|
|
|
74.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share basic
|
|
$
|
(1.38
|
)
|
|
$
|
0.14
|
|
|
$
|
(2.30
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share diluted
|
|
$
|
(1.38
|
)
|
|
$
|
0.14
|
|
|
$
|
(2.30
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the treasury stock method to calculate the dilutive
effect of stock options and other common stock equivalents
(potentially dilutive shares) on earnings per share. Diluted
earnings per share recognizes the dilution that would occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. These potential shares
include dilutive stock options and DDSUs.
Options to purchase an aggregate of 2,644,665 of our common
shares were held by our employees as of September 30, 2006.
For the three months and nine months ended September 30,
2006, 734,394 of these options are potentially dilutive at an
average exercise price of $17.80. Additionally, there were
100,944 DDSUs that were considered potentially dilutive shares
for both of the 2006 periods presented (see
Note 10 Stock-Based Compensation). A total of
1,910,271 anti-dilutive options were held by our employees as of
September 30, 2006 and would not have been included in our
calculation of diluted loss per share because their exercise
prices were greater than our average stock price during the
periods. The potentially dilutive shares described above were
not included in our calculation of diluted loss per share for
the three months and nine months ended September 30, 2006
as they would be anti-dilutive due to our net losses reported
for each period presented.
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 three months ended September 30, 2005. For the nine
months ended September 30, 2005, 1,366,028 options to
purchase common shares at an average exercise price of
$19.43 per share were dilutive. Additionally, there were
41,652 DDSUs that were considered dilutive shares for both of
the 2005 periods presented (see Note 10 Stock
Based Compensation). A total of 1,341,143 anti-dilutive options
were held by our employees as of September 30, 2005 and
were not included in our calculation of
29
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
diluted loss per share because their exercise prices were
greater than our average stock price during the periods.
|
|
17.
|
Commitments
and Contingencies
|
Alcan is our primary supplier of prime and sheet ingot.
Purchases from Alcan represented 36% and 40% of our total
combined prime and sheet ingot purchases for the three months
and nine months ended September 30, 2006, respectively, and
49% of our total combined prime and sheet ingot purchases for
both the three months and nine months ended September 30,
2005.
Legal
Proceedings
Reynolds Boat Case. As previously disclosed,
we and Alcan were defendants in a case in the United States
District Court for the Western District of Washington, in
Tacoma, Washington, case number
C04-0175RJB.
Plaintiffs were Reynolds Metals Company, Alcoa, Inc. and
National Union Fire Insurance Company of Pittsburgh PA. The case
was tried before a jury beginning on May 1, 2006 under
warranty theories, based on allegations that from 1998 to 2001
we and Alcan sold certain aluminum products that were ultimately
used for marine applications and were unsuitable for such
applications. The jury reached a verdict on May 22, 2006
against us and Alcan for approximately $60 million, and the
court later awarded Reynolds and Alcoa approximately
$16 million in prejudgment interest and court costs.
The case was settled during July 2006 as among us, Alcan,
Reynolds, Alcoa and their insurers for $71 million. We
contributed approximately $1 million toward the settlement,
and the remaining $70 million was funded by our insurers.
Although the settlement was substantially funded by our
insurance carriers, certain of them have reserved the right to
request a refund from us, after reviewing details of the
plaintiffs damages to determine if they include costs of a
nature not covered under the insurance contracts. Of the
$70 million funded, $39 million is in dispute with and
under further review by certain of our insurance carriers, who
have six months from the date of the settlement to complete
their review. In the third quarter of 2006, we posted a letter
of credit in the amount of approximately $10 million in
favor of one of those insurance carriers, while we resolve the
questions, if any, about the extent of coverage of the costs
included in the settlement.
As of December 31, 2005, we recognized a liability for the
full amount of the settlement, included in Accrued expenses
and other current liabilities of $71 million, with a
corresponding charge against earnings. We also recognized an
insurance receivable included in Prepaid expenses and other
current assets of $31 million, with a corresponding
increase to earnings. Although $70 million of the
settlement was funded by our insurers, we only recognized an
insurance receivable to the extent that coverage was not in
dispute. We recognized a net charge of $40 million during
the fourth quarter of 2005.
In July 2006, we contributed and paid $1 million to our
insurers who subsequently paid the entire settlement amount of
$71 million to the plaintiffs. Accordingly, during the
third quarter of 2006 we reversed the previously recorded
insurance receivable of $31 million and reduced our
recorded liability by the same amount plus the $1 million
contributed by us. The remaining liability of $39 million
represents the amount of the settlement claim that was funded by
our insurers but is still in dispute with and under further
review by certain of our insurance carriers, who have six months
from the date of settlement to complete their review. The
$39 million liability is included in Accrued expenses
and other current liabilities in our condensed consolidated
balance sheet as of September 30, 2006.
While the ultimate resolution of the nature and extent of any
costs not covered under our insurance contracts cannot be
determined with certainty or reasonably estimated at this time,
if there is an adverse outcome with respect to insurance
coverage, and we are required to reimburse our insurers, it
could have a material impact on cash flows in the period of
resolution. Alternatively, the ultimate resolution could be
30
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
favorable such that insurance coverage is in excess of what we
have recognized to date. This would result in our recording a
non-cash gain in the period of resolution, and this non-cash
gain could have a material impact on our results of operations
during the period in which such a determination is made.
Environmental
Matters
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 in the range of $12 million to
$26 million. Based upon the report and other factors, we
accrued $19 million as our estimated cost. In addition,
NYSDEC held a public hearing on the remediation plan on
March 13, 2006 and we believe that our estimate of
$19 million is reasonable, and that the remediation plan
will be approved for implementation in 2007 or 2008.
Indirect
Guarantees of the Indebtedness of Others
We have issued indirect guarantees of the indebtedness of others
and we recognize a liability for the fair value of obligations
assumed under such guarantees. Currently, we only issue indirect
guarantees for the indebtedness of others. The guarantees may
cover the following entities:
|
|
|
|
|
wholly-owned or majority-owned subsidiaries;
|
|
|
|
variable interest entities consolidated under FASB
Interpretation No. 46 (Revised), Consolidation of
Variable Interest Entities; and
|
|
|
|
Aluminium Norf GmbH, which is a fifty percent (50%) owned joint
venture that does not meet the consolidation tests under FASB
Interpretation No. 46 (Revised).
|
In the case of our wholly-owned subsidiaries, the indebtedness
guaranteed is for trade accounts payable to third parties. For
our majority-owned subsidiaries, the indebtedness guaranteed is
for short-term loan, overdraft and other debt facilities with
financial institutions.
Since we consolidate wholly-owned and majority-owned
subsidiaries and variable interest entities in our financial
statements, all outstanding liabilities associated with trade
accounts payable and short-term debt facilities for these
entities are already included in our condensed consolidated
balance sheets.
31
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The following table discloses information about our obligations
under indirect guarantees of indebtedness of others as of
September 30, 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential
|
|
|
Liability Carrying
|
|
|
Assets Held for
|
|
Type of Entity
|
|
Future Payment
|
|
|
Value
|
|
|
Collateral
|
|
|
Wholly-owned subsidiaries
|
|
$
|
35
|
|
|
$
|
21
|
|
|
$
|
|
|
Majority-owned subsidiaries
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Aluminium Norf GmbH
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Segment,
Geographical Area and Major Customer Information
|
Due in part to the regional nature of supply and demand of
aluminum rolled products and in order to best serve our
customers, we manage our activities on the basis of geographical
areas and are organized under four operating segments: North
America; Europe; Asia and South America.
We measure the profitability and financial performance of our
operating segments, based on Regional Income, in accordance with
FASB Statement No. 131, Disclosure About the Segments of
an Enterprise and Related Information. Regional Income
provides a measure of our underlying regional segment results
that is in line with our portfolio approach to risk management.
We define Regional Income as income before (a) interest
expense and amortization of debt issuance costs; (b) gains
and losses on change in fair value of derivative
instruments net; (c) depreciation and
amortization; (d) impairment charges on long-lived assets;
(e) minority interests share; (f) adjustments to
reconcile our proportional share of Regional Income from
non-consolidated affiliates to income as determined on the
equity method of accounting; (g) restructuring (charges)
recoveries net; (h) gains or losses on
disposals of property, plant and equipment and businesses;
(i) corporate selling, general and administrative expenses;
(j) other corporate costs; (k) litigation
settlement net of insurance recoveries;
(l) provision or benefit for taxes on income (loss); and
(m) cumulative effect of accounting change net
of tax.
Net sales and expenses are measured in accordance with the
policies and procedures described in Note 1
Business and Summary of Significant Accounting Policies to our
consolidated and combined financial statements for the year
ended December 31, 2005, except the operating segments
include our proportionate share of net sales, expenses, assets
and liabilities of our non-consolidated affiliates accounted for
using the equity method, since they are managed within each
operating segment.
We do not treat all derivative instruments as hedges under FASB
Statement No. 133. Accordingly, changes in fair value are
recognized immediately in earnings, which results in the
recognition of fair value as a gain or loss in advance of the
contract settlement. In the accompanying condensed consolidated
and combined statements of operations, changes in fair value of
derivative instruments not accounted for as hedges under FASB
Statement No. 133 are recognized in Other (income)
expenses net. These gains or losses may or may
not result from cash settlement. For Regional Income purposes we
only include the impact of the derivative gains or losses to the
extent they are settled in cash during that period.
During the quarter ended September 30, 2006 we added a line
to our Regional Income reconciliation to improve the disclosure
of gains or losses resulting from cash settlement of derivatives
that have been included in Regional Income. Prior periods have
been revised to conform to the current period presentation.
32
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Selected
Segment Financial Information
The following tables present selected segment financial
information as of and for the three months and nine months ended
September 30, 2006 and 2005 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Three
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended September 30, 2006
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
954
|
|
|
$
|
940
|
|
|
$
|
388
|
|
|
$
|
216
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
2,494
|
|
Intersegment sales
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
21
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
Regional Income (Loss)
|
|
|
(19
|
)
|
|
|
71
|
|
|
|
18
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
Depreciation and amortization
|
|
|
17
|
|
|
|
21
|
|
|
|
14
|
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
57
|
|
Capital expenditures
|
|
|
6
|
|
|
|
8
|
|
|
|
6
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
22
|
|
Total assets
|
|
|
1,487
|
|
|
|
2,392
|
|
|
|
1,021
|
|
|
|
814
|
|
|
|
(98
|
)
|
|
|
64
|
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Three
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended September 30, 2005
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
836
|
|
|
$
|
737
|
|
|
$
|
328
|
|
|
$
|
157
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
2,053
|
|
Intersegment sales
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
Regional Income
|
|
|
54
|
|
|
|
52
|
|
|
|
23
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Depreciation and amortization
|
|
|
18
|
|
|
|
23
|
|
|
|
12
|
|
|
|
11
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
56
|
|
Capital expenditures
|
|
|
18
|
|
|
|
16
|
|
|
|
5
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
45
|
|
Total assets
|
|
|
1,388
|
|
|
|
2,129
|
|
|
|
971
|
|
|
|
780
|
|
|
|
(81
|
)
|
|
|
77
|
|
|
|
5,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Nine
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended September 30, 2006
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
2,841
|
|
|
$
|
2,688
|
|
|
$
|
1,235
|
|
|
$
|
626
|
|
|
$
|
(13
|
)
|
|
$
|
|
|
|
$
|
7,377
|
|
Intersegment sales
|
|
|
1
|
|
|
|
2
|
|
|
|
12
|
|
|
|
39
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
Regional Income
|
|
|
64
|
|
|
|
208
|
|
|
|
70
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
Depreciation and amortization
|
|
|
53
|
|
|
|
68
|
|
|
|
41
|
|
|
|
33
|
|
|
|
(24
|
)
|
|
|
3
|
|
|
|
174
|
|
Capital expenditures
|
|
|
24
|
|
|
|
26
|
|
|
|
15
|
|
|
|
17
|
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
77
|
|
Total assets
|
|
|
1,487
|
|
|
|
2,392
|
|
|
|
1,021
|
|
|
|
814
|
|
|
|
(98
|
)
|
|
|
64
|
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Nine
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended September 30, 2005
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
2,500
|
|
|
$
|
2,376
|
|
|
$
|
1,025
|
|
|
$
|
448
|
|
|
$
|
(12
|
)
|
|
$
|
|
|
|
$
|
6,337
|
|
Intersegment sales
|
|
|
2
|
|
|
|
30
|
|
|
|
6
|
|
|
|
37
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
Regional Income
|
|
|
141
|
|
|
|
161
|
|
|
|
80
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
Depreciation and amortization
|
|
|
54
|
|
|
|
74
|
|
|
|
37
|
|
|
|
33
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
173
|
|
Capital expenditures
|
|
|
35
|
|
|
|
38
|
|
|
|
15
|
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
8
|
|
|
|
104
|
|
Total assets
|
|
|
1,388
|
|
|
|
2,129
|
|
|
|
971
|
|
|
|
780
|
|
|
|
(81
|
)
|
|
|
77
|
|
|
|
5,264
|
|
33
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The following table presents the reconciliations from Total
Regional Income to Net income (loss) for the three months and
nine months ended September 30, 2006 and 2005 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Total Regional Income
|
|
$
|
107
|
|
|
$
|
153
|
|
|
$
|
464
|
|
|
$
|
468
|
|
Interest expense and amortization
of debt issuance costs
|
|
|
(55
|
)
|
|
|
(49
|
)
|
|
|
(160
|
)
|
|
|
(155
|
)
|
(Gain) loss on cash settlement of
derivative instruments net, included in Regional
Income
|
|
|
(62
|
)
|
|
|
4
|
|
|
|
(193
|
)
|
|
|
(10
|
)
|
Gain (loss) on change in fair
value of derivative instruments net
|
|
|
(37
|
)
|
|
|
39
|
|
|
|
58
|
|
|
|
56
|
|
Depreciation and amortization
|
|
|
(57
|
)
|
|
|
(56
|
)
|
|
|
(174
|
)
|
|
|
(173
|
)
|
Minority interests share
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(19
|
)
|
Adjustment to eliminate
proportional consolidation (A)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(26
|
)
|
|
|
(27
|
)
|
Restructuring (charges)
recoveries net
|
|
|
(10
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
|
(4
|
)
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(5
|
)
|
Gain (loss) on disposals of
property, plant and equipment and businesses net
|
|
|
(2
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
11
|
|
Corporate selling, general and
administrative expenses
|
|
|
(33
|
)
|
|
|
(19
|
)
|
|
|
(88
|
)
|
|
|
(49
|
)
|
Other corporate costs net
|
|
|
2
|
|
|
|
4
|
|
|
|
10
|
|
|
|
6
|
|
Benefit (provision) for taxes on
income (loss)
|
|
|
52
|
|
|
|
(37
|
)
|
|
|
(30
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(102
|
)
|
|
$
|
10
|
|
|
$
|
(170
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Our financial information for our segments (including Regional
Income) includes the results of our non-consolidated affiliates
on a proportionately consolidated basis, which is consistent
with the way we manage our business segments. However, under
GAAP, these non-consolidated affiliates are accounted for using
the equity method of accounting. Therefore, in order to
reconcile Total Regional Income to Net income, the proportional
Regional Income of these non-consolidated affiliates is removed
from Total Regional Income, net of our share of their net
after-tax results, which is reported as Equity in net income
of non-consolidated affiliates on our condensed consolidated
and combined statements of operations. See
Note 6 Investment in and Advances to
Non-consolidated Affiliates and Related Party Transactions to
our condensed consolidated and combined financial statements for
further information about these non-consolidated affiliates. |
Information
about Major Customers
All of our operating segments had net sales to Rexam Plc
(Rexam), our largest customer and our only customer accounting
for more than 10% of our total net sales. Net sales to Rexam and
the percentages of our total net sales for the three months and
nine months ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net sales to Rexam (in millions)
|
|
$
|
357
|
|
|
$
|
282
|
|
|
$
|
1,021
|
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net sales
|
|
|
14.3
|
%
|
|
|
13.8
|
%
|
|
|
13.8
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
19.
|
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)
are comprised of the majority of our businesses in Canada, the
United States, the United Kingdom, 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 presents condensed consolidating and
combining statements of operations for the three months and nine
months ended September 30, 2006 and 2005, condensed
consolidating balance sheets as of September 30, 2006 and
December 31, 2005, and condensed consolidating and
combining statements of cash flows for the nine months ended
September 30, 2006 and 2005 of the Parent, the Guarantors,
and the Non-Guarantors. Investments include investment in and
advances to non-consolidated affiliates as well as investments
in net assets of divisions included in the Parent, and have been
presented using the equity method of accounting.
Novelis
Inc.
Condensed
Consolidating Statement of Operations
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
415
|
|
|
$
|
2,176
|
|
|
$
|
657
|
|
|
$
|
(754
|
)
|
|
$
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
404
|
|
|
|
2,121
|
|
|
|
625
|
|
|
|
(761
|
)
|
|
|
2,389
|
|
Selling, general and
administrative expenses
|
|
|
13
|
|
|
|
70
|
|
|
|
20
|
|
|
|
|
|
|
|
103
|
|
Depreciation and amortization
|
|
|
4
|
|
|
|
37
|
|
|
|
16
|
|
|
|
|
|
|
|
57
|
|
Research and development expenses
|
|
|
7
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
10
|
|
Restructuring charges
net
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
12
|
|
|
|
35
|
|
|
|
5
|
|
|
|
|
|
|
|
52
|
|
Equity in net income of affiliates
|
|
|
70
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(70
|
)
|
|
|
(5
|
)
|
Other expenses net
|
|
|
4
|
|
|
|
27
|
|
|
|
3
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514
|
|
|
|
2,297
|
|
|
|
670
|
|
|
|
(831
|
)
|
|
|
2,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit)
for taxes on loss and minority interests share
|
|
|
(99
|
)
|
|
|
(121
|
)
|
|
|
(13
|
)
|
|
|
77
|
|
|
|
(156
|
)
|
Provision (benefit) for taxes on
loss
|
|
|
3
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority
interests share
|
|
|
(102
|
)
|
|
|
(66
|
)
|
|
|
(13
|
)
|
|
|
77
|
|
|
|
(104
|
)
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(102
|
)
|
|
$
|
(66
|
)
|
|
$
|
(11
|
)
|
|
$
|
77
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating and Combining Statement of Operations
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
and
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Combined
|
|
|
Net sales
|
|
$
|
332
|
|
|
$
|
1,697
|
|
|
$
|
579
|
|
|
$
|
(555
|
)
|
|
$
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
321
|
|
|
|
1,523
|
|
|
|
545
|
|
|
|
(555
|
)
|
|
|
1,834
|
|
Selling, general and
administrative expenses
|
|
|
19
|
|
|
|
55
|
|
|
|
16
|
|
|
|
|
|
|
|
90
|
|
Depreciation and amortization
|
|
|
3
|
|
|
|
39
|
|
|
|
14
|
|
|
|
|
|
|
|
56
|
|
Research and development expenses
|
|
|
6
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
10
|
|
Restructuring charges
(recoveries) net
|
|
|
|
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
|
|
|
|
7
|
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
12
|
|
|
|
29
|
|
|
|
5
|
|
|
|
|
|
|
|
46
|
|
Equity in net income of affiliates
|
|
|
(52
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
52
|
|
|
|
(2
|
)
|
Other (income)
expenses net
|
|
|
10
|
|
|
|
(50
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
1,596
|
|
|
|
585
|
|
|
|
(503
|
)
|
|
|
1,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision
(benefit) for taxes on income (loss) and minority
interests share
|
|
|
13
|
|
|
|
101
|
|
|
|
(6
|
)
|
|
|
(52
|
)
|
|
|
56
|
|
Provision (benefit) for taxes on
income (loss)
|
|
|
3
|
|
|
|
43
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority
interests share
|
|
|
10
|
|
|
|
58
|
|
|
|
3
|
|
|
|
(52
|
)
|
|
|
19
|
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10
|
|
|
$
|
58
|
|
|
$
|
(6
|
)
|
|
$
|
(52
|
)
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating Statement of Operations
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
1,204
|
|
|
$
|
6,309
|
|
|
$
|
2,086
|
|
|
$
|
(2,222
|
)
|
|
$
|
7,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
1,164
|
|
|
|
6,017
|
|
|
|
1,969
|
|
|
|
(2,219
|
)
|
|
|
6,931
|
|
Selling, general and
administrative expenses
|
|
|
47
|
|
|
|
193
|
|
|
|
53
|
|
|
|
|
|
|
|
293
|
|
Depreciation and amortization
|
|
|
11
|
|
|
|
114
|
|
|
|
49
|
|
|
|
|
|
|
|
174
|
|
Research and development expenses
|
|
|
20
|
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
29
|
|
Restructuring charges
net
|
|
|
|
|
|
|
11
|
|
|
|
2
|
|
|
|
|
|
|
|
13
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
33
|
|
|
|
102
|
|
|
|
14
|
|
|
|
|
|
|
|
149
|
|
Equity in net income of affiliates
|
|
|
75
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(75
|
)
|
|
|
(12
|
)
|
Other (income)
expenses net
|
|
|
13
|
|
|
|
(77
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363
|
|
|
|
6,356
|
|
|
|
2,090
|
|
|
|
(2,294
|
)
|
|
|
7,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for taxes on
loss and minority interests share
|
|
|
(159
|
)
|
|
|
(47
|
)
|
|
|
(4
|
)
|
|
|
72
|
|
|
|
(138
|
)
|
Provision for taxes on loss
|
|
|
11
|
|
|
|
8
|
|
|
|
11
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority
interests share
|
|
|
(170
|
)
|
|
|
(55
|
)
|
|
|
(15
|
)
|
|
|
72
|
|
|
|
(168
|
)
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(170
|
)
|
|
$
|
(55
|
)
|
|
$
|
(17
|
)
|
|
$
|
72
|
|
|
$
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating and Combining Statement of Operations
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
and
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Combined
|
|
|
Net sales
|
|
$
|
960
|
|
|
$
|
5,218
|
|
|
$
|
1,835
|
|
|
$
|
(1,676
|
)
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
933
|
|
|
|
4,718
|
|
|
|
1,703
|
|
|
|
(1,676
|
)
|
|
|
5,678
|
|
Selling, general and
administrative expenses
|
|
|
52
|
|
|
|
159
|
|
|
|
49
|
|
|
|
|
|
|
|
260
|
|
Depreciation and amortization
|
|
|
8
|
|
|
|
119
|
|
|
|
46
|
|
|
|
|
|
|
|
173
|
|
Research and development expenses
|
|
|
19
|
|
|
|
9
|
|
|
|
1
|
|
|
|
|
|
|
|
29
|
|
Restructuring charges
(recoveries) net
|
|
|
|
|
|
|
(4
|
)
|
|
|
8
|
|
|
|
|
|
|
|
4
|
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
46
|
|
|
|
87
|
|
|
|
15
|
|
|
|
|
|
|
|
148
|
|
Equity in net income of affiliates
|
|
|
(89
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
89
|
|
|
|
(6
|
)
|
Other income net
|
|
|
(31
|
)
|
|
|
(37
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
|
|
5,045
|
|
|
|
1,823
|
|
|
|
(1,587
|
)
|
|
|
6,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for taxes on income and minority interests share
|
|
|
22
|
|
|
|
173
|
|
|
|
12
|
|
|
|
(89
|
)
|
|
|
118
|
|
Provision (benefit) for taxes on
income
|
|
|
(10
|
)
|
|
|
83
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority
interests share
|
|
|
32
|
|
|
|
90
|
|
|
|
18
|
|
|
|
(89
|
)
|
|
|
51
|
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
|
$
|
90
|
|
|
$
|
(1
|
)
|
|
$
|
(89
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating Balance Sheet
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2
|
|
|
$
|
49
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
71
|
|
Accounts receivable net
of allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
64
|
|
|
|
846
|
|
|
|
331
|
|
|
|
|
|
|
|
1,241
|
|
related parties
|
|
|
376
|
|
|
|
409
|
|
|
|
21
|
|
|
|
(784
|
)
|
|
|
22
|
|
Inventories
|
|
|
59
|
|
|
|
875
|
|
|
|
378
|
|
|
|
(3
|
)
|
|
|
1,309
|
|
Prepaid expenses and other current
assets
|
|
|
3
|
|
|
|
54
|
|
|
|
15
|
|
|
|
|
|
|
|
72
|
|
Current portion of fair value of
derivative instruments
|
|
|
|
|
|
|
104
|
|
|
|
3
|
|
|
|
|
|
|
|
107
|
|
Deferred income tax assets
|
|
|
2
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
506
|
|
|
|
2,345
|
|
|
|
777
|
|
|
|
(787
|
)
|
|
|
2,841
|
|
Property, plant and
equipment net
|
|
|
115
|
|
|
|
1,256
|
|
|
|
759
|
|
|
|
|
|
|
|
2,130
|
|
Goodwill
|
|
|
|
|
|
|
27
|
|
|
|
201
|
|
|
|
|
|
|
|
228
|
|
Intangible assets net
|
|
|
|
|
|
|
17
|
|
|
|
3
|
|
|
|
|
|
|
|
20
|
|
Investments
|
|
|
539
|
|
|
|
155
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
155
|
|
Fair value of derivative
instruments net of current portion
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Deferred income tax assets
|
|
|
19
|
|
|
|
16
|
|
|
|
32
|
|
|
|
|
|
|
|
67
|
|
Other long-term assets
|
|
|
1,185
|
|
|
|
175
|
|
|
|
130
|
|
|
|
(1,306
|
)
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,364
|
|
|
$
|
4,046
|
|
|
$
|
1,902
|
|
|
$
|
(2,632
|
)
|
|
$
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
4
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
5
|
|
|
|
80
|
|
|
|
28
|
|
|
|
|
|
|
|
113
|
|
related parties
|
|
|
|
|
|
|
469
|
|
|
|
30
|
|
|
|
(499
|
)
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
99
|
|
|
|
706
|
|
|
|
383
|
|
|
|
|
|
|
|
1,188
|
|
related parties
|
|
|
78
|
|
|
|
188
|
|
|
|
57
|
|
|
|
(285
|
)
|
|
|
38
|
|
Accrued expenses and other current
liabilities
|
|
|
102
|
|
|
|
479
|
|
|
|
121
|
|
|
|
|
|
|
|
702
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
82
|
|
|
|
4
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
284
|
|
|
|
2,007
|
|
|
|
624
|
|
|
|
(784
|
)
|
|
|
2,131
|
|
Long-term debt net of
current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,660
|
|
|
|
498
|
|
|
|
171
|
|
|
|
|
|
|
|
2,329
|
|
related parties
|
|
|
|
|
|
|
1,069
|
|
|
|
237
|
|
|
|
(1,306
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
19
|
|
|
|
108
|
|
|
|
16
|
|
|
|
|
|
|
|
143
|
|
Accrued post-retirement benefits
|
|
|
12
|
|
|
|
236
|
|
|
|
87
|
|
|
|
|
|
|
|
335
|
|
Other long-term liabilities
|
|
|
67
|
|
|
|
181
|
|
|
|
16
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,042
|
|
|
|
4,099
|
|
|
|
1,151
|
|
|
|
(2,090
|
)
|
|
|
5,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427
|
|
(Accumulated deficit)/retained
earnings/owners net investment
|
|
|
(92
|
)
|
|
|
(247
|
)
|
|
|
580
|
|
|
|
(333
|
)
|
|
|
(92
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(13
|
)
|
|
|
194
|
|
|
|
15
|
|
|
|
(209
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
322
|
|
|
|
(53
|
)
|
|
|
595
|
|
|
|
(542
|
)
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,364
|
|
|
$
|
4,046
|
|
|
$
|
1,902
|
|
|
$
|
(2,632
|
)
|
|
$
|
5,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating Balance Sheet
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2
|
|
|
$
|
34
|
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
100
|
|
Accounts receivable net
of allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
67
|
|
|
|
689
|
|
|
|
342
|
|
|
|
|
|
|
|
1,098
|
|
related parties
|
|
|
381
|
|
|
|
318
|
|
|
|
22
|
|
|
|
(688
|
)
|
|
|
33
|
|
Inventories
|
|
|
49
|
|
|
|
769
|
|
|
|
310
|
|
|
|
|
|
|
|
1,128
|
|
Prepaid expenses and other current
assets
|
|
|
2
|
|
|
|
55
|
|
|
|
9
|
|
|
|
|
|
|
|
66
|
|
Current portion of fair value of
derivative instruments
|
|
|
|
|
|
|
186
|
|
|
|
8
|
|
|
|
|
|
|
|
194
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
501
|
|
|
|
2,051
|
|
|
|
763
|
|
|
|
(688
|
)
|
|
|
2,627
|
|
Property, plant and
equipment net
|
|
|
121
|
|
|
|
1,297
|
|
|
|
742
|
|
|
|
|
|
|
|
2,160
|
|
Goodwill
|
|
|
|
|
|
|
25
|
|
|
|
186
|
|
|
|
|
|
|
|
211
|
|
Intangible assets net
|
|
|
|
|
|
|
18
|
|
|
|
3
|
|
|
|
|
|
|
|
21
|
|
Investments
|
|
|
729
|
|
|
|
144
|
|
|
|
|
|
|
|
(729
|
)
|
|
|
144
|
|
Fair value of derivative
instruments net of current portion
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Deferred income tax assets
|
|
|
8
|
|
|
|
5
|
|
|
|
32
|
|
|
|
|
|
|
|
45
|
|
Other long-term assets
|
|
|
1,129
|
|
|
|
173
|
|
|
|
119
|
|
|
|
(1,243
|
)
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,488
|
|
|
$
|
3,803
|
|
|
$
|
1,845
|
|
|
$
|
(2,660
|
)
|
|
$
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
3
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
23
|
|
|
|
4
|
|
|
|
|
|
|
|
27
|
|
related parties
|
|
|
45
|
|
|
|
409
|
|
|
|
17
|
|
|
|
(471
|
)
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
76
|
|
|
|
442
|
|
|
|
348
|
|
|
|
|
|
|
|
866
|
|
related parties
|
|
|
62
|
|
|
|
152
|
|
|
|
41
|
|
|
|
(217
|
)
|
|
|
38
|
|
Accrued expenses and other current
liabilities
|
|
|
105
|
|
|
|
411
|
|
|
|
125
|
|
|
|
|
|
|
|
641
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
288
|
|
|
|
1,465
|
|
|
|
536
|
|
|
|
(688
|
)
|
|
|
1,601
|
|
Long-term debt net of
current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,742
|
|
|
|
640
|
|
|
|
218
|
|
|
|
|
|
|
|
2,600
|
|
related parties
|
|
|
|
|
|
|
1,017
|
|
|
|
226
|
|
|
|
(1,243
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
176
|
|
|
|
10
|
|
|
|
|
|
|
|
186
|
|
Accrued post-retirement benefits
|
|
|
9
|
|
|
|
213
|
|
|
|
83
|
|
|
|
|
|
|
|
305
|
|
Other long-term liabilities
|
|
|
16
|
|
|
|
163
|
|
|
|
13
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
|
|
3,674
|
|
|
|
1,086
|
|
|
|
(1,931
|
)
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
Retained earnings/(accumulated
deficit)/owners net investment
|
|
|
92
|
|
|
|
(2
|
)
|
|
|
621
|
|
|
|
(619
|
)
|
|
|
92
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(84
|
)
|
|
|
131
|
|
|
|
(21
|
)
|
|
|
(110
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
433
|
|
|
|
129
|
|
|
|
600
|
|
|
|
(729
|
)
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,488
|
|
|
$
|
3,803
|
|
|
$
|
1,845
|
|
|
$
|
(2,660
|
)
|
|
$
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating Statement of Cash Flows
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
152
|
|
|
$
|
2
|
|
|
$
|
35
|
|
|
$
|
(183
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5
|
)
|
|
|
(49
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
(77
|
)
|
Disposal of business
net
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Cash advance received on pending
transfer of rights
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Proceeds from sales of assets
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Proceeds from loans
receivable net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related parties
|
|
|
53
|
|
|
|
(29
|
)
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
27
|
|
Changes in investment in and
advances to non-consolidated affiliates
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Premiums paid to purchase
derivative instruments
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Net proceeds from settlement of
derivative instruments
|
|
|
|
|
|
|
232
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
41
|
|
|
|
174
|
|
|
|
(29
|
)
|
|
|
4
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of new debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
related parties
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
Principal repayments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
(82
|
)
|
|
|
(143
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
(297
|
)
|
related parties
|
|
|
(73
|
)
|
|
|
(119
|
)
|
|
|
(3
|
)
|
|
|
195
|
|
|
|
|
|
Short-term borrowings
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
5
|
|
|
|
55
|
|
|
|
24
|
|
|
|
|
|
|
|
84
|
|
related parties
|
|
|
(20
|
)
|
|
|
12
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preference shares
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
12
|
|
|
|
|
|
common
shareholders
|
|
|
(14
|
)
|
|
|
(155
|
)
|
|
|
(16
|
)
|
|
|
171
|
|
|
|
(14
|
)
|
minority
interests
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
Debt issuance costs
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(193
|
)
|
|
|
(163
|
)
|
|
|
(53
|
)
|
|
|
179
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
|
|
|
|
13
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
(34
|
)
|
Effect of exchange rate changes
on cash balances held in foreign currencies
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
5
|
|
Cash and cash
equivalents beginning of period
|
|
|
2
|
|
|
|
34
|
|
|
|
64
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of period
|
|
$
|
2
|
|
|
$
|
49
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED AND
COMBINED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Condensed
Consolidating and Combining Statement of Cash Flows
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
and
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Combined
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
116
|
|
|
$
|
399
|
|
|
$
|
(14
|
)
|
|
$
|
(135
|
)
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(12
|
)
|
|
|
(67
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
(104
|
)
|
Proceeds from sales of assets
|
|
|
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
9
|
|
Proceeds from loans
receivable net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
4
|
|
|
|
15
|
|
|
|
|
|
|
|
19
|
|
related parties
|
|
|
(1,104
|
)
|
|
|
(157
|
)
|
|
|
(118
|
)
|
|
|
1,752
|
|
|
|
373
|
|
Share repurchase
intercompany
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
|
|
|
|
Premiums paid to purchase
derivative instruments
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Net proceeds from settlement of
derivative instruments
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(716
|
)
|
|
|
(149
|
)
|
|
|
(120
|
)
|
|
|
1,352
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,875
|
|
|
|
825
|
|
|
|
50
|
|
|
|
|
|
|
|
2,750
|
|
related parties
|
|
|
40
|
|
|
|
1,459
|
|
|
|
253
|
|
|
|
(1,752
|
)
|
|
|
|
|
Principal repayments
|
|
|
(1,316
|
)
|
|
|
(1,512
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
(2,922
|
)
|
Short-term borrowings
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
2
|
|
|
|
(68
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
(137
|
)
|
related parties
|
|
|
(30
|
)
|
|
|
(281
|
)
|
|
|
9
|
|
|
|
|
|
|
|
(302
|
)
|
Share repurchase
intercompany
|
|
|
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
400
|
|
|
|
|
|
Issuance of preference shares
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preference shares
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
|
|
common
shareholders
|
|
|
(20
|
)
|
|
|
(158
|
)
|
|
|
(2
|
)
|
|
|
160
|
|
|
|
(20
|
)
|
minority
interests
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Net receipts from (payments to)
Alcan
|
|
|
100
|
|
|
|
(21
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
72
|
|
Debt issuance costs
|
|
|
(49
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
602
|
|
|
|
(178
|
)
|
|
|
156
|
|
|
|
(1,217
|
)
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD
LOOKING STATEMENTS
The following information should be read together with our
unaudited condensed consolidated 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.
References herein to Novelis, the
Company, we, our, or
us refer to Novelis Inc. and its subsidiaries unless
the context specifically indicates otherwise. References herein
to Alcan refer to Alcan, Inc.
GENERAL
Novelis is the worlds leading aluminum rolled products
producer based on shipment volume. We produce aluminum sheet and
light gauge products for the construction and industrial,
beverage and food cans, foil products and transportation
markets. As of September 30, 2006, we had operations on
four continents: North America; Europe; Asia and South America,
through 34 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, primary aluminum smelting and power generation
facilities that are integrated with our rolling plants in
Brazil. We are the only company of our size and scope focused
solely on aluminum rolled products markets and capable of local
supply of technically sophisticated products in all of these
geographic regions.
Unless otherwise specifically identified as our original
Form 10-K,
any references to our
Form 10-K
made throughout this document shall refer to our Annual Report
on
Form 10-K
for the year ended December 31, 2005 filed with the United
States Securities and Exchange Commission (SEC) on
August 25, 2006, as amended on October 20, 2006.
HIGHLIGHTS
Significant highlights, events and factors impacting our
business during the three months and nine months ended
September 30, 2006 are presented briefly below. Each is
discussed in further detail throughout Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
We had net sales of $2.5 billion and a net loss of
$102 million, or $(1.38) per share for our quarter ended
September 30, 2006, compared to net sales of
$2.1 billion and net income of $10 million, or
$0.14 per share for the third quarter of 2005. We had net
sales of $7.4 billion and a net loss of $170 million,
or $(2.30) per share for the nine months ended
September 30, 2006, compared to net sales of
$6.3 billion and net income of $32 million, or
$0.43 per share for the nine months ended
September 30, 2005.
|
|
|
|
Total rolled products shipments increased from 725 kilotonnes
(kt) in the third quarter of 2005 to 737kt in the third quarter
of 2006, while ingot products shipments declined from 46kt to
37kt in those same periods. Total rolled products shipments
increased from 2,168kt for the nine months ended
September 30, 2005 to 2,231kt for the nine months ended
September 30, 2006, while ingot products shipments declined
from 174kt to 125kt in those same periods.
|
|
|
|
We reduced our total debt by $37 million during the third
quarter of 2006 and by $184 million through the nine months
ended September 30, 2006, which was in excess of our
required principal payment obligations.
|
43
|
|
|
|
|
London Metal Exchange (LME) pricing for aluminum (metal) was an
average of 36% higher during the third quarter of 2006 than the
same period for 2005, and an average of 37% higher during the
nine months ended September 30, 2006 than the same period
for 2005.
|
|
|
|
Net sales for the third quarter and nine months ended
September 30, 2006 increased 21% and 16%, respectively,
compared to the same 2005 periods due mainly to the rise in LME
prices. However, the benefit of higher LME prices on our net
sales was limited by metal price ceilings in sales contracts
representing approximately 20% of our estimated total shipments.
During the third quarter and first nine months of 2006, we were
unable to pass through approximately $115 million and
$350 million, respectively, of metal price increases
associated with sales under these contracts. The metal price
ceilings are discussed in more detail below.
|
|
|
|
As a result of our restatement and review process, delayed
filings and continued reliance on third party consultants we
continue to incur higher corporate costs and interest expense in
2006 than in 2005. For the third quarter and nine months ended
September 30, 2006, we estimate that these expenses
approximated $9 million and $32 million, respectively.
We expect to continue to incur these higher costs until we
complete our registered exchange offer for our Senior Notes and
until our accounting and finance functions are permanently
staffed with the appropriate complement of personnel to support
our ongoing financial reporting requirements. The restatement
and review process and delayed filings are discussed in more
detail below.
|
|
|
|
During the third quarter we recognized pre-tax losses of
$37 million related to the change in fair value of
derivative instruments. During the nine months ended
September 30, 2006, we recognized pre-tax gains of
$58 million related to the change in fair value of
derivative instruments. These amounts are included in Other
(income) expenses net. Regional Income includes
approximately $62 million and $193 million of
cash-settled derivative gains for the third quarter and nine
months ended September 30, 2006, respectively. These
derivative instruments and the related accounting are discussed
in more detail below.
|
|
|
|
The net loss for the third quarter includes an income tax
benefit of $52 million, while the net loss for the nine
months ended September 30, 2006 includes income tax expense
of $30 million. These amounts were impacted by
(1) pre-tax foreign currency gains or losses with no tax
effect and the tax effect of foreign currency gains or losses
with no pre-tax effect, (2) changes in valuation allowances
and (3) foreign rate differences. Cash taxes paid during
the third quarter and nine months ended September 30, 2006
were $5 million and $24 million, respectively.
|
METAL
PRICE CEILINGS
Most of our business is conducted under a conversion model,
which allows us to pass through increases or decreases in the
price of aluminum to our customers. Nearly all of our products
have a price structure with two components: (i) a
pass-through aluminum price based on the LME plus local market
premiums and (ii) a margin over metal price
based on the conversion cost to produce the rolled product and
the competitive market conditions for that product.
Sales contracts representing approximately 20% of our estimated
total shipments for 2006 provide for a ceiling over which metal
prices cannot contractually be passed through to certain
customers, unless adjusted. As a result, we are unable to pass
through the complete increase in metal prices for sales under
these contracts and this negatively impacts our margins when the
metal price is above the ceiling price. During the third quarter
and nine months ended September 30, 2006, we were unable to
pass through approximately $115 million and
$350 million, respectively, of metal price increases
associated with sales under these contracts.
We employ three strategies to mitigate our risk of rising metal
prices that we cannot pass through to certain customers due to
metal price ceilings. First, we maximize the amount of our
internally supplied metal inputs from our smelting, refining and
mining operations in Brazil. Second, we rely on the output from
our recycling operations which utilize used beverage cans
(UBCs). Both of these strategies have historically
44
provided a benefit as these sources of metal are typically less
expensive than purchasing aluminum from third party suppliers.
We refer to these two strategies as our internal hedges. While
we believe that our primary aluminum production continues to
provide the expected benefits during this sustained period of
high LME prices, the recycling operations are providing less
internal hedge benefit than we expected. LME metal prices and
other market issues have resulted in higher than expected prices
of UBCs, thus compressing the internal hedge benefit we receive
from this strategy.
Beyond our internal hedges described above, our third strategy
to mitigate the risk of loss or reduced profitability associated
with the metal price ceilings is to purchase call options
and/or
synthetic call options on projected aluminum volume requirements
above our assumed internal hedge position. To hedge our exposure
in 2006, we previously purchased call options at various strike
prices. In September of 2006, we began purchasing synthetic call
options, which are purchases of both fixed forward derivative
instruments and put options, to hedge our exposure to further
metal price increases in 2007.
For accounting purposes, we do not treat all derivative
instruments as hedges under Financial Accounting Standards Board
(FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Accordingly,
changes in fair value are recognized immediately in earnings,
which results in the recognition of fair value as a gain or loss
in advance of the contract settlement, and we expect further
earnings volatility as a result. In the accompanying condensed
consolidated and combined statements of operations, changes in
fair value of derivative instruments not accounted for as hedges
under FASB Statement No. 133 are recognized in Other
(income) expenses net. These gains or losses may or
may not result from cash settlement. For Regional Income
purposes we only include the impact of the derivative gains or
losses to the extent they are settled in cash during that period.
At current metal prices, we have not fully covered our exposure
relative to the metal price ceilings with the three hedging
strategies described above. This is primarily a result of
(i) not being able to purchase affordable call options or
fixed forward derivative instruments with strike prices that
directly coincide with the metal price ceilings and
(ii) our recycling operations are providing less internal
hedge than we previously expected, as the spread between UBC
prices and LME prices has not increased at the levels we
projected internally. We do expect incremental improvement in
2007 over 2006, however, as our net sales under contracts with
price ceilings decreases to approximately 10% of total estimated
shipments in 2007.
METAL
PRICE LAG
On certain sales contracts we experience timing differences on
the pass through of changing aluminum prices based on the
difference in the price we pay for aluminum and the price we
ultimately charge our customers after the aluminum is processed.
Generally, and in the short-term, in periods of rising prices
our earnings benefit from this timing difference while the
opposite is true in periods of declining prices. We refer to
this timing difference as metal price lag. From the second
quarter to the third quarter, average LME prices declined and as
a result our third quarter pre-tax earnings were negatively
impacted by approximately $33 million. For the nine months
ended September 30, 2006, we have benefited from metal
price lag by approximately $43 million.
Generally, and in the short-term, metal price lag impacts cash
flows negatively in periods of rising metal prices due primarily
to inventory processing time, while the opposite is true in
periods of declining prices. During the third quarter of 2006,
we began selling short-term LME futures contracts to reduce the
cash flow volatility of fluctuating metal prices, but we have
not fully mitigated this short-term risk.
In Europe, certain of our sales contracts contain fixed metal
prices for periods of time such as four to thirty-six months. In
some cases, this can result in a negative (positive) impact on
sales as metal prices increase (decrease) because the prices are
fixed at historical levels. We enter into forward metal
purchases simultaneous with these contracts that directly hedge
the economic risk of future metal price fluctuation. The
positive or negative impact on sales under these contracts has
been included in the metal price lag effect described above,
without regard to the fixed forward instruments purchased to
offset this risk. The sales and Regional Income impacts are
described more fully in the Operations and Segment Review for
our Europe operating segment.
45
RESTATEMENT
AND REVIEW AND DELAYED FILINGS
We restated our condensed consolidated and combined financial
statements for our quarters ended March 31, 2005 and
June 30, 2005, as filed on May 16, 2006. The
restatement and review process included an extensive review of
the contingencies, reserves and adjustments made to our opening
balance sheet as of January 6, 2005.
As a result of the restatement and review process, certain
filings were delayed, including our Quarterly Report on
Form 10-Q
for the period ended September 30, 2005, our Annual Report
on
Form 10-K
for the year ended December 31, 2005 and our Quarterly
Reports on
Form 10-Q
for the periods ended March 31, 2006 and June 30, 2006.
INTERNAL
CONTROLS
The financial restatement and review we commenced in fiscal 2005
that continued into fiscal 2006 identified the need for
substantial improvement in our financial accounting and control
personnel, processes and reporting. We previously reported in
our Annual Report on
Form 10-K
for the year ended December 31, 2005 and continue to report
as of September 30, 2006 that we have material weaknesses
in our internal control over financial reporting and that our
disclosure controls and procedures were not effective. We are
working to remediate these weaknesses to enable us to timely and
accurately prepare and file our reports with the SEC. We expect
to continue to implement significant process improvements and
add substantially to our permanent financial and accounting
staff throughout the coming quarters. See Item 4.
Controls and Procedures.
SPIN-OFF
FROM ALCAN
On May 18, 2004, Alcan announced its intention to transfer
its rolled products businesses into a separate company and to
pursue a spin-off of that company to its shareholders. The
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 Novelis substantially all of the aluminum rolled
products businesses operated by Alcan, 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 rolling facilities in Europe
whose end-use markets and customers were similar to ours.
Post-Transaction
Adjustments
The agreements giving effect to the spin-off provide for various
post-transaction adjustments and the resolution of outstanding
matters. On November 8, 2006, Alcan and we executed a
settlement agreement resolving the material working capital and
cash balance adjustments to the opening balance sheet and issues
relating to the transfer of U.S. pension assets and liabilities
from Alcan to Novelis. Excluding pension assets and liability
transfers, the net impact of the settlement was a payment to
Novelis of approximately $4 million. The pension assets and
liability transfer is expected to be completed by year end,
subject to a true-up adjustment in 2007.
Agreements
between Novelis and Alcan
At the spin-off, we 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. The
terms and conditions of the agreements were determined primarily
by Alcan and may not reflect what two unaffiliated parties might
have agreed to. Had these agreements been negotiated with
unaffiliated third parties, their terms may have been more
favorable, or less favorable, to us.
46
OPERATIONS
AND SEGMENT REVIEW
The following discussion and analysis is based on our condensed
consolidated and combined statements of operations, which
reflect our results of operations for the quarters and nine
months ended September 30, 2006 and 2005, as prepared in
accordance with generally accepted accounting principles in the
United States of America (GAAP).
The following tables present our shipments, our operating
results and certain other information relevant to our business
for the quarters and nine months ended September 30, 2006
and 2005, as well as the percent change from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
Periods Ended September 30,
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Shipments in
kilotonnes (A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products, including tolling
(the conversion of customer-owned metal)
|
|
|
737
|
|
|
|
725
|
|
|
|
2
|
%
|
|
|
2,231
|
|
|
|
2,168
|
|
|
|
3
|
%
|
Ingot products, including primary
and secondary ingot and recyclable aluminum (B)
|
|
|
37
|
|
|
|
46
|
|
|
|
(20
|
)%
|
|
|
125
|
|
|
|
174
|
|
|
|
(28
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
774
|
|
|
|
771
|
|
|
|
|
%
|
|
|
2,356
|
|
|
|
2,342
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
One kilotonne (kt) is 1,000 metric tonnes. One metric tonne is
equivalent to 2,204.6 pounds. |
|
(B) |
|
Ingot products shipments include primary ingot in Brazil,
foundry products sold in Korea and Europe, secondary ingot in
Europe and other miscellaneous recyclable aluminum sales made
for logistical purposes. |
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
Periods Ended September 30,
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,494
|
|
|
$
|
2,053
|
|
|
|
21
|
%
|
|
$
|
7,377
|
|
|
$
|
6,337
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
2,389
|
|
|
|
1,834
|
|
|
|
30
|
%
|
|
|
6,931
|
|
|
|
5,678
|
|
|
|
22
|
%
|
Selling, general and
administrative expenses
|
|
|
103
|
|
|
|
90
|
|
|
|
14
|
%
|
|
|
293
|
|
|
|
260
|
|
|
|
13
|
%
|
Depreciation and amortization
|
|
|
57
|
|
|
|
56
|
|
|
|
2
|
%
|
|
|
174
|
|
|
|
173
|
|
|
|
1
|
%
|
Research and development expenses
|
|
|
10
|
|
|
|
10
|
|
|
|
|
%
|
|
|
29
|
|
|
|
29
|
|
|
|
|
%
|
Restructuring charges
net
|
|
|
10
|
|
|
|
7
|
|
|
|
43
|
%
|
|
|
13
|
|
|
|
4
|
|
|
|
225
|
%
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
4
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
5
|
|
|
|
(100
|
)%
|
Interest expense and amortization
of debt issuance costs net
|
|
|
52
|
|
|
|
46
|
|
|
|
13
|
%
|
|
|
149
|
|
|
|
148
|
|
|
|
1
|
%
|
Equity in net income of
non-consolidated
affiliates
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
150
|
%
|
|
|
(12
|
)
|
|
|
(6
|
)
|
|
|
100
|
%
|
Other (income)
expenses net
|
|
|
34
|
|
|
|
(48
|
)
|
|
|
(171
|
)%
|
|
|
(62
|
)
|
|
|
(72
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650
|
|
|
|
1,997
|
|
|
|
33
|
%
|
|
|
7,515
|
|
|
|
6,219
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
taxes on income and minority interests share
|
|
|
(156
|
)
|
|
|
56
|
|
|
|
(379
|
)%
|
|
|
(138
|
)
|
|
|
118
|
|
|
|
(217
|
)%
|
Provision (benefit) for taxes on
income (loss)
|
|
|
(52
|
)
|
|
|
37
|
|
|
|
(241
|
)%
|
|
|
30
|
|
|
|
67
|
|
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interests share
|
|
|
(104
|
)
|
|
|
19
|
|
|
|
(647
|
)%
|
|
|
(168
|
)
|
|
|
51
|
|
|
|
(429
|
)%
|
Minority interests share
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
(122
|
)%
|
|
|
(2
|
)
|
|
|
(19
|
)
|
|
|
(89
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(102
|
)
|
|
$
|
10
|
|
|
|
(1,120
|
)%
|
|
$
|
(170
|
)
|
|
$
|
32
|
|
|
|
(631
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
London Metal Exchange
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum (per metric tonne, and
presented in U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing cash price as of
September 30,
|
|
$
|
2,572
|
|
|
$
|
1,857
|
|
|
|
39
|
%
|
Average cash price during the
quarters ended September 30,
|
|
$
|
2,481
|
|
|
$
|
1,830
|
|
|
|
36
|
%
|
Average cash price during the nine
months ended September 30,
|
|
$
|
2,516
|
|
|
$
|
1,839
|
|
|
|
37
|
%
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
|
Third Quarter
|
|
|
Strengthen/
|
|
|
Nine Months
|
|
|
Strengthen/
|
|
Periods Ended September 30,
|
|
2006
|
|
|
2005
|
|
|
(Weaken)
|
|
|
2006
|
|
|
2005
|
|
|
(Weaken)
|
|
|
Federal Reserve Bank of New
York Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average of the month end rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar per Euro
|
|
|
1.275
|
|
|
|
1.217
|
|
|
|
5
|
%
|
|
|
1.252
|
|
|
|
1.258
|
|
|
|
|
%
|
Brazilian real per U.S. dollar
|
|
|
2.161
|
|
|
|
2.317
|
|
|
|
(7
|
)%
|
|
|
2.171
|
|
|
|
2.456
|
|
|
|
(12
|
)%
|
South Korean won per
U.S. dollar
|
|
|
954
|
|
|
|
1,036
|
|
|
|
(8
|
)%
|
|
|
956
|
|
|
|
1,021
|
|
|
|
(6
|
)%
|
Canadian dollar per
U.S. dollar
|
|
|
1.118
|
|
|
|
1.192
|
|
|
|
(6
|
)%
|
|
|
1.127
|
|
|
|
1.221
|
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
Periods Ended September 30,
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
New York Mercantile
Exchange Energy Price Quotations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Sweet
Crude
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average settlement price (per
barrel)
|
|
$
|
71.55
|
|
|
$
|
56.25
|
|
|
|
27
|
%
|
|
$
|
67.09
|
|
|
$
|
49.10
|
|
|
|
37
|
%
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Henry Hub contract
settlement price (per MMBTU) (A)
|
|
$
|
6.58
|
|
|
$
|
8.49
|
|
|
|
(22
|
)%
|
|
$
|
7.44
|
|
|
$
|
7.16
|
|
|
|
4
|
%
|
|
|
|
(A) |
|
One MMBTU is the equivalent of one decatherm, or one million
BTUs (British Thermal Units). |
49
RESULTS
OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2006
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2005
Shipments
We had increased shipments of rolled products in the third
quarter of 2006 compared to 2005 due primarily to increases in
North America and Europe. The increase in North America was in
the original equipment manufacturer (OEM)/distributor market, up
8kt, as we increased our customer base. In Europe, we
experienced higher shipments in all markets except foil
products. These increases were partially offset by lower can and
industrial products shipments in Asia.
The reduction in ingot products shipments was attributable
primarily to our European operations where the closing of our
Borgofranco casting alloys business during the first quarter of
2006 resulted in 8kt of lower shipments in the third quarter of
2006, as compared to the third quarter of 2005.
Net
sales
Higher net sales in the third quarter of 2006 compared to 2005
resulted primarily from the increase in LME metal prices, which
were 36% higher on average during the third quarter of 2006
compared to the same 2005 quarter. Metal represents
approximately 60% 70% of the sales value of our
products. Net sales was adversely impacted in North America due
to price ceilings on certain can contracts, which limited our
ability to pass through approximately $115 million of metal
price increases in the third quarter of 2006. In comparison, we
were unable to pass through approximately $5 million of
metal price increases in the third quarter of 2005 for a net
unfavorable impact of approximately $110 million.
Costs and
expenses
The following table presents our costs and expenses for the
quarters ended September 30, 2006 and 2005 (in dollars and
expressed as percentages of net sales).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$ in millions
|
|
|
Net Sales
|
|
|
$ in millions
|
|
|
Net Sales
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization)
|
|
$
|
2,389
|
|
|
|
95.9
|
%
|
|
$
|
1,834
|
|
|
|
89.4
|
%
|
Selling, general and
administrative expenses
|
|
|
103
|
|
|
|
4.1
|
%
|
|
|
90
|
|
|
|
4.4
|
%
|
Depreciation and amortization
|
|
|
57
|
|
|
|
2.3
|
%
|
|
|
56
|
|
|
|
2.7
|
%
|
Research and development expenses
|
|
|
10
|
|
|
|
0.4
|
%
|
|
|
10
|
|
|
|
0.5
|
%
|
Restructuring charges
net
|
|
|
10
|
|
|
|
0.4
|
%
|
|
|
7
|
|
|
|
0.3
|
%
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
%
|
|
|
4
|
|
|
|
0.2
|
%
|
Interest expense and amortization
of debt issuance costs net
|
|
|
52
|
|
|
|
2.1
|
%
|
|
|
46
|
|
|
|
2.2
|
%
|
Equity in net income of
non-consolidated affiliates
|
|
|
(5
|
)
|
|
|
(0.2
|
)%
|
|
|
(2
|
)
|
|
|
(0.1
|
)%
|
Other (income)
expenses net
|
|
|
34
|
|
|
|
1.3
|
%
|
|
|
(48
|
)
|
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,650
|
|
|
|
106.3
|
%
|
|
$
|
1,997
|
|
|
|
97.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold. Metal represents
approximately 70% 80% of our input costs, and the
increase in cost of goods sold in dollar terms is primarily due
to the impact of higher LME prices. As a percentage of net
sales, cost of goods sold was adversely impacted due to price
ceilings on certain can contracts, which limited our ability to
pass through approximately $115 million of metal price
increases during the third quarter of 2006 as described above.
In comparison, we were unable to pass through approximately
$5 million of metal price increases during the third
quarter of 2005. Further, during the third quarter of 2006 we
experienced
50
adverse impacts from higher energy and transportation costs in
all regions except South America, compared to the same period in
2005.
Selling, general and administrative expenses
(SG&A). SG&A in 2006 exceeds 2005 due
primarily to higher corporate costs which included
$6 million related to severance for our former chief
executive officer, incremental stock compensation expense of
$2 million primarily related to changes in fair values of
previously issued share-based awards and $3 million of
additional legal and professional fees incurred as a result of
our continued reliance on third-party consultants to support our
financial reporting requirements.
Interest expense and amortization of debt issuance
costs net. Interest expense increased
primarily as a result of (1) penalty interest and waiver
fee amortization we incurred during the third quarter of 2006
due to the late filing of our financial statements and
(2) higher interest rates on our remaining variable rate
debt, which were partially offset by lower interest expense due
to reduced debt levels in 2006 compared to 2005.
Other (income) expenses net. The
reconciliation of the difference between the quarters is shown
below (in millions):
|
|
|
|
|
|
|
Other
|
|
|
|
(Income)
|
|
|
|
Expenses Net
|
|
|
Other (income)
expenses net for the quarter ended
September 30, 2005
|
|
$
|
(48
|
)
|
|
|
|
|
|
Net losses of $37 million on
change in fair value of derivative instruments in 2006, compared
to net gains of $39 million in 2005
|
|
|
76
|
|
Loss on disposal of property,
plant and equipment net in 2006 of $2 million
|
|
|
2
|
|
Exchange gains of $5 million
in 2006 compared to gains of $4 million in 2005
|
|
|
(1
|
)
|
Other net
|
|
|
5
|
|
|
|
|
|
|
Other (income)
expenses net for the quarter ended
September 30, 2006
|
|
$
|
34
|
|
|
|
|
|
|
Provision
(benefit) for taxes on income (loss)
For the third quarter of 2006, we recorded a $52 million
benefit for taxes on our pre-tax loss of $161 million,
before our equity in net income of non-consolidated affiliates
and minority interests share, which represented an
effective tax rate of 32%. Our effective tax rate is less than
the benefit at the Canadian statutory rate of 33% due primarily
to (1) a $12 million increase in valuation allowances
primarily related to tax losses in certain jurisdictions where
we believe it is more likely than not that we will not be able
to utilize those losses, mostly offset by (2) an
$11 million benefit from differences between the Canadian
statutory and foreign effective tax rates resulting from the
application of an annual effective tax rate to profit and loss
entities in different jurisdictions.
For the third quarter of 2005, we recorded a $37 million
provision for taxes on our pre-tax income of $54 million,
before our equity in net income of non-consolidated affiliates
and minority interests share, which represented an
effective tax rate of 69%. Our effective tax rate is greater
than the Canadian statutory rate of 33% due primarily to
(1) $34 million of expense for (a) pre-tax
foreign currency gains or losses with no tax effect,
(b) the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect, and (c) the
remeasurement of deferred income taxes, (2) $5 million
of expense from differences between the Canadian statutory and
foreign effective tax rates resulting from the application of an
annual effective tax rate to profit and loss entities in
different jurisdictions, (3) a $12 million reduction
in valuation allowances primarily related to a change in
judgment regarding the realizability of net operating losses,
due to an expected increase in the profitability of our
operations in Asia, where we previously believed it was more
likely than not that we would not be able to utilize such
losses, and (4) a $10 million benefit from
expense/income items with no tax effect net.
51
Net
income (loss)
We reported a net loss of $102 million for the quarter
ended September 30, 2006, or $(1.38) per share, compared to
net income of $10 million, or $0.14 per share for the
quarter ended September 30, 2005.
OPERATING
SEGMENT REVIEW FOR THE QUARTER ENDED SEPTEMBER 30, 2006
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2005
Regional
Income
Due in part to the regional nature of supply and demand of
aluminum rolled products and in order to best serve our
customers, we manage our activities on the basis of geographical
areas and are organized under four operating segments: North
America; Europe; Asia and South America.
Our chief operating decision-maker uses regional financial
information in deciding how to allocate resources to an
individual segment, and in assessing performance of the segment.
Novelis chief operating decision-maker is its chief
executive officer.
We measure the profitability and financial performance of our
operating segments based on Regional Income, in accordance with
FASB Statement No. 131, Disclosure About the Segments of
an Enterprise and Related Information. Regional Income
provides a measure of our underlying regional segment results
that is in line with our portfolio approach to risk management.
We define Regional Income as income before (a) interest
expense and amortization of debt issuance costs; (b) gains
and losses on change in fair value of derivative
instruments net; (c) depreciation and
amortization; (d) impairment charges on long-lived assets;
(e) minority interests share; (f) adjustments to
reconcile our proportional share of Regional Income from
non-consolidated affiliates to income as determined on the
equity method of accounting; (g) restructuring (charges)
recoveries net; (h) gains or losses on
disposals of property, plant and equipment and businesses;
(i) corporate selling, general and administrative expenses;
(j) other corporate costs; (k) litigation
settlement net of insurance recoveries;
(l) provision or benefit for taxes on income (loss); and
(m) cumulative effect of accounting change net
of tax.
We do not treat all derivative instruments as hedges under FASB
Statement No. 133. Accordingly, changes in fair value are
recognized immediately in earnings, which results in the
recognition of fair value as a gain or loss in advance of the
contract settlement. In the accompanying condensed consolidated
and combined statements of operations, changes in fair value of
derivative instruments not accounted for as hedges under FASB
Statement No. 133 are recognized in Other (income)
expenses net. These gains or losses may or may not
result from cash settlement. For Regional Income purposes we
only include the impact of the derivative gains or losses to the
extent they are settled in cash during that period.
During the quarter ended September 30, 2006 we added a line
to our Regional Income reconciliation to improve the disclosure
of gains or losses resulting from cash settlement of derivatives
that have been included in Regional Income. Prior periods have
been revised to conform to the current period presentation.
52
Reconciliation
The following table presents Regional Income (Loss) by operating
segment and reconciles Total Regional Income to Net income
(loss) (in millions).
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2006
|
|
|
2005
|
|
|
Regional Income
(Loss)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(19
|
)
|
|
$
|
54
|
|
Europe
|
|
|
71
|
|
|
|
52
|
|
Asia
|
|
|
18
|
|
|
|
23
|
|
South America
|
|
|
37
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total Regional Income
|
|
|
107
|
|
|
|
153
|
|
Interest expense and amortization
of debt issuance costs
|
|
|
(55
|
)
|
|
|
(49
|
)
|
(Gains) losses on cash settlement
of derivative instruments net, included in Regional
Income
|
|
|
(62
|
)
|
|
|
4
|
|
Gains (losses) on change in fair
value of derivative instruments net
|
|
|
(37
|
)
|
|
|
39
|
|
Depreciation and amortization
|
|
|
(57
|
)
|
|
|
(56
|
)
|
Minority interests share
|
|
|
2
|
|
|
|
(9
|
)
|
Adjustment to eliminate
proportional consolidation (A)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Restructuring charges
net
|
|
|
(10
|
)
|
|
|
(7
|
)
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
(4
|
)
|
Losses on disposals of property,
plant and equipment and businesses
|
|
|
(2
|
)
|
|
|
|
|
Corporate selling, general and
administrative expenses
|
|
|
(33
|
)
|
|
|
(19
|
)
|
Other corporate costs net
|
|
|
2
|
|
|
|
4
|
|
Benefit (provision) for taxes on
income (loss)
|
|
|
52
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(102
|
)
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Our financial information for our segments (including Regional
Income) includes the results of our non-consolidated affiliates
on a proportionately consolidated basis, which is consistent
with the way we manage our business segments. However, under
GAAP, these non-consolidated affiliates are accounted for using
the equity method of accounting. Therefore, in order to
reconcile Total Regional Income to Net income (loss), the
proportional Regional Income of these non-consolidated
affiliates is removed from Total Regional Income, net of our
share of their net after-tax results, which is reported as
Equity in net income of non-consolidated affiliates in the
accompanying condensed consolidated and combined statements of
operations. See Note 6 Investment in and
Advances to Non-consolidated Affiliates and Related Party
Transactions to our condensed consolidated and combined
financial statements for further information about these
non-consolidated affiliates. |
OPERATING
SEGMENT RESULTS
North
America
As of September 30, 2006, North America manufactured
aluminum sheet and light gauge products through 10 aluminum
rolled products facilities and two dedicated recycling
facilities. Important end-use applications include beverage
cans, containers and packaging, automotive and other
transportation applications, building products and other
industrial applications.
53
The following table presents key financial and operating
information for North America for the quarters ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
296
|
|
|
|
285
|
|
|
|
3.9
|
%
|
Ingot products
|
|
|
17
|
|
|
|
18
|
|
|
|
(5.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
313
|
|
|
|
303
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
954
|
|
|
$
|
836
|
|
|
|
14.1
|
%
|
Regional Income (Loss)
|
|
$
|
(19
|
)
|
|
$
|
54
|
|
|
|
(135.2
|
)%
|
Total assets
|
|
$
|
1,487
|
|
|
$
|
1,388
|
|
|
|
7.1
|
%
|
Shipments
Rolled products shipments increased in the third quarter of 2006
as compared to 2005 primarily due to increasing our customer
base in the OEM/distributor market.
Net
sales
Net sales increases in the third quarter of 2006 compared to
2005 were driven primarily by metal prices, which were 36%
higher on average in the third quarter of 2006 compared to 2005,
and higher shipments discussed above. Increases in metal prices
are largely passed through to customers. However, the pass
through of metal price increases to our customers was limited in
cases where metal price ceilings were exceeded. This factor
unfavorably impacted North America net sales in the third
quarter of 2006 by approximately $115 million. In 2005, we
were unable to pass through approximately $5 million of
metal price increases for a net
quarter-over-quarter
unfavorable impact of approximately $110 million.
Regional
Income
As described above, the net unfavorable impact of metal price
ceilings was approximately $110 million, which reduced 2006
Regional Income as compared to 2005. This was partially offset
by $29 million of gains from the cash settlement of
derivative instruments recognized during the third quarter of
2006. Price increases implemented during the year added
$9 million to Regional Income during the third quarter of
2006. These price increases were partially offset by higher
energy and transportation costs.
Europe
As of September 30, 2006, Europe provided European markets
with value-added sheet and light gauge products through its 14
plants, including one recycling facility. Europe serves a broad
range of aluminum rolled product end-use markets in various
applications including can, automotive, lithographic and painted
products.
54
The following table presents key financial and operating
information for Europe for the quarters ended September 30,
2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
265
|
|
|
|
252
|
|
|
|
5.2
|
%
|
Ingot products
|
|
|
4
|
|
|
|
13
|
|
|
|
(69.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
269
|
|
|
|
265
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
940
|
|
|
$
|
737
|
|
|
|
27.5
|
%
|
Regional Income
|
|
$
|
71
|
|
|
$
|
52
|
|
|
|
36.5
|
%
|
Total assets
|
|
$
|
2,392
|
|
|
$
|
2,129
|
|
|
|
12.4
|
%
|
Shipments
Rolled products shipments increased during the third quarter of
2006 compared to the same quarter of 2005. Increased shipments
in all product groups other than foil more than offset a 5kt
decline in foil and a 5kt decline in shipments due to the sale
of our Annecy plant in March 2006. Ingot products shipments
declined primarily as a result of the closure of our Borgofranco
facility during the first quarter of 2006.
Net
sales
Net sales increased primarily as a result of the 36% increase in
average LME metal prices, which was partially offset by
unfavorable metal price lag.
Regional
Income
Compared to 2005, Regional Income was impacted in the third
quarter of 2006 by a number of factors. First, as compared to
2005, Regional Income in 2006 was unfavorably impacted by
$23 million due to sales to certain customers at previously
fixed forward prices. This negative impact was directly offset
by $23 million of cash-settled derivative gains related to
forward LME purchases entered into
back-to-back
with the customer contracts. Second, 2006 was favorably impacted
by increased volume and other operational improvements by
approximately $20 million, the closing of our Borgofranco
facility, which incurred losses of $4 million in 2005 and
currency benefits of $3 million. Finally, these benefits
were partially offset by higher energy costs of approximately
$8 million in 2006 as compared to 2005.
Total
assets
Total assets increased primarily due to the increase in metal
prices, which impacted both inventories and accounts receivable.
Asia
As of September 30, 2006, Asia operated three manufacturing
facilities, with production balanced between foil, construction
and industrial, and beverage and food can end-use applications.
55
The following table presents key financial and operating
information for Asia for the quarters ended September 30,
2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
106
|
|
|
|
119
|
|
|
|
(10.9
|
)%
|
Ingot products
|
|
|
9
|
|
|
|
9
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
115
|
|
|
|
128
|
|
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
388
|
|
|
$
|
328
|
|
|
|
18.3
|
%
|
Regional Income
|
|
$
|
18
|
|
|
$
|
23
|
|
|
|
(21.7
|
)%
|
Total assets
|
|
$
|
1,021
|
|
|
$
|
971
|
|
|
|
5.1
|
%
|
Shipments
Rolled products shipments declined primarily due to lower can
and industrial products shipments of 12kt, as price increases
unfavorably impacted demand in these markets.
Net
sales
Net sales for the third quarter of 2006 were higher than in
2005, as we experienced higher metal prices that were largely
passed through to our customers.
Regional
Income
Regional Income was negatively impacted by metal price lag of
$6 million and lower volume which reduced Regional Income
by $4 million in 2006 as compared to 2005. These reductions
to Regional Income were partially offset by currency benefits.
South
America
As of September 30, 2006, South America operated two
rolling plant facilities in Brazil along with two smelters, an
alumina refinery, a bauxite mine and power generation
facilities. South America manufactures various aluminum rolled
products, including can stock, automotive and industrial sheet
and light gauge for the beverage and food can, construction and
industrial and transportation end-use markets.
The following table presents key financial and operating
information for South America for the quarters ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
70
|
|
|
|
68
|
|
|
|
2.9
|
%
|
Ingot products
|
|
|
7
|
|
|
|
7
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
77
|
|
|
|
75
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
216
|
|
|
$
|
157
|
|
|
|
37.6
|
%
|
Regional Income
|
|
$
|
37
|
|
|
$
|
24
|
|
|
|
54.2
|
%
|
Total assets
|
|
$
|
814
|
|
|
$
|
780
|
|
|
|
4.4
|
%
|
56
Shipments
Rolled products shipments increased during the third quarter of
2006 due to local can market growth, which was up 3kt, partly
offset by lower industrial products and foil shipments.
Net
sales
The main driver for the rise in net sales for the third quarter
of 2006 over 2005 was the increase in LME prices, which are
passed through to customers.
Regional
Income
As compared to 2005, Regional Income benefited from several
operational improvements resulting in approximately
$12 million of lower operating costs as well as from slight
gains on cash-settled derivatives. In addition, we benefited
slightly from rising LME metal prices because approximately 85%
of our raw material input cost comes from our smelters, which
has little to no correlation with LME metal price movements.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
2005
Shipments
We had increased shipments of rolled products in three of our
four operating regions in the nine months ended
September 30, 2006 compared to the 2005 period. The largest
increase was in North America, up 31kt, driven by a 23kt
increase in can shipments. We also experienced increased
shipments in the can market in Europe totaling 10kt and smaller
increases in all other product groups, except our foil business
which lost volume. In South America, can shipments increased by
17kt, which was partially offset by small reductions in
shipments of industrial products to export markets and shipments
of foil products. In Asia, shipments were down due to lower
demand in the Asian can market.
We experienced a decline in ingot shipments in three of our
operating regions in 2006 compared to 2005. The main decrease
was in Europe, driven by lower primary re-melt shipments and the
closing of our Borgofranco casting alloys business during the
first quarter of 2006.
Net
sales
Higher net sales in the nine months ended September 30,
2006 compared to the same 2005 period was primarily the result
of an increase in LME metal pricing, which was 37% higher on
average during the first nine months of 2006 than the comparable
2005 period. Metal represents approximately 60% 70%
of the sales value of our products. Net sales for the first nine
months of 2006 was adversely impacted in North America due to
price ceilings on certain can contracts, which limited our
ability to pass through approximately $350 million of metal
price increases. During the comparative time period in 2005 we
were unable to pass through approximately $50 million of
metal price increases for a net unfavorable impact of
approximately $300 million.
57
Costs
and expenses
The following table presents our costs and expenses for the nine
months ended September 30, 2006 and 2005 (in dollars and
expressed as percentages of net sales).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$ in millions
|
|
|
Net Sales
|
|
|
$ in millions
|
|
|
Net Sales
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization)
|
|
$
|
6,931
|
|
|
|
94.0
|
%
|
|
$
|
5,678
|
|
|
|
89.6
|
%
|
Selling, general and
administrative expenses
|
|
|
293
|
|
|
|
4.0
|
%
|
|
|
260
|
|
|
|
4.1
|
%
|
Depreciation and amortization
|
|
|
174
|
|
|
|
2.3
|
%
|
|
|
173
|
|
|
|
2.7
|
%
|
Research and development expenses
|
|
|
29
|
|
|
|
0.4
|
%
|
|
|
29
|
|
|
|
0.5
|
%
|
Restructuring charges
net
|
|
|
13
|
|
|
|
0.2
|
%
|
|
|
4
|
|
|
|
|
%
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
%
|
|
|
5
|
|
|
|
0.1
|
%
|
Interest expense and amortization
of debt issuance costs net
|
|
|
149
|
|
|
|
2.0
|
%
|
|
|
148
|
|
|
|
2.3
|
%
|
Equity in net income of
non-consolidated affiliates
|
|
|
(12
|
)
|
|
|
(0.2
|
)%
|
|
|
(6
|
)
|
|
|
(0.1
|
)%
|
Other income net
|
|
|
(62
|
)
|
|
|
(0.8
|
)%
|
|
|
(72
|
)
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,515
|
|
|
|
101.9
|
%
|
|
$
|
6,219
|
|
|
|
98.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold. Metal represents
approximately 70% 80% of our input costs, and the
increase in cost of goods sold in dollar terms is primarily due
to the impact of higher LME prices. As a percentage of net
sales, cost of goods sold for the first nine months of 2006 was
adversely impacted due to price ceilings on certain can
contracts, which limited our ability to pass through
approximately $350 million of metal price increases as
described above. During the comparable period in 2005, we were
unable to pass through approximately $50 million of metal
price increases. Further, we experienced adverse impacts from
higher energy and transportation costs in all regions and
unfavorable exchange rate impacts, most notably in South America.
Selling, general and administrative expenses
(SG&A). Included in SG&A for the nine
months ended September 30, 2005 are Novelis
start-up
costs of approximately $5 million which do not recur in
2006. Excluding these
start-up
costs, SG&A has increased during the first nine months of
2006 as compared to the same time period in 2005 primarily
because of higher corporate costs that include an incremental
$20 million of legal and professional fees incurred in
connection with the restatement and review process, delayed
filings and as a result of our continued reliance on third party
consultants to support our financial reporting requirements. In
addition, corporate costs were higher during 2006 due to
approximately $10 million of severance associated with
certain corporate executives, $4 million of incremental
stock compensation primarily associated with changes in fair
values of previously issued share-based awards that are settled
in cash, and generally higher employee costs as a result of
additional permanent hires made since the companys
inception.
Interest expense and amortization of debt issuance
costs net. In 2005, we expensed
$11 million in debt issuance fees on undrawn credit
facilities during our first quarter, used to back up the Alcan
notes we received in January 2005 as part of the spin-off.
Excluding the debt issuance fees, interest expense increased in
the nine months ended September 30, 2006 over 2005
primarily as a result of (1) penalty interest we incurred
during 2006 due to the late filing of our financial statements
and (2) higher interest rates on our remaining variable
rate debt, which were partially offset by lower interest expense
as a result of reduced debt levels.
Restructuring charges net. During
2006, we announced several restructuring programs, including our
central management and administration activities in Zurich,
Switzerland, our Neuhausen research and development center in
Switzerland; our Goettingen facility in Germany, and the
reorganization of our plants in
58
Ohle and Ludenscheid, Germany, including the closing of two
non-core business lines located within those facilities. We
incurred aggregate restructuring charges of approximately
$9 million during the nine months ended September 30,
2006 in connection with these programs.
Other income net. The
reconciliation of the difference between the periods is shown
below (in millions):
|
|
|
|
|
|
|
Other
|
|
|
|
Income Net
|
|
|
Other income net
for the nine months ended September 30, 2005
|
|
$
|
(72
|
)
|
|
|
|
|
|
Net gains of $58 million on
the change in fair value of derivative instruments in 2006,
compared to net gains of $56 million in 2005
|
|
|
(2
|
)
|
Loss on disposal of business in
2006 of $15 million
|
|
|
15
|
|
Loss on disposal of property,
plant and equipment in 2006 of $1 million compared to gains
of $11 million in 2005
|
|
|
12
|
|
Exchange gains of $15 million
in 2006 compared to losses of $1 million in 2005
|
|
|
(16
|
)
|
Other net
|
|
|
1
|
|
|
|
|
|
|
Other income net
for the nine months ended September 30, 2006
|
|
$
|
(62
|
)
|
|
|
|
|
|
Provision
for taxes on income (loss)
For the nine months ended September 30, 2006, we recorded a
$30 million provision for taxes on our pre-tax loss of
$150 million, before our equity in net income of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of (20)%. Our effective
tax rate differs from the benefit at the Canadian statutory rate
of 33% due to (1) a $42 million increase in valuation
allowances primarily related to tax losses in certain
jurisdictions where we believe it is more likely than not that
we will not be able to utilize those losses and
(2) $38 million of expense for (a) pre-tax
foreign currency gains or losses with no tax effect,
(b) the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect and (c) the
remeasurement of deferred income taxes.
For the nine months ended September 30, 2005, we recorded a
$67 million provision for taxes on our pre-tax income of
$112 million, before our equity in net income of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of 60%. Our effective
tax rate is greater than the Canadian statutory rate of 33% due
primarily to $30 million of expense for (a) pre-tax
foreign currency gains or losses with no tax effect,
(b) the tax effect of U.S. dollar denominated currency
gains or losses with no pre-tax effect and (c) the
remeasurement of deferred income taxes.
Net
income (loss)
We reported a net loss of $170 million for the nine months
ended September 30, 2006, or $(2.30) per share, compared to
net income of $32 million, or $0.43 per share for the
nine months ended September 30, 2005. Net income for the
nine months ended September 30, 2005 included our
consolidated net income of $61 million for the period from
January 6, 2005 (the effective date of the spin-off) to
September 30, 2005, and a combined loss of $29 million
on the
mark-to-market
of derivative instruments, primarily with Alcan, for the period
from January 1 to January 5, 2005, prior to the spin-off.
59
OPERATING
SEGMENT REVIEW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
2005
The following table presents Regional Income by operating
segment and reconciles Total Regional Income to Net income
(loss) (in millions).
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Regional Income
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
64
|
|
|
$
|
141
|
|
Europe
|
|
|
208
|
|
|
|
161
|
|
Asia
|
|
|
70
|
|
|
|
80
|
|
South America
|
|
|
122
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
Total Regional Income
|
|
|
464
|
|
|
|
468
|
|
Interest expense and amortization
of debt issuance costs
|
|
|
(160
|
)
|
|
|
(155
|
)
|
Gains on cash settlement of
derivative instruments net, included in Regional
Income
|
|
|
(193
|
)
|
|
|
(10
|
)
|
Gains on change in fair value of
derivative instruments net
|
|
|
58
|
|
|
|
56
|
|
Depreciation and amortization
|
|
|
(174
|
)
|
|
|
(173
|
)
|
Minority interests share
|
|
|
(2
|
)
|
|
|
(19
|
)
|
Adjustment to eliminate
proportional consolidation (A)
|
|
|
(26
|
)
|
|
|
(27
|
)
|
Restructuring charges
net
|
|
|
(13
|
)
|
|
|
(4
|
)
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
(5
|
)
|
Gains (losses) on disposals of
property, plant and equipment and businesses
|
|
|
(16
|
)
|
|
|
11
|
|
Corporate selling, general and
administrative expenses
|
|
|
(88
|
)
|
|
|
(49
|
)
|
Other corporate costs net
|
|
|
10
|
|
|
|
6
|
|
Provision for taxes on income
(loss)
|
|
|
(30
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(170
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Our financial information for our segments (including Regional
Income) includes the results of our non-consolidated affiliates
on a proportionately consolidated basis, which is consistent
with the way we manage our business segments. However, under
GAAP, these non-consolidated affiliates are accounted for using
the equity method of accounting. Therefore, in order to
reconcile Total Regional Income to Net income (loss), the
proportional Regional Income of these non-consolidated
affiliates is removed from Total Regional Income, net of our
share of their net after-tax results, which is reported as
Equity in net income of non-consolidated affiliates in the
accompanying condensed consolidated and combined statements of
operations. See Note 6 Investment in and
Advances to Non-consolidated Affiliates and Related Party
Transactions to our condensed consolidated and combined
financial statements for further information about these
non-consolidated affiliates. |
60
OPERATING
SEGMENT RESULTS
North
America
The following table presents key financial and operating
information for North America for the nine months ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
883
|
|
|
|
852
|
|
|
|
3.6
|
%
|
Ingot products
|
|
|
59
|
|
|
|
61
|
|
|
|
(3.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
942
|
|
|
|
913
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,841
|
|
|
$
|
2,500
|
|
|
|
13.6
|
%
|
Regional Income
|
|
$
|
64
|
|
|
$
|
141
|
|
|
|
(54.6
|
)%
|
Total assets
|
|
$
|
1,487
|
|
|
$
|
1,388
|
|
|
|
7.1
|
%
|
Shipments
Rolled products shipments increased by 23kt due to increased
orders in the can market during the nine months ended
September 30, 2006. Foil shipments increased by 4kt as we
increased our market share and shipments in the OEM/distributor
market increased by 7kt. The remaining difference is primarily
explained by lower shipments into the light gauge automotive
finstock and automotive sheet markets.
Net
sales
North America net sales increases in the nine months ended
September 30, 2006 compared to 2005 were driven primarily
by metal prices, which were 37% higher on average in 2006
compared to 2005. Increases in metal prices are largely passed
through to customers. However, the pass through of metal price
increases to our customers was limited in cases where metal
price ceilings were exceeded. This factor unfavorably impacted
North America net sales in the nine months ended
September 30, 2006 by approximately $350 million.
During the comparable period of 2005, we were unable to pass
through approximately $50 million of metal price increases
for a net unfavorable impact of approximately $300 million.
Regional
Income
As described above, the net unfavorable impact of metal price
ceilings was approximately $300 million which reduced 2006
Regional Income as compared to 2005. This was partially offset
by $120 million of gains from the cash settlement of
derivative instruments during the nine months ended
September 30, 2006 and $71 million from the benefit of
metal price lag in 2006. Price increases added approximately
$29 million to Regional Income in 2006 and additionally,
higher UBC spreads, increased volume, and operational
improvements favorably impacted 2006 by $27 million as
compared to 2005. These benefits were partially offset by
$24 million of higher energy and transportation costs.
61
Europe
The following table presents key financial and operating
information for Europe for the nine months ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
797
|
|
|
|
768
|
|
|
|
3.8
|
%
|
Ingot products
|
|
|
15
|
|
|
|
63
|
|
|
|
(76.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
812
|
|
|
|
831
|
|
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,688
|
|
|
$
|
2,376
|
|
|
|
13.1
|
%
|
Regional Income
|
|
$
|
208
|
|
|
$
|
161
|
|
|
|
29.2
|
%
|
Total assets
|
|
$
|
2,392
|
|
|
$
|
2,129
|
|
|
|
12.4
|
%
|
Shipments
Rolled products shipments increased primarily due to a 31kt
increase in hot rolled and cold rolled coil shipments (an
intermediate product) and a 10kt increase in can shipments.
Other market increases include 7kt in automotive and 5kt in each
of the painted and plain markets, driven by strong market
demand. These increases were partially offset by lower foilstock
shipments of 26kt and the sale of our Annecy operation in March
2006, which reduced shipments in the nine months of 2006 by
15kt. Ingot products shipments declined due to lower re-melt
shipments of 26kt and lower casting alloys shipments of 24kt due
to the closing of our Borgofranco facility.
Net
sales
Net sales increased primarily as a result of the 37% increase in
average LME metal prices which was partially offset by the
reduction in total shipments described above and unfavorable
metal price lag.
Regional
Income
Compared to 2005, Regional Income was impacted in 2006 by a
number of factors. First, as compared to 2005, Regional Income
was unfavorably impacted by $63 million due to sales to
certain customers at previously fixed forward prices. This
negative impact was directly offset by $63 million of
cash-settled derivative gains related to forward LME purchases
entered into
back-to-back
with the customer contracts. Second, metal price lag related to
inventory processing time favorably impacted 2006 by
approximately $23 million. Third, price, mix and other
operational improvements added $45 million to Regional
Income. Fourth, Europe incurred approximately $5 million of
Novelis
start-up
costs in 2005 that did not recur in 2006. Finally, these
benefits were partially offset by a $26 million increase in
energy costs in 2006.
Total
assets
Total assets increased primarily due to the increase in metal
prices, which impacted both inventories and accounts receivable.
62
Asia
The following table presents key financial and operating
information for Asia for the nine months ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
347
|
|
|
|
356
|
|
|
|
(2.5
|
)%
|
Ingot products
|
|
|
32
|
|
|
|
30
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
379
|
|
|
|
386
|
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,235
|
|
|
$
|
1,025
|
|
|
|
20.5
|
%
|
Regional Income
|
|
$
|
70
|
|
|
$
|
80
|
|
|
|
(12.5
|
)%
|
Total assets
|
|
$
|
1,021
|
|
|
$
|
971
|
|
|
|
5.1
|
%
|
Shipments
Rolled products shipments for the nine months ended
September 30, 2006 declined compared to the same period in
2005 due to reduced demand for can and industrial products
resulting from the higher LME prices. Ingot products shipments
were higher due to increased regional automotive demand.
Net
sales
Net sales increased primarily as a result of the 37% increase in
average LME metal prices which was largely passed through to
customers.
Regional
Income
Regional Income for the nine months ended September 30,
2006 was lower than the same period in 2005, due primarily to
lower volume, and higher employment, energy, and non-aluminum
metal costs.
South
America
The following table presents key financial and operating
information for South America for the nine months ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
204
|
|
|
|
191
|
|
|
|
6.8
|
%
|
Ingot products
|
|
|
19
|
|
|
|
21
|
|
|
|
(9.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
223
|
|
|
|
212
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
626
|
|
|
$
|
448
|
|
|
|
39.7
|
%
|
Regional Income
|
|
$
|
122
|
|
|
$
|
86
|
|
|
|
41.9
|
%
|
Total assets
|
|
$
|
814
|
|
|
$
|
780
|
|
|
|
4.4
|
%
|
63
Shipments
Can shipments for the nine months ended September 30, 2006
increased by 17kt over 2005, with the main driver being local
market growth. This growth was slightly offset by reductions in
shipments in the foil and industrial products markets.
Net
sales
The main drivers for the rise in net sales for the nine months
ended September 30, 2006 over 2005 were the increase in LME
prices, which are passed through to customers, higher shipping
volume and by a reduction in tolling sales in 2006 compared to
2005.
Regional
Income
In the nine months ended September 30, 2006, we benefited
from rising LME metal prices in two ways. First, the output from
our smelters, representing approximately 85% of our raw material
input cost, has little to no correlation with LME metal price
movements. Second, we experienced favorable metal price lag
resulting from price increases. These two factors favorably
impacted Regional Income by approximately $32 million.
Regional Income for the nine months ended September 30,
2006 also benefited from a number of other items as compared to
2005. These include approximately $6 million of expenses
incurred in 2005 associated with certain labor claims which did
not recur in 2006, $6 million of gains from the cash
settlement of derivative instruments, a positive physical
inventory adjustment of $5 million and other cost
reductions of approximately $8 million. These benefits were
partially offset by the impact of a stronger Brazilian real,
which was on average 12% higher in the nine months ended
September 30, 2006 as compared to 2005. This unfavorably
impacted Regional Income by $21 million as the majority of
sales are in U.S. dollars while local manufacturing costs
are incurred in Brazilian real.
LIQUIDITY
AND CAPITAL RESOURCES
Our liquidity and available capital resources are impacted by
operating, financing and investing activities.
Operating
Activities
Free cash flow (which is a non-GAAP measure) consists of
(a) Net cash provided by operating activities;
(b) less dividends and capital expenditures; (c) less
premiums paid to purchase derivative instruments; (d) plus
net proceeds from settlement of derivative instruments.
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. We believe the line on our condensed
consolidated and combined statement of cash flows entitled
Net 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.
64
The following tables show the reconciliation from Net cash
provided by operating activities to Free cash flow for the nine
months ended September 30, 2006 and 2005, and the
September 30, 2006 and December 31, 2005 balances of
cash and cash equivalents (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Net cash provided by operating
activities
|
|
$
|
6
|
|
|
$
|
366
|
|
|
$
|
(360
|
)
|
Dividends
|
|
|
(28
|
)
|
|
|
(27
|
)
|
|
|
(1
|
)
|
Capital expenditures
|
|
|
(77
|
)
|
|
|
(104
|
)
|
|
|
27
|
|
Premiums paid to purchase
derivative instruments
|
|
|
(2
|
)
|
|
|
(26
|
)
|
|
|
24
|
|
Net proceeds from settlement of
derivative instruments
|
|
|
227
|
|
|
|
96
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
126
|
|
|
$
|
305
|
|
|
$
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
71
|
|
|
$
|
100
|
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $6 million
for the nine months ended September 30, 2006,
$360 million less than the $366 million provided in
the comparable 2005 period. For a discussion of the factors in
our operating results that impact Net cash provided by operating
activities, including other non-cash items, refer to the
discussion in Operating Segment Review for the Nine Months
Ended September 30, 2006 Compared to the Nine Months Ended
September 30, 2005.
Changes in assets and liabilities contributed $67 million
to Net cash provided by operating activities for the nine months
ended September 30, 2006, which was $160 million less
than the comparable 2005 period, when changes in assets and
liabilities contributed net cash of $227 million. Included
within the $67 million in changes in assets and liabilities
for 2006 were positive net cash flows of $301 million from
a net increase in trade payables and other current liabilities,
substantially offset by negative net cash flows of
$260 million from a net increase in accounts receivable and
inventories. Changes in all other assets and liabilities
provided net cash flows of $26 million.
Free cash flow was $126 million for the nine months ended
September 30, 2006, $179 million less than the
comparable 2005 period. This was directly attributable to the
decrease in Net cash provided by operating activities, half of
which was offset by the net increase in cash flows resulting
from derivative instrument activity and lower capital
expenditures in 2006 as compared to 2005.
Financing
Activities
In the nine months ended September 30, 2006, we reduced our
total debt by a net amount of $184 million, paying down
$224 million on our Floating rate Term Loan B; paying off
in full our Korean won (KRW) 30 billion ($30 million)
5.75% fixed rate loan originally due October 2008; and paying
down $20 million of our $50 million 5.30% loan due in
February 2008. We also made principal payments aggregating
approximately $3 million relating to capital lease
obligations and other debt. We borrowed an additional
$86 million on our short-term credit facilities during the
nine months ended September 30, 2006. From
December 31, 2005 to September 30, 2006, changes in
foreign exchange rates had the effect of increasing our foreign
currency denominated capital lease obligations and other debt by
$7 million.
We have approximately $413 million available under our
$500 million revolving credit facility as of
September 30, 2006.
To date, we have paid fees related to the five waiver and
consent agreements under the credit agreement relating to our
senior secured credit facilities of approximately
$6 million, which are being amortized over the remaining
life of the debt.
65
Our senior secured credit facilities include 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.
On October 16, 2006, we amended the financial covenants to
our senior secured credit facilities. In particular, we amended
our maximum total leverage, minimum interest coverage, and
minimum fixed charge coverage ratios through the quarter ending
March 31, 2008. We also amended and modified other
provisions of the senior secured credit facilities to permit
more efficient ordinary-course operations, including increasing
the amounts of certain permitted investments and asset-backed
securitizations, permitting nominal quarterly dividends, and the
transfer of an intercompany loan to another subsidiary. In
return for these amendments and modifications, we paid aggregate
fees of approximately $3 million to lenders who consented
to the amendments and modifications, and agreed to continue
paying the higher applicable margins on our senior secured
credit facilities, and the higher unused commitment fees on our
revolving credit facilities that were instated with a prior
waiver and consent agreement in May 2006. Specifically, we
agreed to a 1.25% applicable margin for Term Loans maintained as
Base Rate Loans, a 2.25% applicable margin for Term Loans
maintained as Eurocurrency Rate Loans, a 1.50% applicable margin
for Revolver Loans maintained as Base Rate Loans, a 2.50%
applicable margin for Revolver Loans maintained as Eurocurrency
Rate Loans and a 62.5 basis point commitment fee on the
unused portion of the revolving credit facility, until such time
as the compliance certificate for the fiscal quarter ending
March 31, 2008 has been delivered.
The amended maximum total leverage, minimum interest coverage
and minimum fixed charge coverage ratios for the period ended
September 30, 2006 are 6.5 to 1; 2 to 1; and 0.8 to 1,
respectively. We were in compliance with these financial
covenants as of the period ended September 30, 2006. In
addition, as described below, we previously obtained waivers
from our lenders related to our inability to timely file our SEC
reports.
Under the indenture that governs the Senior Notes, we are
subject to certain restrictive covenants applicable to incurring
additional debt and providing additional guarantees, paying
dividends beyond certain amounts and making other restricted
payments, sales and transfers of assets, certain consolidations
or mergers, and certain transactions with affiliates. We were in
compliance with these covenants as of September 30, 2006.
As of September 30, 2006, we had entered into interest rate
swaps to fix the
3-month
LIBOR interest rate on a total of $200 million of the
floating rate Term Loan B debt at effective weighted
average interest rates and amounts expiring as follows: 3.8% on
$100 million through February 3, 2007; and 3.9% on
$100 million through February 3, 2008. We are still
obligated to pay any applicable margin, as defined in our senior
secured credit facilities, as amended, in addition to these
interest rates. As of September 30, 2006, 78% of our debt
was fixed rate and 22% was variable rate.
In the first quarter of 2006, we repaid our KRW 30 billion
($30 million) 5.75% fixed rate loan originally due October
2008. In May 2006, a portion of the $50 million (KRW
51 billion) 5.30% fixed rate loan was refinanced into a KRW
19 billion ($20 million) short-term floating rate
loan, which was paid in June 2006. In October 2006, the balance
of this loan was refinanced into two short-term floating rate
loans: (1) a KRW 10 billion ($11 million) loan,
which was repaid in October 2006 and (2) a KRW
20 billion ($21 million) loan due within six months.
We were in compliance with all debt covenants related to our
Novelis Korea Limited bank loans as of September 30, 2006.
Standard & Poors Ratings Service and Moodys
Investors Services currently assign our Senior Notes a rating of
B and B2, respectively. Our credit ratings may be subject to
revision or withdrawal at any time by the credit rating
agencies, and each rating should be evaluated independently of
any other rating. We cannot ensure that a rating will remain in
effect for any given period of time or that a rating will not be
lowered or withdrawn entirely by a credit rating agency if, in
its judgment, circumstances so warrant. If the credit rating
agencies downgrade our ratings, we would likely be required to
pay a higher interest rate in future financings, incur increased
margin deposit requirements, and our potential pool of investors
and funding sources could decrease.
66
Investing
Activities
The following table presents information regarding our Net cash
provided by investing activities for the nine months ended
September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Proceeds from settlement of
derivative instruments, less premiums paid to purchase
derivative instruments
|
|
$
|
225
|
|
|
$
|
70
|
|
|
$
|
155
|
|
Capital expenditures
|
|
|
(77
|
)
|
|
|
(104
|
)
|
|
|
27
|
|
Proceeds from loans
receivable net
|
|
|
27
|
|
|
|
392
|
|
|
|
(365
|
)
|
Cash advance received on pending
transfer of rights
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Payments related to disposal of
business
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Changes in investment in and
advances to non-consolidated affiliates
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Proceeds from sales of assets
|
|
|
3
|
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
$
|
190
|
|
|
$
|
367
|
|
|
$
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the first nine months of 2005, $373 million of the
proceeds from loans receivable net represents
proceeds received from Alcan related to the spin-off, to retire
loans due to Novelis entities.
The majority of our capital expenditures for both the 2006 and
2005 periods were invested in projects devoted to product
quality, technology, productivity enhancements and undertaking
small projects to increase capacity. During the nine months
ended September 30, 2005, capital expenditures included
three larger projects: a casting expansion project in our
Oswego, New York facility; a tandem mill project in our
Rogerstone, Wales facility and the build-out of the Atlanta
corporate offices and related information technology
infrastructure.
The following table presents additional information regarding
our capital expenditures, depreciation and reinvestment rate for
the nine months ended September 30, 2006 and 2005.
Reinvestment rate is defined as capital expenditures expressed
as a percentage of depreciation and amortization expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Capital expenditures
|
|
$
|
77
|
|
|
$
|
104
|
|
|
$
|
(27
|
)
|
Depreciation and amortization
|
|
$
|
174
|
|
|
$
|
173
|
|
|
|
1
|
|
Reinvestment rate
|
|
|
44
|
%
|
|
|
60
|
%
|
|
|
|
|
Impact
of Late SEC Filings on our Debt Agreements
The restatement of our unaudited condensed consolidated and
combined financial statements for the quarters ended
March 31, 2005 and June 30, 2005 (filed on
May 16, 2006) resulted in delays in the filing of our
Quarterly Report on
Form 10-Q
for the period ended September 30, 2005 (filed on
May 16, 2006), our Annual Report on
Form 10-K
for the year ended December 31, 2005 (filed on
August 25, 2006 and amended on October 20, 2006), our
Quarterly Report on
Form 10-Q
for the period ended March 31, 2006 (filed on
September 15, 2006) and our Quarterly Report on
Form 10-Q
for the period ended June 30, 2006 (filed on
October 20, 2006).
Senior
Secured Credit Facilities
The terms of our senior secured credit facilities require that
we deliver unaudited quarterly and audited annual financial
statements to our lenders within specified periods of time. Due
to the delays, we obtained a
67
series of five waiver and consent agreements from the lenders
under the facility to extend the various filing deadlines. Under
the most recent waiver, we extended the filing deadline for this
Form 10-Q
to the earlier of 30 days after the receipt of an effective
notice of default under the Senior Notes and December 29,
2006 (as applicable).
On July 26, 2006, we entered into a Commitment Letter with
Citigroup Global Markets Inc. for backstop financing facilities
in an amount up to $2.855 billion. We paid fees of
approximately $4 million in conjunction with this
commitment. The Commitment Letter was originally set to expire
on October 2, 2006; however, it was amended to and did
expire on October 31, 2006. Accordingly, during the fourth
quarter of 2006, we will charge the $4 million in fees to
Interest expense and debt issuance costs net.
OFF-BALANCE
SHEET ARRANGEMENTS
Derivative
Instruments
As of September 30, 2006, we have derivative financial
instruments, as defined by FASB Statement No. 133. See
Note 13 Financial Instruments and Commodity
Contracts to our condensed consolidated and combined financial
statements.
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 energy prices. Such
instruments are used for risk management purposes only. We may
be exposed to losses in the future if the counterparties to the
contracts fail to perform. We are satisfied that the risk of
such non-performance is remote, due to our monitoring of credit
exposures.
In the first quarter of 2006, we implemented hedge accounting
for certain of our cross-currency interest rate swaps with
respect to intercompany loans to several European subsidiaries
and forward foreign exchange contracts. As of September 30,
2006, we had $712 million of cross-currency interest rate
swaps (Euro 475 million, British Pound (GBP)
62 million and Swiss Franc (CHF) 35 million) and
$114 million of forward foreign exchange contracts
(267 million Brazilian real (BRL)).
The fair values of our financial instruments and commodity
contracts as of September 30, 2006, were as follows (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Net Fair
|
|
|
|
Maturity Dates
|
|
Assets
|
|
|
Liabilities
|
|
|
Value
|
|
|
Forward foreign exchange contracts
|
|
2006 through 2011
|
|
$
|
12
|
|
|
$
|
(11
|
)
|
|
$
|
1
|
|
Interest rate swaps
|
|
2007 through 2008
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Cross-currency interest rate swaps
|
|
2006 through 2015
|
|
|
|
|
|
|
(76
|
)
|
|
|
(76
|
)
|
Aluminum forward contracts
|
|
2006 through 2009
|
|
|
68
|
|
|
|
(21
|
)
|
|
|
47
|
|
Aluminum options
|
|
2006
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Fixed price electricity contract
|
|
2016
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
Embedded derivative instruments
|
|
2007
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
(108
|
)
|
|
|
54
|
|
Less: current portion
|
|
|
|
|
107
|
|
|
|
(41
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55
|
|
|
$
|
(67
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Indirect
Guarantees of Indebtedness
The following table discloses information about our obligations
under indirect guarantees of indebtedness of others as of
September 30, 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Liability
|
|
|
Assets
|
|
|
|
Potential Future
|
|
|
Carrying
|
|
|
Held for
|
|
Type of Entity
|
|
Payment
|
|
|
Value
|
|
|
Collateral
|
|
|
Wholly-owned subsidiaries
|
|
$
|
35
|
|
|
$
|
21
|
|
|
$
|
|
|
Majority-owned subsidiaries
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Aluminium Norf GmbH
|
|
|
13
|
|
|
|
|
|
|
|
|
|
In 2004, we entered into a loan and a corresponding
deposit-and-guarantee
agreement for up to $90 million. As of September 30,
2006 and December 31, 2005, this arrangement had a balance
of $80 million. We do not include the loan or deposit
amounts in the accompanying condensed consolidated balance
sheets as the agreements include a legal right of setoff.
We have no retained or contingent interest in assets transferred
to an unconsolidated entity or similar entity or similar
arrangement that serves as credit, liquidity or market risk
support to that entity for such assets.
Other
Arrangements
As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities
(SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of
September 30, 2006 and December 31, 2005, we are not
involved in any unconsolidated SPE transactions.
CONTRACTUAL
OBLIGATIONS
We have future obligations under various contracts relating to
debt and interest payments, capital and operating leases,
long-term purchase obligations, and post-retirement benefit
plans. During the nine months ended September 30, 2006,
there were no significant changes to these obligations as
reported in our Annual Report on
Form 10-K
for the year ended December 31, 2005.
DIVIDENDS
The following table shows information regarding dividends
declared on our common shares during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Common Share
|
|
|
Payment Date
|
|
February 23, 2006
|
|
March 8, 2006
|
|
$
|
0.09
|
|
|
March 23, 2006
|
April 27, 2006
|
|
May 20, 2006
|
|
$
|
0.09
|
|
|
June 20, 2006
|
August 28, 2006
|
|
September 7, 2006
|
|
$
|
0.01
|
|
|
September 25, 2006
|
October 26, 2006
|
|
November 20, 2006
|
|
$
|
0.01
|
|
|
December 20, 2006
|
Future dividends are at the discretion of the board of directors
and will depend on, among other things, our financial resources,
cash flows generated by our business, our cash requirements,
restrictions under the instruments governing our indebtedness,
being in compliance with the appropriate indentures and
covenants under the instruments that govern our indebtedness
that would allow us to legally pay dividends and other relevant
factors.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
During the nine months ended September 30, 2006, there were
no significant changes to our critical accounting policies and
estimates as reported in our Annual Report on
Form 10-K
for the year ended December 31, 2005.
69
RECENT
ACCOUNTING STANDARDS
In September 2006, the Staff of the SEC issued Staff Accounting
Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB No. 108
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. We will adopt SAB No. 108 as
of December 31, 2006. We do not expect the adoption of
SAB No. 108 to have a material impact on our
consolidated financial position, results of operations and cash
flows.
In September 2006, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, which requires a company that sponsors one or more
single-employer defined benefit pension and other postretirement
benefit plans (benefit plans) to recognize in its balance sheet
the funded status of a benefit plan, which is the difference
between the fair value of plan assets and the benefit
obligation, as a net asset or liability, with an offsetting
adjustment to accumulated other comprehensive income in
shareholders equity. FASB Statement No. 158 requires
additional financial statement disclosure regarding certain
effects on net periodic benefit cost. FASB Statement
No. 158 requires prospective application and the
recognition and disclosure requirements are effective for fiscal
years ending after December 15, 2006. We will adopt FASB
Statement No. 158 as of December 31, 2006. We are
currently evaluating the impact of the adoption of FASB
Statement No. 158 on our consolidated financial position,
results of operations and cash flows.
In addition, FASB Statement No. 158 requires that a company
measure defined benefit plan assets and obligations at its
year-end balance sheet date. We currently use our year-end
balance sheet date as our measurement date and, as a result,
that new requirement will not affect us.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. FASB
Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently
evaluating the potential impact, if any, of the adoption of FASB
Statement No. 157 on our consolidated financial position,
results of operations and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which is
effective for fiscal years beginning after December 15,
2006. FASB Interpretation No. 48 clarifies the accounting
for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FASB Interpretation No. 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We are currently evaluating the potential impact, if
any, of the adoption of FASB Interpretation No. 48 on our
consolidated financial position, results of operations and cash
flows.
We have determined that all other recently issued accounting
pronouncements will not have a material impact on our
consolidated financial position, results of operations and cash
flows, or do not apply to our operations.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET
DATA
This document contains forward-looking statements that are based
on current expectations, estimates, forecasts and projections
about the industry in which we operate, and beliefs and
assumptions made by our management. Such statements include, in
particular, statements about our plans, strategies and
prospects. Words such as expect,
anticipate, intend, plan,
believe, seek, estimate and
variations of such words and similar expressions are intended to
identify such forward-looking statements. Examples of
forward-looking statements in this Quarterly Report on
Form 10-Q
include, but are not limited to, our expectations with respect
to the impact of metal price movements on our financial
performance, our metal price ceiling
70
exposure, the effectiveness of our hedging programs and our
efforts to improve our financial reporting processes and
controls. These statements are based on beliefs and assumptions
of Novelis management, which in turn are based on
currently available information. These statements are not
guarantees of future performance and involve assumptions and
risks and uncertainties that are difficult to predict.
Therefore, actual outcomes and results may differ materially
from what is expressed, implied or forecasted in such
forward-looking statements. We do not intend, and we disclaim
any obligation, to update any forward-looking statements,
whether as a result of new information, future events or
otherwise.
This document also contains information concerning our markets
and products generally, which is forward-looking in nature and
is based on a variety of assumptions regarding the ways in which
these markets and product categories will develop. These
assumptions have been derived from information currently
available to us and to the third-party industry analysts quoted
herein. This information includes, but is not limited to product
shipments and share of production. Actual market results may
differ from those predicted. While we do not know what impact
any of these differences may have on our business, our results
of operations, financial condition, cash flow and 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:
|
|
|
|
|
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 prices) or other materials and raw
materials we use;
|
|
|
|
the effect of metal price ceilings in certain of our sales
contracts;
|
|
|
|
our ability to successfully negotiate with our customers to
remove or limit metal price ceilings in our contracts;
|
|
|
|
the effectiveness of our metal hedging activities, including our
internal used beverage can and smelter hedges;
|
|
|
|
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;
|
|
|
|
continuing obligations and other relationships resulting from
our spin-off from Alcan;
|
|
|
|
changes in the relative values of various currencies;
|
|
|
|
factors affecting our operations, such as litigation,
environmental remediation and
clean-up
costs, 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;
|
|
|
|
our ability to improve and maintain effective internal control
over financial reporting and disclosure controls and procedures
in the future;
|
|
|
|
changes in the fair value of derivative instruments;
|
|
|
|
cyclical demand and pricing within the principal markets for our
products as well as seasonality in certain of our
customers industries;
|
71
|
|
|
|
|
changes in government regulations, particularly those affecting
taxes, environmental, health or safety compliance; and
|
|
|
|
changes in interest rates that have the effect of increasing the
amounts we pay under our principal credit agreement and other
financing agreements.
|
The above list of factors is not exhaustive. Some of these and
other factors are discussed in more detail under
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2005 as amended and filed
with the SEC and are specifically incorporated by reference into
this filing.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in commodity
prices (aluminum, electricity and natural gas), foreign currency
exchange rates and interest rates that could impact our results
of operations and financial condition.
We manage our exposure to these and other market risks through
regular operating and financing activities and derivative
financial instruments. We use derivative financial instruments
as risk management tools only, and not for speculative purposes.
Except where noted, the derivative contracts are
marked-to-market
and the related gains and losses are included in earnings in the
current accounting period. Typically, gains and losses on these
contracts are offset by the opposite effect of movements in the
underlying business transactions.
By their nature, all derivative financial instruments involve
risk, including the credit risk of non-performance by
counterparties. All derivative contracts are executed with
counterparties that, in our judgment, are creditworthy. Our
maximum potential loss may exceed the amount recognized in the
accompanying condensed consolidated balance sheets.
The decision of whether and when to execute derivative
instruments, along with the duration of the instrument, can vary
from period to period depending on market conditions and the
relative costs of the instruments. The duration is always linked
to the timing of the underlying exposure, with the connection
between the two being regularly monitored.
Commodity
Price Risks
We have commodity price risk with respect to purchases of
certain raw materials including aluminum, electricity and
natural gas.
Aluminum
Most of our business is conducted under a conversion model,
which allows us to pass through increases or decreases in the
price of aluminum to our customers. Nearly all of our products
have a price structure with two components: (i) a pass
through aluminum price based on the LME plus local market
premiums and (ii) a margin over metal price
based on the conversion cost to produce the rolled product and
the competitive market conditions for that product.
In situations where we offer customers fixed prices for future
delivery of our products, we may enter into derivative
instruments for the metal inputs in order to protect the profit
on the conversion of the product. Consequently, the gain or loss
resulting from movements in the price of aluminum on these
contracts would generally be offset by an equal and opposite
impact on the net sales and purchases being hedged.
In addition, sales contracts representing approximately 20% of
our total shipments for the three months and nine months ended
September 30, 2006 provide for a ceiling over which metal
prices cannot contractually be passed through to certain
customers, unless adjusted. As a result, we are unable to pass
through the complete increase in metal prices for sales under
these contracts and this negatively impacts our margins when the
metal price is above the ceiling price.
72
We employ three strategies to mitigate our risk of rising metal
prices that we cannot pass through to certain customers due to
metal price ceilings. First, we maximize the amount of our
internally supplied metal inputs from our smelting, refining and
mining operations in Brazil. Second, we rely on the output from
our recycling operations which utilize used beverage cans
(UBCs). Both of these strategies have historically provided a
benefit as these sources of metal are typically less expensive
than purchasing aluminum from third party suppliers. These two
strategies are referred to as our internal hedges. While we
believe that our primary aluminum production continues to
provide the expected benefits during this sustained period of
high LME prices, the recycling operations are providing less
internal hedge benefit than expected. LME metal prices and other
market issues have resulted in higher than expected prices of
UBCs, thus compressing the internal hedge benefit we receive
from this strategy.
Beyond our internal hedges described above, our third strategy
to mitigate the risk of loss or reduced profitability associated
with the metal price ceilings is to purchase options
and/or fixed
forward derivative instruments on projected aluminum volume
requirements above our assumed internal hedge position. To hedge
our exposure in 2006, we previously purchased call options at
various strike prices. In September of 2006, we began purchasing
synthetic call options, which are purchases of both fixed
forward derivative instruments and put options, to hedge our
exposure to further price volatility in 2007.
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
September 30, 2006 given a 10% change in the three-month
LME price.
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
Rate/Price
|
|
|
Fair Value
|
|
|
|
|
|
|
(In millions)
|
|
|
Aluminum Options
|
|
|
10
|
%
|
|
$
|
9
|
|
Aluminum Forward Contracts
|
|
|
10
|
%
|
|
|
35
|
|
Electricity
and Natural Gas
We use several sources of energy in the manufacture and delivery
of our aluminum rolled products. In 2005, natural gas and
electricity represented approximately 70% of our energy
consumption by cost. We also use fuel oil and transport fuel.
The majority of energy usage occurs at our casting centers, at
our smelters in South America and during the hot rolling of
aluminum. Our cold rolling facilities require relatively less
energy. We purchase our natural gas on the open market, which
subjects us to market pricing fluctuations. Recent natural gas
pricing changes in the United States have increased our energy
costs. We seek to stabilize our future exposure to natural gas
prices through the use of forward purchase and futures
contracts. Natural gas prices in Europe, Asia and South America
have historically been more stable than in the United States. As
of September 30, 2006, we have a nominal amount of forward
purchases outstanding relating to natural gas.
A portion of our electricity requirements are purchased pursuant
to long-term contracts in the local regions in which we operate.
A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs. In South America,
we have our own hydroelectric facilities that meet approximately
25% of that regions total electricity requirements. We
have an existing long-term supply contract in North America
for certain electricity costs at fixed rates.
Rising energy costs worldwide, due to the volatility of supply
and international geopolitical events, expose us to reduced
operating profits as changes cannot immediately be recovered
under existing contracts and sales agreements, and may only be
mitigated in future periods under future pricing arrangements.
73
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
September 30, 2006 given a 10% change in spot prices for
energy contracts.
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
Rate/Price
|
|
|
Fair Value
|
|
|
|
|
|
|
(In millions)
|
|
|
Electricity
|
|
|
10
|
%
|
|
$
|
12
|
|
Natural Gas
|
|
|
10
|
%
|
|
|
|
|
Foreign
Currency Exchange Risks
Exchange rate movements, particularly the Euro, the Canadian
dollar, the Brazilian real and the Korean won against the
U.S. dollar, have an impact on our operating results. In
Europe, where we have predominantly local currency selling
prices and operating costs, we benefit as the Euro strengthens
but are adversely affected as the Euro weakens. In Korea, where
we have local currency selling prices for local sales and
U.S. dollar denominated selling prices for exports, we
benefit slightly as the won weakens but are adversely affected
as the won strengthens, due to a slightly higher percentage of
exports compared to local sales. In Canada and Brazil, where we
have predominately U.S. dollar selling prices and local
currency operating costs, we benefit as the local currencies
weaken but are adversely affected as the local currencies
strengthen. Foreign currency contracts may be used to hedge the
economic exposures at our foreign operations.
It is our policy to minimize functional currency exposures
within each of our key regional operating segments. As such, the
majority of our foreign currency exposures are from either
forecasted net sales or forecasted purchase commitments in
non-functional currencies. Our most significant
non-U.S. dollar
functional currency operating segments are Europe and Asia,
which have the Euro and the Korean won as their functional
currencies, respectively. South America is U.S. dollar
functional with Brazilian real transactional exposure.
We face translation risks related to the changes in foreign
currency exchange rates. Amounts invested in our foreign
operations are translated into U.S. dollars at the exchange
rates in effect at the balance sheet date. The resulting
translation adjustments are recorded as a component of
Accumulated other comprehensive loss in the Shareholders
equity section of the accompanying condensed consolidated
balance sheets. Net sales and expenses in our foreign
operations foreign currencies are translated into varying
amounts of U.S. dollars depending upon whether the
U.S. dollar weakens or strengthens against other
currencies. Therefore, changes in exchange rates may either
positively or negatively affect our net sales and expenses from
foreign operations as expressed in U.S. dollars.
Any negative impact of currency movements on the currency
contracts that we have entered into to hedge foreign currency
commitments to purchase or sell goods and services would be
offset by an equal and opposite favorable exchange impact on the
commitments being hedged. For a discussion of accounting
policies and other information relating to currency contracts,
see Note 1 Business and Summary of Significant
Accounting Policies to our consolidated and combined financial
statements in our Annual Report on
Form 10-K
for the year ended December 31, 2005 and
Note 13 Financial Instruments and Commodity
Contracts to our condensed consolidated and combined financial
statements included in this Quarterly Report on
Form 10-Q.
74
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
September 30, 2006 given a 10% change in rates.
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
Rate
|
|
|
Fair Value
|
|
|
|
|
|
|
(In millions)
|
|
|
Currency measured against the
U.S. dollar
|
|
|
|
|
|
|
|
|
Euro
|
|
|
10
|
%
|
|
$
|
46
|
|
Korean won
|
|
|
10
|
%
|
|
|
28
|
|
Brazilian real
|
|
|
10
|
%
|
|
|
21
|
|
Loans and investments in European operations have been hedged by
cross-currency interest rate swaps (Euro 475 million, GBP
62 million, CHF 35 million). The CHF swap was
designated as a cash flow hedge and the remaining swaps were
designated as net investment hedges. Loans from European
operations have been hedged by cross-currency principal-only
swaps (Euro 91 million). The principal-only swaps are
accounted for as cash flow hedges.
The following table presents the estimated potential effect on
the fair values of the cross-currency interest rate swaps as of
September 30, 2006 given a 10% change in rates.
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
Rate
|
|
|
Fair Value
|
|
|
|
|
|
|
(In millions)
|
|
|
Currency measured against the
U.S. dollar
|
|
|
|
|
|
|
|
|
Euro
|
|
|
10
|
%
|
|
$
|
73
|
|
Interest
Rate Risks
We are subject to interest rate risk related to our floating
rate debt. For every 12.5 basis point increase in the
interest rates on the $511 million of variable rate Term
Loan B debt that has not been swapped into fixed interest
rates as of September 30, 2006, our annual net income would
be reduced by approximately $0.4 million.
As of September 30, 2006, approximately 78% of our debt
obligations were at fixed rates. Due to the nature of fixed-rate
debt, there would be no significant impact on our interest
expense or cash flows from either a 10% increase or decrease in
market rates of interest.
From time to time, we have used interest rate swaps to manage
our debt cost. We have entered into interest rate swaps to fix
the interest rate on $200 million of our floating rate Term
Loan B facility, which is part of our senior secured
facility. In Korea, we entered into interest rate swaps to fix
the interest rate on various floating rate debt.
See Note 8 Long-Term Debt to the accompanying
condensed consolidated and combined financial statements for
further information.
Sensitivities
The following table presents the estimated potential effect on
the fair values of these derivative instruments as of
September 30, 2006 given a 10% change in rates.
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
Rate
|
|
|
Fair Value
|
|
|
|
|
|
|
(In millions)
|
|
|
Interest Rate Swap
contracts
|
|
|
|
|
|
|
|
|
North America
|
|
|
10
|
%
|
|
$
|
1
|
|
Asia
|
|
|
10
|
%
|
|
|
|
|
75
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of disclosure controls and procedures
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that the information
required to be disclosed in reports filed or submitted under the
Securities Exchange Act of 1934, as amended (Exchange Act), is
(1) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and
(2) accumulated and communicated to management, including
the chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
In connection with the preparation of this Quarterly Report on
Form 10-Q
for the period ended September 30, 2006, members of
management, at the direction (and with the participation) of our
chief executive officer and chief financial officer, performed
an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e)
under the Exchange Act), as of September 30, 2006 and
concluded that they were not effective as of September 30,
2006 as a result of (1) the continued existence of material
weaknesses in internal control over financial reporting
described in our Annual Report on
Form 10-K
for the year ended December 31, 2005, and (2) the
error in identifying one of our four most highly compensated
executive officers, other than the chief executive officer, in
our original 2005
Form 10-K.
Notwithstanding the material weaknesses, management has
concluded that our unaudited condensed consolidated and combined
financial statements were prepared in accordance with generally
accepted accounting principles in the United States of America
(GAAP). Accordingly, and to the best of managements
knowledge, the unaudited condensed consolidated and combined
financial statements included in this Quarterly Report on
Form 10-Q
fairly present in all material respects our financial position,
results of operations and cash flows for the periods presented
in accordance with GAAP.
Remediation
measures for identified material weaknesses
Management, with Audit Committee oversight, has taken actions to
remediate the material weaknesses described in our Annual Report
on
Form 10-K
for the year ended December 31, 2005. These include but are
not limited to the following:
1. We hired a new chief financial officer on July 17,
2006, appointed a new chief accounting officer on June 29,
2006 and hired a new chief internal auditor on January 9,
2006. We continue to seek and recruit additional full-time
resources to strengthen our accounting and finance staff.
2. In May 2006, we engaged outside consultants, other than
our independent registered public accounting firm, to assist us
with accounting for income taxes, specifically the calculation
of income taxes payable, deferred income tax assets and
liabilities and related income tax provision. In that same
month, and with the assistance of our outside consultants, we
began providing formal income tax training to our finance,
accounting and tax professionals. In addition, we have
implemented a formal income tax accounting preparation and
review process.
3. We also engaged outside consultants, other than our
independent registered public accounting firm, to assist us with
our analysis of complex accounting transactions, the
implementation of new accounting pronouncements and related
reporting.
4. In May 2006, we enhanced our process to oversee the
preparation and review of our public filings for accuracy and
completeness. This includes the implementation of detailed
reporting packages prepared by segment or plant management and
reviewed by corporate management and its outside consultants
where appropriate.
5. Led by our chief accounting officer, we implemented a
formal analytical review process in May 2006 whereby significant
balance sheet and or income statement account fluctuations are
identified, investigated and explained. These procedures assist
with the identification of non-routine or non-systematic
transactions
and/or the
improper or inconsistent application of our policies and
procedures. This includes the timely and accurate reporting of
accrued expenses.
76
6. We have also implemented enhanced reporting procedures
and cross functional discussions within and among our legal,
accounting and finance departments to improve the accuracy,
completeness and timeliness of reporting of legal matters,
non-routine transactions and control deficiencies. For example,
the chief accounting officer holds bi-weekly calls with regional
finance leadership to update them on new accounting
pronouncements, discuss control deficiencies or new non-routine
transactions and address any reporting or accounting concerns on
a timely basis.
We believe that these actions will assist us with the
remediation of the identified material weaknesses. However, we
have not completed our documentation and testing of the
corrective processes and procedures as we will be required to do
for the fiscal year ending December 31, 2006 under
Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) and related SEC rules and regulations.
We cannot assure you that these material weaknesses will be
remediated prior to the conclusion of this evaluation, or that
we will not uncover additional material weaknesses.
Changes
in internal control over financial reporting and related
matters
As announced on August 29, 2006, our board of directors
replaced Brian Sturgell, our president and chief executive
officer. Immediately thereafter, William T. Monahan, the
chairman of our board of directors, assumed the role of interim
chief executive officer, and will continue to serve as interim
chief executive officer until a successor has been selected and
is in place. Our executive team will now report directly to
Mr. Monahan. In light of Mr. Monahans interim
chief executive officer responsibilities, the board of directors
has formed a temporary office of the chairman that is comprised
of Mr. Monahan and directors Clarence J. Chandran and
Edward A. Blechschmidt. Mr. Sturgell will be available to
advise the office of the chairman until a successor has been
selected and is in place.
As described above, there were changes in our internal control
over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting during the quarter ended
September 30, 2006.
77
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Reynolds Boat Case. As previously disclosed,
we and Alcan were defendants in a case in the United States
District Court for the Western District of Washington, in
Tacoma, Washington, case number C04-0175RJB. Plaintiffs were
Reynolds Metals Company, Alcoa, Inc. and National Union Fire
Insurance Company of Pittsburgh PA. The case was tried before a
jury beginning on May 1, 2006 under warranty theories,
based on allegations that from 1998 to 2001 we and Alcan sold
certain aluminum products that were ultimately used for marine
applications and were unsuitable for such applications. The jury
reached a verdict on May 22, 2006 against us and Alcan for
approximately $60 million, and the court later awarded
Reynolds and Alcoa approximately $16 million in prejudgment
interest and court costs.
The case was settled during July 2006 as among us, Alcan,
Reynolds, Alcoa and their insurers for $71 million. We
contributed approximately $1 million toward the settlement,
and the remaining $70 million was funded by our insurers.
Although the settlement was substantially funded by our
insurance carriers, certain of them have reserved the right to
request a refund from us, after reviewing details of the
plaintiffs damages to determine if they include costs of a
nature not covered under the insurance contracts. Of the
$70 million funded, $39 million is in dispute with and
under further review by certain of our insurance carriers, who
have six months from the date of the settlement to complete
their review. In the third quarter of 2006, we posted a letter
of credit in the amount of approximately $10 million in
favor of one of those insurance carriers, while we resolve the
questions, if any, about the extent of coverage of the costs
included in the settlement.
As of December 31, 2005, we recognized a liability included
in Accrued expenses and other current liabilities of
$71 million, the full amount of the settlement, with a
corresponding charge against earnings. We also recognized an
insurance receivable included in Prepaid expenses and other
current assets of $31 million with a corresponding increase
to earnings. Although $70 million of the settlement was
funded by our insurers, we have only recognized an insurance
receivable to the extent that coverage is not in dispute. We
recognized a net charge of $40 million during the fourth
quarter of 2005.
In July 2006, we contributed and paid $1 million to our
insurers who subsequently paid the entire settlement amount of
$71 million to the plaintiffs. Accordingly, during the
third quarter of 2006 we reversed the previously recorded
insurance receivable of $31 million and reduced our
recorded liability by the same amount plus the $1 million
contributed by us. The remaining liability of $39 million
represents the amount of the settlement claim that was funded by
our insurers but is still in dispute with and under further
review by certain of our insurance carriers, who have six months
from the date of settlement to complete their review. The
$39 million liability is included in Accrued expenses and
other current liabilities in our condensed consolidated balance
sheet as of September 30, 2006.
While the ultimate resolution of the nature and extent of any
costs not covered under our insurance contracts cannot be
determined with certainty or reasonably estimated at this time,
if there is an adverse outcome with respect to insurance
coverage, and we are required to reimburse our insurers, it
could have a material impact on cash flows in the period of
resolution. Alternatively, the ultimate resolution could be
favorable such that insurance coverage is in excess of what we
have recognized to date. This would result in our recording a
non-cash gain in the period of resolution, and this non-cash
gain could have a material impact on our results of operations
during the period in which such a determination is made.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate and Articles
of Incorporation of Novelis Inc. (incorporated by reference to
Exhibit 3.1 to the
Form 8-K
filed by Novelis Inc. on January 7, 2005 (File
No. 001-32312))
|
|
3
|
.2
|
|
By-law No. 1 of Novelis Inc.
(incorporated by reference to Exhibit 3.2 to the
Form 10 filed by Novelis Inc. on November 17, 2004
(File
No. 001-32312))
|
78
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
4
|
.1
|
|
Shareholder Rights Agreement
between Novelis and CIBC Mellon Trust Company (incorporated by
reference to Exhibit 4.1 to the
Form 10-K
filed by Novelis Inc. on March 30, 2005 (File
No. 001-32312))
|
|
4
|
.2
|
|
Specimen Certificate of Novelis
Inc. Common Shares (incorporated by reference to
Exhibit 4.2 to the Form 10 filed by Novelis Inc. on
December 27, 2004 (File
No. 001-32312))
|
|
4
|
.3
|
|
Indenture, relating to the Notes,
dated as of February 3, 2005, between the Company, the
guarantors named on the signature pages thereto and The Bank of
New York Trust Company, N.A., as trustee (incorporated by
reference to Exhibit 4.1 to our Current Report on
Form 8-K
filed on February 3, 2005 (File
No. 001-32312))
|
|
4
|
.4
|
|
Registration Rights Agreement,
dated as of February 3, 2005, among the Company, the
guarantors named on the signature pages thereto, Citigroup
Global Markets Inc., Morgan Stanley & Co. Incorporated
and UBS Securities LLC, as Representatives of the Initial
Purchasers (incorporated by reference to Exhibit 4.2 to our
Current Report on
Form 8-K
filed on February 3, 2005 (File
No. 001-32312))
|
|
4
|
.5
|
|
Form of Note for
71/4% Senior
Notes due 2015 (incorporated by reference to Exhibit 4.1 to
the
Form S-4
filed by Novelis Inc. on August 3, 2005 (File
No. 331-127139))
|
|
10
|
.1
|
|
Fifth Waiver, dated as of
August 11, 2006, under the Credit Agreement dated
January 7, 2005 among Novelis Inc., Novelis Corporation,
Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup
North America, Inc. and the issuers and lenders a party thereto
(incorporated by reference to Exhibit 10.1 to the
Form 8-K
filed by Novelis Inc. on August 17, 2006 (File
No. 001-32312))
|
|
10
|
.2
|
|
Form of Change in Control
Agreement between Novelis Inc. and certain executive officers
(incorporated by reference to Exhibit 99.1 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
10
|
.3
|
|
Form of Change in Control
Agreement between Novelis Inc. and certain executive officers
and key employees (incorporated by reference to
Exhibit 99.2 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
10
|
.4
|
|
Form of Recognition Agreement
between Novelis Inc. and certain executive officers and key
employees (incorporated by reference to Exhibit 99.3 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
31
|
.1
|
|
Section 302 Certification of
Principal Executive Officer
|
|
31
|
.2
|
|
Section 302 Certification of
Principal Financial Officer
|
|
32
|
.1
|
|
Section 906 Certification of
Principal Executive Officer
|
|
32
|
.2
|
|
Section 906 Certification of
Principal Financial Officer
|
79
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NOVELIS INC.
Rick Dobson
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
By:
|
/s/ Robert
M. Patterson
|
Robert M. Patterson
Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 2006
80
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate and Articles
of Incorporation of Novelis Inc. (incorporated by reference to
Exhibit 3.1 to the
Form 8-K
filed by Novelis Inc. on January 7, 2005 (File
No. 001-32312))
|
|
3
|
.2
|
|
By-law No. 1 of Novelis Inc.
(incorporated by reference to Exhibit 3.2 to the
Form 10 filed by Novelis Inc. on November 17, 2004
(File
No. 001-32312))
|
|
4
|
.1
|
|
Shareholder Rights Agreement
between Novelis and CIBC Mellon Trust Company (incorporated by
reference to Exhibit 4.1 to the
Form 10-K
filed by Novelis Inc. on March 30, 2005 (File
No. 001-32312))
|
|
4
|
.2
|
|
Specimen Certificate of Novelis
Inc. Common Shares (incorporated by reference to
Exhibit 4.2 to the Form 10 filed by Novelis Inc. on
December 27, 2004 (File
No. 001-32312))
|
|
4
|
.3
|
|
Indenture, relating to the Notes,
dated as of February 3, 2005, between the Company, the
guarantors named on the signature pages thereto and The Bank of
New York Trust Company, N.A., as trustee (incorporated by
reference to Exhibit 4.1 to our Current Report on
Form 8-K
filed on February 3, 2005 (File
No. 001-32312))
|
|
4
|
.4
|
|
Registration Rights Agreement,
dated as of February 3, 2005, among the Company, the
guarantors named on the signature pages thereto, Citigroup
Global Markets Inc., Morgan Stanley & Co. Incorporated
and UBS Securities LLC, as Representatives of the Initial
Purchasers (incorporated by reference to Exhibit 4.2 to our
Current Report on
Form 8-K
filed on February 3, 2005 (File
No. 001-32312))
|
|
4
|
.5
|
|
Form of Note for
71/4% Senior
Notes due 2015 (incorporated by reference to Exhibit 4.1 to
the
Form S-4
filed by Novelis Inc. on August 3, 2005 (File
No. 331-127139))
|
|
10
|
.1
|
|
Fifth Waiver, dated as of
August 11, 2006, under the Credit Agreement dated
January 7, 2005 among Novelis Inc., Novelis Corporation,
Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup
North America, Inc. and the issuers and lenders a party thereto
(incorporated by reference to Exhibit 10.1 to the
Form 8-K
filed by Novelis Inc. on August 17, 2006 (File
No. 001-32312))
|
|
10
|
.2
|
|
Form of Change in Control
Agreement between Novelis Inc. and certain executive officers
(incorporated by reference to Exhibit 99.1 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
10
|
.3
|
|
Form of Change in Control
Agreement between Novelis Inc. and certain executive officers
and key employees (incorporated by reference to
Exhibit 99.2 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
10
|
.4
|
|
Form of Recognition Agreement
between Novelis Inc. and certain executive officers and key
employees (incorporated by reference to Exhibit 99.3 to the
Form 8-K
filed by Novelis on September 27, 2006 (File
No. 001-32312))
|
|
31
|
.1
|
|
Section 302 Certification of
Principal Executive Officer
|
|
31
|
.2
|
|
Section 302 Certification of
Principal Financial Officer
|
|
32
|
.1
|
|
Section 906 Certification of
Principal Executive Officer
|
|
32
|
.2
|
|
Section 906 Certification of
Principal Financial Officer
|
81