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
March 31, 2007
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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
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30326
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(Address of principal executive
offices)
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(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 þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of April 30, 2007, the registrant had 75,415,336 common
shares outstanding.
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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Novelis
Inc.
COMPREHENSIVE LOSS (unaudited)
(in millions, except per share amounts)
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|
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Three Months Ended
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March 31,
|
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|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
2,630
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|
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
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2,447
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|
2,135
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|
Selling, general and
administrative expenses
|
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99
|
|
|
|
92
|
|
Depreciation and amortization
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|
|
58
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|
|
|
58
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|
Research and development expenses
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8
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|
|
|
9
|
|
Restructuring charges
net
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|
|
9
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|
|
|
1
|
|
Impairment charges on long-lived
assets
|
|
|
8
|
|
|
|
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
50
|
|
|
|
48
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|
Equity in net income of
non-consolidated affiliates
|
|
|
(3
|
)
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|
|
(3
|
)
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Other (income)
expenses net
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|
|
9
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|
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|
(49
|
)
|
|
|
|
|
|
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|
|
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2,685
|
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2,291
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|
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|
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Income (loss) before provision for
taxes on income (loss) and minority interests share
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|
(55
|
)
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28
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|
Provision for taxes on income
(loss)
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|
|
7
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|
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|
102
|
|
|
|
|
|
|
|
|
|
|
Loss before minority
interests share
|
|
|
(62
|
)
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|
|
(74
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)
|
Minority interests share
|
|
|
(2
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
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|
|
(64
|
)
|
|
|
(74
|
)
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|
|
|
|
|
|
|
|
|
Other comprehensive
income net of tax
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
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|
11
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|
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|
37
|
|
Change in fair value of effective
portion of hedges net
|
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|
3
|
|
|
|
|
|
Postretirement benefit plans:
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
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|
1
|
|
|
|
|
|
Change in minimum pension liability
|
|
|
|
|
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(7
|
)
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|
|
|
|
|
|
|
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Other comprehensive
income net of tax
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15
|
|
|
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30
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|
|
|
|
|
|
|
|
|
|
Comprehensive loss
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|
$
|
(49
|
)
|
|
$
|
(44
|
)
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|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
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Net loss per share
basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
|
|
Dividends per common
share
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|
$
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
Novelis
Inc.
(in
millions, except number of shares)
|
|
|
|
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|
|
|
|
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March 31,
|
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|
December 31,
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2007
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|
2006
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
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|
Cash and cash equivalents
|
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$
|
128
|
|
|
$
|
73
|
|
Accounts receivable (net of
allowances of $29 in both 2007 and 2006)
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,350
|
|
|
|
1,321
|
|
related parties
|
|
|
25
|
|
|
|
21
|
|
Inventories
|
|
|
1,491
|
|
|
|
1,391
|
|
Prepaid expenses and other current
assets
|
|
|
39
|
|
|
|
42
|
|
Current portion of fair value of
derivative instruments
|
|
|
92
|
|
|
|
106
|
|
Deferred income tax assets
|
|
|
19
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
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Total current assets
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|
|
3,144
|
|
|
|
2,963
|
|
Property, plant and
equipment net
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|
|
2,098
|
|
|
|
2,143
|
|
Goodwill
|
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|
239
|
|
|
|
236
|
|
Intangible assets net
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|
20
|
|
|
|
20
|
|
Investment in and advances to
non-consolidated affiliates
|
|
|
153
|
|
|
|
150
|
|
Fair value of derivative
instruments net of current portion
|
|
|
55
|
|
|
|
44
|
|
Deferred income tax assets
|
|
|
102
|
|
|
|
76
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
third parties
|
|
|
105
|
|
|
|
101
|
|
related parties
|
|
|
54
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,970
|
|
|
$
|
5,792
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
143
|
|
|
$
|
144
|
|
Short-term borrowings
|
|
|
245
|
|
|
|
133
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,614
|
|
|
|
1,542
|
|
related parties
|
|
|
49
|
|
|
|
44
|
|
Accrued expenses and other current
liabilities
|
|
|
480
|
|
|
|
508
|
|
Deferred income tax liabilities
|
|
|
73
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
2,604
|
|
|
|
2,432
|
|
Long-term debt net of
current portion
|
|
|
2,157
|
|
|
|
2,158
|
|
Deferred income tax liabilities
|
|
|
103
|
|
|
|
81
|
|
Accrued postretirement benefits
|
|
|
427
|
|
|
|
425
|
|
Other long-term liabilities
|
|
|
352
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,643
|
|
|
|
5,439
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
152
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
unlimited number of first preferred and second preferred shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value;
unlimited number of shares authorized; 75,357,660 and
74,140,335 shares issued and outstanding as of
March 31, 2007 and December 31, 2006, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
428
|
|
|
|
398
|
|
Accumulated deficit
|
|
|
(263
|
)
|
|
|
(198
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
175
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
5,970
|
|
|
$
|
5,792
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Novelis
Inc.
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
Adjustments to determine net cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
58
|
|
|
|
58
|
|
Net gain on change in fair value of
derivative instruments
|
|
|
(30
|
)
|
|
|
(54
|
)
|
Deferred income taxes
|
|
|
(9
|
)
|
|
|
82
|
|
Amortization of debt issuance costs
|
|
|
2
|
|
|
|
2
|
|
Provision for uncollectible
accounts receivable
|
|
|
|
|
|
|
2
|
|
Equity in net income of
non-consolidated affiliates
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Minority interests share
|
|
|
2
|
|
|
|
|
|
Impairment charges on long-lived
assets
|
|
|
8
|
|
|
|
|
|
Share-based compensation
|
|
|
2
|
|
|
|
1
|
|
Gain on sales of businesses,
investments and assets net
|
|
|
|
|
|
|
14
|
|
Changes in assets and liabilities
(net of effects from acquisitions and divestitures):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
third parties
|
|
|
(25
|
)
|
|
|
(87
|
)
|
related parties
|
|
|
|
|
|
|
(1
|
)
|
Inventories
|
|
|
(95
|
)
|
|
|
(140
|
)
|
Prepaid expenses and other current
assets
|
|
|
3
|
|
|
|
(15
|
)
|
Other long-term assets
|
|
|
(5
|
)
|
|
|
(1
|
)
|
Accounts payable
|
|
|
|
|
|
|
|
|
third parties
|
|
|
73
|
|
|
|
284
|
|
related parties
|
|
|
5
|
|
|
|
1
|
|
Accrued expenses and other current
liabilities
|
|
|
(22
|
)
|
|
|
1
|
|
Accrued postretirement benefits
|
|
|
4
|
|
|
|
13
|
|
Other long-term liabilities
|
|
|
9
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(87
|
)
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(24
|
)
|
|
|
(21
|
)
|
Disposal of business net
|
|
|
|
|
|
|
(7
|
)
|
Proceeds from sales of assets
|
|
|
|
|
|
|
2
|
|
Changes to investment in and
advances to non-consolidated affiliates
|
|
|
1
|
|
|
|
2
|
|
Proceeds from loans
receivable net related parties
|
|
|
1
|
|
|
|
7
|
|
Net proceeds from settlement of
derivative instruments
|
|
|
24
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
2
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(1
|
)
|
|
|
(112
|
)
|
Short-term borrowings
net
|
|
|
113
|
|
|
|
6
|
|
Dividends
|
|
|
|
|
|
|
|
|
common shareholders
|
|
|
|
|
|
|
(7
|
)
|
minority interests
|
|
|
|
|
|
|
(13
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(1
|
)
|
Proceeds from the exercise of
employee stock options
|
|
|
27
|
|
|
|
|
|
Windfall tax benefit on share-based
compensation
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
140
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
55
|
|
|
|
22
|
|
Effect of exchange rate changes
on cash balances held in foreign currencies
|
|
|
|
|
|
|
2
|
|
Cash and cash
equivalents beginning of period
|
|
|
73
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of period
|
|
$
|
128
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
84
|
|
|
$
|
76
|
|
Income taxes paid
|
|
|
18
|
|
|
|
12
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Novelis
Inc.
(in millions, except number of common shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance as of December 31,
2006
|
|
|
74,140,335
|
|
|
$
|
|
|
|
$
|
398
|
|
|
$
|
(198
|
)
|
|
$
|
(5
|
)
|
|
$
|
195
|
|
Adjustment for uncertain tax
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
2007 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
(64
|
)
|
Issuance of common stock from the
exercise of employee stock options
|
|
|
1,217,325
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
Change in fair value of effective
portion of hedges net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Windfall tax benefit on
share-based compensation
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2007
|
|
|
75,357,660
|
|
|
$
|
|
|
|
$
|
428
|
|
|
$
|
(263
|
)
|
|
$
|
10
|
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Novelis
Inc.
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
March 31, 2007, we had operations on four continents: North
America; Europe; Asia and South America, through 33 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 financial
statements should be read in conjunction with our audited
consolidated financial statements and accompanying notes in our
Annual Report on
Form 10-K
for the year ended December 31, 2006, filed with the United
States Securities and Exchange Commission (SEC) on March 1,
2007.
The accompanying (a) condensed consolidated balance sheet
as of December 31, 2006, which has been derived from
audited financial statements, and (b) unaudited condensed
consolidated 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 condensed consolidated financial statements are
not necessarily indicative of operating results for the entire
year. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements recognize all
adjustments of a normal recurring nature considered necessary to
fairly state our financial position as of March 31, 2007
and December 31, 2006; the results of our operations for
the three months ended March 31, 2007 and 2006; our cash
flows for the three months ended March 31, 2007 and 2006;
and changes in our shareholders equity for the three
months ended March 31, 2007.
Certain reclassifications of prior period amounts have been made
to conform to the presentation adopted for the current period.
Recently
Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, which
provides companies with an option to report selected financial
assets and liabilities at fair value. The new statement
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities and requires companies to provide additional
information that will help investors and other users of
financial statements to more easily understand the effect of a
companys choice to use fair value on its earnings. The new
statement also requires entities to display the fair value of
those assets and liabilities for which the company has chosen to
use fair value on the face of the balance sheet. FASB Statement
No. 159 does not eliminate disclosure requirements included
in other accounting standards, including requirements for
disclosures about fair value measurements included in FASB
6
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Statements No. 157, Fair Value Measurements, and
No. 107, Disclosures about Fair Value of Financial
Instruments. FASB Statement No. 159 is effective as of
the beginning of an entitys first fiscal year beginning
after November 15, 2007. Early adoption is permitted as of
the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of FASB
Statement No. 157. We have not yet commenced evaluating the
potential impact, if any, of the adoption of FASB Statement
No. 159 on our consolidated financial position, results of
operations and cash flows.
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.
We have determined that all other recently issued accounting
pronouncements will not have a material impact on our
consolidated financial position, results of operations or cash
flows, or do not apply to our operations.
|
|
2.
|
Potential
Acquisition of Novelis Common Stock
|
On February 10, 2007, Novelis Inc., Hindalco Industries
Limited (Hindalco) and AV Aluminum Inc., an indirect subsidiary
of Hindalco, entered into an Arrangement Agreement (the
Arrangement Agreement). On March 30, 2007, AV Aluminum Inc.
assigned its interest in the Arrangement Agreement to AV Metals
Inc. (Acquisition Sub), a subsidiary of Hindalco. Under the
Arrangement Agreement, Acquisition Sub will acquire all of the
issued and outstanding common shares of Novelis for cash at a
per share price of $44.93, without interest and less any
required withholding taxes (the Purchase Price), to be
implemented by way of a court-approved plan of arrangement (the
Arrangement).
Pursuant to the Arrangement Agreement, at the effective time of
the Arrangement, each common share of Novelis issued and
outstanding immediately prior to the effective time (other than
common shares held by (i) Hindalco or Acquisition Sub or
any of their affiliates or (ii) any shareholders who
properly exercise dissent rights under the Canada Business
Corporations Act) will be transferred to Acquisition Sub in
exchange for the right to receive the Purchase Price. The
acquisition of Novelis is an all-cash transaction which values
Novelis at approximately $6 billion, including
approximately $2.4 billion of debt. The transaction is not
subject to a financing condition.
The consummation of the Arrangement is subject to various
customary conditions, including Novelis shareholder approval and
the receipt of regulatory approvals specified in the Arrangement
Agreement
and/or until
the expiration of all applicable waiting periods, including
antitrust approvals under the Competition Act (Canada), the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the European
Union or the relevant antitrust authorities in the applicable
European Union member states, as well as approval under the
Investment Canada Act and approval by the Agência Nacional
de Energia Eléctrica (ANEEL) for the transfer of power
generation concessions/authorizations in Brazil. As of
May 10, 2007, we have the necessary regulatory approval to
proceed with the transaction from all known parties. Subject to
final court approval, we expect that the Arrangement will close
on May 15, 2007.
The Arrangement Agreement contains customary representations and
warranties between Novelis and Hindalco and Acquisition Sub. The
Arrangement Agreement also contains customary covenants and
agreements, including covenants relating to (a) the conduct
of Novelis business between the date of the signing of
7
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
the Arrangement Agreement and the closing of the Arrangement,
(b) solicitation of competing acquisition proposals and
(c) the efforts of the parties to cause the Arrangement to
be completed. Additionally, Novelis shareholders approved the
Arrangement at its special meeting of shareholders on
May 10, 2007.
The Arrangement Agreement contains certain termination rights
and provides that, upon or following the termination of the
Arrangement Agreement, under specified circumstances involving a
competing acquisition proposal, Novelis may be required to pay
Acquisition Sub a termination fee of $100 million or, in
certain circumstances, to reimburse costs and expenses of
Hindalco and its affiliates, to a maximum of $15 million.
In connection with this process, Novelis has incurred or will
incur fees and expenses, including a termination fee with an
unsuccessful bidder. During the first quarter of 2007, we
included expenses of $32 million in Other (income)
expenses net for those costs that have already
been incurred and that are not contingent upon closing. Of this
amount, $22 million was paid during the first quarter of
2007 and the remaining amounts are expected to be paid during
the second quarter of 2007.
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. 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.
|
|
4.
|
Restructuring
Programs
|
In March 2007, management approved the proposed restructuring of
our facilities in Bridgnorth, U.K. These proposed actions are
intended to bring the capacity of our U.K. operations in line
with local market demand and to reduce the cost of our U.K.
operations. Certain production lines will be shut down in the
U.K. and volume will be relocated to other European plants. For
the quarter ended March 31, 2007, we recognized
$8 million in impairment charges on long-lived assets in
the U.K. that will no longer be used, and we recognized
restructuring charges of approximately $8 million relating
primarily to severance costs. We expect all actions related to
the Bridgnorth, U.K. restructuring to be completed in early 2008.
All restructuring provisions and recoveries are included in
Restructuring charges net in the accompanying
condensed consolidated statements of operations unless otherwise
stated. The following table summarizes our restructuring
liabilities for the three months ended March 31, 2007 (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Exit
|
|
|
|
|
|
|
Severance Reserves
|
|
|
Related
|
|
|
Total
|
|
|
|
|
|
|
Corporate
|
|
|
Total
|
|
|
Reserves
|
|
|
Restructuring
|
|
|
|
Europe
|
|
|
and Other
|
|
|
Severance
|
|
|
Europe
|
|
|
Reserves
|
|
|
Balance as of December 31,
2006
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
19
|
|
|
$
|
34
|
|
Provisions
(recoveries) net
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
Cash payments
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Adjustments other
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2007
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Inventories consist of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Finished goods
|
|
$
|
369
|
|
|
$
|
404
|
|
Work in process
|
|
|
359
|
|
|
|
283
|
|
Raw materials
|
|
|
684
|
|
|
|
626
|
|
Supplies
|
|
|
128
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,540
|
|
|
|
1,439
|
|
Allowances
|
|
|
(49
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,491
|
|
|
$
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property,
Plant and Equipment
|
Property, plant and equipment net, consists of the
following (in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Land and property rights
|
|
$
|
97
|
|
|
$
|
97
|
|
Buildings
|
|
|
895
|
|
|
|
894
|
|
Machinery and equipment
|
|
|
4,691
|
|
|
|
4,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,683
|
|
|
|
5,664
|
|
Accumulated depreciation and
amortization
|
|
|
(3,674
|
)
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,009
|
|
|
|
2,056
|
|
Construction in progress
|
|
|
89
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment net
|
|
$
|
2,098
|
|
|
$
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Investment
in and Advances to Non-Consolidated Affiliates and Related Party
Transactions
|
The following table summarizes the ownership structure and our
ownership percentage of the non-consolidated affiliates in which
we have an investment as of March 31, 2007, and which we
account for using the equity method. We have no material
investments that we account for using the cost method.
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
Affiliate Name
|
|
Ownership Structure
|
|
Percentage
|
|
|
Aluminium Norf GmbH
|
|
Corporation
|
|
|
50
|
%
|
Consorcio Candonga
|
|
Unincorporated Joint Venture
|
|
|
50
|
%
|
EuroNorca Partners
|
|
General Partnership
|
|
|
50
|
%
|
MiniMRF LLC
|
|
Limited Liability Company
|
|
|
50
|
%
|
Deutsche Aluminium Verpackung
Recycling GmbH
|
|
Corporation
|
|
|
30
|
%
|
France Aluminium Recyclage S.A.
|
|
Public Limited Company
|
|
|
20
|
%
|
9
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
In November 2006, we sold the common and preferred shares of our
25% interest in Petrocoque S.A. Industria e Comercio
(Petrocoque) to the other shareholders of Petrocoque. Prior to
the sale, we accounted for Petrocoque using the equity method of
accounting. Petrocoques combined results of operations for
the three months ended March 31, 2006 are included in the
table below.
As of March 31, 2007, EuroNorca Partners was inactive and
is in the process of being dissolved. We expect to receive
approximately $2 million once the liquidation proceedings
have been finalized.
We do not control our non-consolidated 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 March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
127
|
|
|
$
|
132
|
|
Costs, expenses and provisions for
taxes on income
|
|
|
122
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying condensed consolidated financial
statements are transactions and balances arising from business
we conduct with these non-consolidated affiliates, which we
classify as related party transactions and balances. The
following table describes the nature and amounts of transactions
that we had with related parties during the three months ended
March 31, 2007 and 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Purchases of tolling services,
electricity and inventories
|
|
|
|
|
|
|
|
|
Aluminium Norf GmbH (A)
|
|
$
|
61
|
|
|
$
|
52
|
|
Consorcio Candonga (B)
|
|
|
3
|
|
|
|
3
|
|
Petrocoque S.A. Industria e
Comercio (C)
|
|
|
N/A
|
|
|
|
1
|
|
|
|
|
(A) |
|
We purchase tolling services (the conversion of customer-owned
metal) from Aluminium Norf GmbH. |
|
(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 (Petrocoque) for use in our smelting operations in
South America. As previously discussed, we sold our interest in
Petrocoque in November 2006. They are not considered a related
party in 2007. |
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.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Accounts receivable (A)
|
|
$
|
25
|
|
|
$
|
21
|
|
Other long-term receivables (A)
|
|
|
54
|
|
|
|
59
|
|
Accounts payable (B)
|
|
|
49
|
|
|
|
44
|
|
|
|
|
(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. |
10
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
8.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities are comprised of
the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Accrued compensation and benefits
|
|
$
|
138
|
|
|
$
|
130
|
|
Accrued settlement of legal claim
|
|
|
39
|
|
|
|
39
|
|
Accrued interest payable
|
|
|
24
|
|
|
|
56
|
|
Accrued income taxes
|
|
|
9
|
|
|
|
17
|
|
Current portion of fair value of
derivative instruments
|
|
|
33
|
|
|
|
42
|
|
Other current liabilities
|
|
|
237
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
$
|
480
|
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Rates(A)
|
|
|
2007
|
|
|
2006
|
|
|
Novelis Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate Term Loan B,
due 2012
|
|
|
7.61
|
%(B)
|
|
$
|
259
|
|
|
$
|
259
|
|
7.25% Senior Notes, due 2015
|
|
|
7.25
|
%
|
|
|
1,400
|
|
|
|
1,400
|
|
Novelis Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate Term Loan B,
due 2012
|
|
|
7.61
|
%(B)
|
|
|
449
|
|
|
|
449
|
|
Novelis Switzerland
S.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, due 2020
(Swiss francs (CHF) 56 million)
|
|
|
7.50
|
%
|
|
|
46
|
|
|
|
47
|
|
Capital lease obligation, due 2011
(CHF 4 million)
|
|
|
2.49
|
%
|
|
|
4
|
|
|
|
4
|
|
Novelis Korea Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan, due 2007
|
|
|
4.55
|
%
|
|
|
70
|
|
|
|
70
|
|
Bank loan, due 2007 (Korean won
(KRW) 40 billion)
|
|
|
4.80
|
%
|
|
|
42
|
|
|
|
43
|
|
Bank loan, due 2007 (KRW
25 billion)
|
|
|
4.45
|
%
|
|
|
27
|
|
|
|
27
|
|
Bank loans, due 2008 through 2011
(KRW 1 billion)
|
|
|
4.01
|
%(C)
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt, due 2007 through 2012
|
|
|
2.45
|
%(C)
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
2,300
|
|
|
|
2,302
|
|
Less: current portion
|
|
|
|
|
|
|
(143
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt net
of current portion
|
|
|
|
|
|
$
|
2,157
|
|
|
$
|
2,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Interest rates are as of March 31, 2007 and exclude the
effects of amortization of debt issuance costs. |
|
(B) |
|
The interest rate for the Floating rate Term Loan B
includes an increased applicable margin in effect through
March 31, 2008 and excludes the effect of any related
interest rate swaps, as discussed below. |
|
(C) |
|
Weighted average interest rate. |
11
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Senior
Secured Credit Facilities
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% (subject to change based on
certain leverage ratios), 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.
Since our inception and through March 31, 2007, we
satisfied the 1% per annum principal amortization
requirement through fiscal year 2010, as well as
$514 million of the principal amortization requirement for
2011. No further minimum principal payments are due until 2011.
As of March 31, 2007, we had $708 million outstanding
under the Term Loan B 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. Substantially all of our assets are pledged as collateral
under our 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 delays in certain of our SEC filings for 2005 and 2006, we
obtained a series of five waiver and consent agreements from the
lenders under the facility to extend the various filing
deadlines. Fees paid related to the five waiver and consent
agreements totaled $6 million. 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. Unamortized fees related to these
waiver and consent agreements are included in Other long-term
assets in the accompanying condensed consolidated balance
sheets and were $5 million as of both March 31, 2007
and December 31, 2006.
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 receivables
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
March 31, 2007 were 8.25 to 1; 1.50 to 1; and 0.70
to 1, respectively. We were in compliance with these
covenants for the quarter ended March 31, 2007.
Total debt issuance costs, including amendment fees discussed
above, totaling $34 million have been recorded in Other
long-term assets and are being amortized over the life of
the related borrowing in Interest expense and amortization of
debt issuance costs net using the
effective interest amortization method for the Term
Loans and the straight-line method for the revolving credit and
letters of credit facility. The
12
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
unamortized amount of these costs was $22 million and
$23 million as of March 31, 2007 and December 31,
2006, respectively.
On April 27, 2007, our lenders consented to a further
amendment of our senior secured credit facilities in order to
(1) provide us with additional liquidity,
(2) potentially allow us to avoid more costly bridge
financing in connection with the transaction with Hindalco and
(3) remove certain technical provisions that are affecting
normal-course operations of our business.
The amendment specifically includes the following:
(1) permission to increase the Term Loan B facility by
$150 million; (2) a limited waiver of the change of
control Event of Default (as defined in the senior secured
credit facilities) to the earliest of (i) the date on which
any payments are made with respect to the Senior Notes (other
than scheduled interest), (ii) the third business day prior
to the sixtieth day following the change of control and
(iii) July 7, 2007 if the change of control does not
occur on or prior to such date; and (3) a modification of
three provisions, to now (a) permit the formation of
certain joint ventures, (b) permit the payment of a
liquidating cash dividend from a specific 50%-owned partnership
and (c) permit a capital contribution between guarantor
subsidiaries. In return for these amendments and modifications,
we have agreed to pay aggregate fees of approximately
$2.5 million to lenders who consent to the amendments and
modifications.
7.25% Senior
Notes
On February 3, 2005, we issued $1.4 billion aggregate
principal amount of senior unsecured debt securities (Senior
Notes). The Senior Notes were priced at par, bear interest at
7.25% and mature on February 15, 2015. Debt issuance costs
totaling $28 million have been recorded in Other
long-term assets and are being amortized over the life of
the related borrowing in Interest expense and amortization of
debt issuance costs net using the
effective interest amortization method. The
unamortized amount of these costs was $24 million as of
both March 31, 2007 and December 31, 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 for the quarter ended
March 31, 2007.
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 for registered notes. 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 and, as a result, we began to incur additional
special interest at rates ranging from 0.25% to 1.00%. We filed
a post-effective amendment to the registration statement on
December 1, 2006 which was declared effective by the SEC on
December 22, 2006. We ceased paying additional special
interest effective January 5, 2007, upon completion of the
exchange offer.
Pursuant to the terms of our Senior Notes, we are obligated,
within 30 days of the closing of the Arrangement, to make
an offer to purchase the Senior Notes at a price equal to 101%
of their principal amount plus accrued and unpaid interest to
the date the Senior Notes are purchased. In addition, Hindalco
and Acquisition Sub have indicated that they may cause us to
take other steps to repay, retire or redeem the Senior Notes
after the closing of the Arrangement. The closing of the
Arrangement does not require the consent or approval of the
holders of the Senior Notes.
13
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
As a result of the change in the market price of our
7.25% Senior Notes from 96.25 as of December 31, 2006
to 105.75 as of March 31, 2007, the estimated fair value of
this debt has increased $133 million to $1.481 billion.
Korean
Bank Loans
In November 2004, Novelis Korea Limited (Novelis Korea),
formerly Alcan Taihan Aluminium Limited, entered into a Korean
won (KRW) 40 billion ($40 million) floating rate
long-term loan due November 2007. We immediately entered into an
interest rate swap to fix the interest rate at 4.80%.
In December 2004, we entered into a $70 million floating
rate long-term loan due December 2007. We immediately entered
into an interest rate and cross currency swap for this loan
through a 4.55% fixed rate KRW 73 billion loan.
Additionally, in December 2004 we entered into a KRW
25 billion ($25 million) floating rate loan due
December 2007. We immediately entered into an interest rate swap
to fix the interest rate at 4.45%.
In the first quarter of 2007, interest rates on other Korean
bank loans for $1 million (KRW 1 billion) ranged from
3.50% to 5.50%.
Other
Agreements
In 2004, we entered into a loan and a corresponding
deposit-and-guarantee
agreement for up to $90 million. As of March 31, 2007
and December 31, 2006, this arrangement had a balance of
$80 million. We do not include the loan or deposit amounts
in our condensed consolidated balance sheets as the agreements
include a legal right of setoff and we have the intent and
ability to setoff.
Interest
Rate Swaps
In addition to interest rate swaps on certain Korean bank loans
noted above, as of March 31, 2007, we have one outstanding
interest rate swap to fix the
3-month
LIBOR interest rate at an effective weighted average interest
rate of 3.9% on $100 million of the floating rate Term
Loan B debt expiring on February 3, 2008. On
February 3, 2007, an interest rate swap to fix the
3-month
LIBOR interest rate at an effective interest rate of 3.8% on an
additional $100 million of the floating rate Term
Loan B debt expired. 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 March 31, 2007, 66% of our debt was fixed rate and 34%
was variable rate.
Capital
Lease Obligations
In December 2004, in connection with the spin-off, we entered
into a fifteen-year capital lease obligation with Alcan for
assets in Sierre, Switzerland, which has an interest rate of
7.5% and calls for fixed quarterly payments of CHF
1.7 million, which is equivalent to $1.4 million at
the exchange rate as of March 31, 2007.
In September 2005, we entered into a six-year capital lease
obligation for equipment in Switzerland which has an interest
rate of 2.49% and calls for fixed monthly payments of CHF
0.1 million, which is equivalent to $0.1 million at
the exchange rate as of March 31, 2007.
Short
Term Borrowings and Lines of Credit
As of March 31, 2007, our short-term borrowings were
$245 million consisting of (1) $241 million in
short-term loans in the U.S. and the U.K. under our
$500 million revolving credit facility and
(2) $4 million in bank overdrafts in Italy. As of
March 31, 2007, $25 million of our $500 million
revolving credit facility was
14
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
utilized for letters of credit and we had approximately
$234 million available under the revolving credit facility.
As of March 31, 2007, we had an additional $59 million
under letters of credit in Korea not included in our revolving
credit facility. The weighted average interest rate on our total
short-term borrowings was 7.77% and 7.70% as of March 31,
2007 and December 31, 2006, respectively.
Commitment fees related to the unused portion of the
$500 million revolving credit facility are 0.625% per
annum. Under the terms of the October 16, 2006 amendment to
our senior secured credit facilities, this rate will remain in
effect until such time as the compliance certificate for the
fiscal quarter ending March 31, 2008 has been delivered.
|
|
10.
|
Accumulated
Other Comprehensive Income (Loss)
|
Other comprehensive income is comprised of the following (in
millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net change in foreign currency
translation adjustments
|
|
$
|
11
|
|
|
$
|
41
|
|
Net change in fair value of
effective portion of hedges
|
|
|
7
|
|
|
|
(7
|
)
|
Postretirement benefit plans:
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
adjustments, before income tax effect
|
|
|
20
|
|
|
|
34
|
|
Income tax effect
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
15
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of income tax
effects, is comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Foreign currency translation
adjustments
|
|
$
|
144
|
|
|
$
|
133
|
|
Fair value of effective portion of
hedges net
|
|
|
(43
|
)
|
|
|
(46
|
)
|
Net actuarial loss
|
|
|
(82
|
)
|
|
|
(83
|
)
|
Net prior service cost
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net transition obligation
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
$
|
10
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Share-Based
Compensation
|
On January 1, 2006, we adopted FASB Statement No. 123
(Revised), Share-Based Payment, 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 statements of operations.
15
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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.
Compensation
to be Settled in Stock
2006
Stock Options
On October 26, 2006, our board of directors authorized a
grant of an aggregate of 885,170 seven-year non-qualified stock
options under the Novelis 2006 Incentive Plan (2006 Incentive
Plan) at an exercise price of $25.53 to certain of our executive
officers and key employees. These options are comprised of equal
portions of premium and non-premium options. Both the premium
and non-premium options vest ratably in 25% annual increments
over a 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 will become
immediately vested and exercisable, without regard to the per
share price restriction on premium options, upon a change in
control of Novelis.
The table below shows the option activity (for both premium and
non-premium options) under our 2006 Incentive Plan for the three
months ended March 31, 2007 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Options outstanding as of
December 31, 2006
|
|
|
858,500
|
|
|
$
|
25.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(32,650
|
)
|
|
$
|
25.53
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of
March 31, 2007
|
|
|
825,850
|
|
|
$
|
25.53
|
|
|
|
6.6
|
|
|
$
|
15,344,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
March 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Monte Carlo valuation model to determine the fair
value of the premium options outstanding under the 2006
Incentive Plan. The Monte Carlo model 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. Because our trading history is
shorter than the expected life of the options, we used
historical stock price volatility data from comparable companies
to supplement our own historical volatility to determine
expected volatility assumptions. The annual expected dividend
yield is based on dividend payments of $0.01 per share per
quarter. Risk-free interest rates are based on
U.S. Treasury Strip yields, compounded daily, consistent
with the expected lives of the options. The fair value of the
premium options is being amortized
16
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
over the requisite service period of each award, which is from
1.0 to 4.0 years, subject to acceleration in cases where
the employee elects retirement or is retirement eligible after
October 26, 2007.
We used the Black-Scholes valuation model to determine the fair
value of non-premium options issued. Because our trading history
is shorter than the expected life of the options, we used
historical stock price volatility data from comparable companies
to supplement our own historical volatility to determine
expected volatility assumptions. The annual expected dividend
yield is based on dividend payments of $0.01 per share per
quarter. Risk-free interest rates are based on
U.S. Treasury Strip yields, compounded daily, consistent
with the expected lives of the options. Because we do not have a
sufficient history of option exercise or cancellation, we
estimated the expected life of the options based on an extension
of the simplified method as prescribed by SEC Staff
Accounting Bulletin (SAB) No. 107, Share-Based
Payment, which allows for the use of a mid-point between the
earliest and latest dates that an award can be exercised.
No premium or non-premium options under the 2006 Incentive Plan
were granted during the three months ended March 31, 2007.
The fair value of our premium and non-premium options was
estimated using the following assumptions:
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2007
|
|
Expected volatility
|
|
42.20 to 46.40%
|
Weighted average volatility
|
|
44.30%
|
Dividend yield
|
|
0.16%
|
Risk-free interest rate
|
|
4.68 to 4.71%
|
Expected life
|
|
1.00 to 4.75 years
|
As of March 31, 2007, we had $7.0 million in
unrecognized compensation expense related to non-vested premium
and non-premium options under the 2006 Incentive Plan, which is
expected to be recognized over a weighted average period of
3.3 years.
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 1,372,663 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 2,723,914 of our common
shares. 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. All of the options will become immediately vested and
exercisable upon a change in control of Novelis.
17
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The following table shows the option activity in our Conversion
Plan for the three months ended March 31, 2007 (all amounts
actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Options outstanding as of
December 31, 2006
|
|
|
2,514,277
|
|
|
$
|
21.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,217,325
|
)
|
|
$
|
21.95
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of
March 31, 2007
|
|
|
1,296,952
|
|
|
$
|
21.74
|
|
|
|
6.2
|
|
|
$
|
29,012,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
March 31, 2007
|
|
|
725,860
|
|
|
$
|
21.67
|
|
|
|
6.0
|
|
|
$
|
16,291,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Black-Scholes valuation model to determine the fair
value of the options outstanding. Because we had no trading
history at the time of the valuation, we used historical stock
price volatility data from comparable companies to determine
expected volatility assumptions. The annual expected dividend
yield was based on our then current and anticipated dividend
payments. Risk-free interest rates were based on
U.S. Treasury bond yields, compounded daily, consistent
with the expected lives of the options. Because we did not have
a sufficient history of option exercise or cancellation, we
estimated the expected life of the options based on the lesser
of the expected term of six years or the remaining life of the
option.
No new options under the Conversion Plan have been granted since
its adoption in January 2005. The fair value of each option was
estimated using the following assumptions:
|
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
March 31, 2007
|
|
Expected volatility
|
|
30.30%
|
Weighted-average volatility
|
|
30.30%
|
Dividend yield
|
|
1.56%
|
Risk-free interest rate
|
|
2.88 to 3.73%
|
Expected life
|
|
0.70 to 5.70 years
|
During the three months ended March 31, 2007, we had
381,009 options vest with a total fair value of
$2.6 million.
Under our Conversion Plan for the three months ended
March 31, 2007, the total intrinsic value of options
exercised was $18.5 million; cash received from options
exercised was $26.7 million; and the actual tax benefit
realized for the tax deductions from the options exercised was
$1.4 million, including $1.1 million of
windfall tax benefits. There were no options
exercised during the three months ended March 31, 2006.
As of March 31, 2007, we had $1.7 million in
unrecognized compensation expense related to non-vested options
under the 2005 Conversion Plan, which is expected to be
recognized over a weighted average period of 1.7 years.
18
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Recognition
Awards
On September 25, 2006, we entered into Recognition
Agreements and granted Recognition Awards to certain executive
officers and other key employees (Executives) to retain and
reward them for continued dedication towards corporate
objectives. Under the terms of these agreements, Executives who
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 Recognition Awards on each
vesting date.
The number of Recognition Awards 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 are recognizing their cost over the
requisite service period of the Executives.
The table below shows the activity for our Recognition Awards
for the three months ended March 31, 2007 (all amounts
actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Recognition Awards as of
December 31, 2006
|
|
|
145,800
|
|
|
$
|
23.15
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition Awards as of
March 31, 2007
|
|
|
145,800
|
|
|
$
|
23.15
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was approximately
$1.0 million and $1.3 million of unamortized
compensation expense related to each of the two vesting dates
for the Recognition Awards, which is expected to be recognized
over the next 0.75 years and 1.75 years, respectively.
As a result of the potential acquisition of our common stock by
Hindalco (see Note 2 Potential Acquisition of
Novelis Common Stock), on February 10, 2007, our board of
directors adopted resolutions to amend the Recognition Awards
with the Executives. As amended, if the transaction is
consummated prior to December 31, 2008 and if the Executive
remains continuously employed by us through the vesting dates of
December 31, 2007 and December 31, 2008, the Executive
is entitled to the awards payable in either, at the option of
the Executive, (i) Hindalco common shares (if offered by
Hindalco) or (ii) cash.
Compensation
to be Settled in Cash
Stock
Appreciation Rights
On October 26, 2006, our board of directors authorized a
grant of 381,090 Stock Appreciation Rights (SARs) under the 2006
Incentive Plan at an exercise price of $25.53 to certain of our
executive officers and key employees. The terms of the SARs are
identical in all material respects to those of the stock options
issued under the 2006 Incentive Plan, 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 SARs 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
19
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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 Novelis.
The table below shows the SARs activity (for both premium and
non-premium SARs) under our 2006 Incentive Plan for the three
months ended March 31, 2007 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
SARs
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
SARs outstanding as of
December 31, 2006
|
|
|
381,090
|
|
|
$
|
25.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(1,090
|
)
|
|
$
|
25.53
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs outstanding as of
March 31, 2007
|
|
|
380,000
|
|
|
$
|
25.53
|
|
|
|
6.6
|
|
|
$
|
7,060,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable as of
March 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Monte Carlo valuation model to determine the fair
value of the premium SARs outstanding under the 2006 Incentive
Plan. The Monte Carlo model 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. Because our trading history is shorter than
the expected life of the SARs, we used historical stock price
volatility data from comparable companies to supplement our own
historical volatility to determine expected volatility
assumptions. No quarterly or annual dividend is expected.
Risk-free interest rates are based on U.S. Treasury Strip
yields, compounded daily, consistent with the expected remaining
lives of the premium SARs. The fair value of the premium SARs is
being amortized over the requisite remaining service period of
each award, which is from 0.57 to 3.57 years, subject to
acceleration in cases where the employee elects retirement or is
retirement eligible after October 26, 2007.
We used the Black-Scholes valuation model to determine the fair
value of the non-premium SARs outstanding. Because our trading
history is shorter than the expected life of the SARs, we used
historical stock price volatility data from comparable companies
to supplement our own historical volatility to determine
expected volatility assumptions. No quarterly or annual dividend
is expected. Risk-free interest rates are based on
U.S. Treasury Strip yields, compounded daily, consistent
with the expected remaining lives of the SARs. Because we do not
have a sufficient history of SAR exercise or cancellation, we
estimated the expected remaining life of the SARs based on an
extension of the simplified method as prescribed by
SAB No. 107.
20
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The fair value of each premium and non-premium SAR under the
2006 Incentive Plan was estimated as of March 31, 2007
using the following assumptions:
|
|
|
Expected volatility
|
|
40.70 to 44.70%
|
Weighted average volatility
|
|
42.70%
|
Dividend yield
|
|
None
|
Risk-free interest rate
|
|
4.51 to 4.59%
|
Expected life
|
|
0.57 to 4.32 years
|
As of March 31, 2007, we had $7.6 million in
unrecognized compensation expense related to non-vested premium
and non-premium SARs under the 2006 Incentive Plan, which is
expected to be recognized over a weighted average period of
3.3 years.
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. All converted SPAUs that were vested at the spin-off
date continued to be vested. Unvested SPAUs vest in four equal
annual installments beginning on January 6, 2006, the first
anniversary of the spin-off date. In a case of a change in
control of Novelis, all SPAUs shall become immediately
exercisable.
The table below shows the activity in our SPAU Plan for the
three months ended March 31, 2007 (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, 2006
|
|
|
418,405
|
|
|
$
|
22.04
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(117,788
|
)
|
|
$
|
22.29
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPAUs outstanding as of
March 31, 2007
|
|
|
300,617
|
|
|
$
|
21.94
|
|
|
|
6.8
|
|
|
$
|
6,665,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPAUs exercisable as of
March 31, 2007
|
|
|
98,378
|
|
|
$
|
21.33
|
|
|
|
6.6
|
|
|
$
|
2,240,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Black-Scholes valuation model to estimate the fair
value of SPAUs granted to employees and to determine the fair
value of the SPAUs outstanding. Because our trading history is
shorter than the expected life of the SPAUs, we used historical
stock price volatility data from comparable companies to
supplement our own historical volatility to determine expected
volatility assumptions. No quarterly or annual dividend is
expected. Risk-free interest rates are based on
U.S. Treasury spot rates consistent with the expected
remaining lives of the SPAUs. Because we do not have a
sufficient history of SPAU exercise or cancellation, we
estimated the expected remaining life of the SPAUs based on an
extension of the simplified method as prescribed by
SAB No. 107.
21
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
The fair value of each SPAU was estimated as of March 31,
2007 using the following assumptions:
|
|
|
Expected volatility
|
|
38.20 to 40.80%
|
Weighted average volatility
|
|
39.91%
|
Dividend yield
|
|
None
|
Risk-free interest rate
|
|
4.51 to 4.56%
|
Expected life
|
|
2.25 to 4.37 years
|
During the three months ended March 31, 2007, we had
101,119 SPAUs vest with a total fair value of $2.7 million.
During the three months ended March 31, 2007, 117,788 SPAUs
were exercised resulting in net payments of $1.7 million in
cash to the holders.
As of March 31, 2007, there was $0.7 million of
unamortized compensation cost related to non-vested SPAUs, which
is expected to be recognized over a remaining vesting period of
1.6 years.
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 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)
(adjusted for the noon exchange rate) 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 number of DDSUs outstanding as of March 31, 2007 and
2006 includes DDSUs issued on April 1, 2007 and 2006,
respectively, as the required service was provided by each
period-end.
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 (adjusted for the
noon exchange rate) and NYSE on the last five trading days prior
to the redemption date. All of the DDSUs will become immediately
payable upon a change in control of Novelis.
The table below shows our DDSU activity for the three months
ended March 31, 2007 (all amounts actual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Redemption
|
|
|
Intrinsic
|
|
|
|
DDSUs
|
|
|
Price
|
|
|
Value
|
|
|
DDSUs outstanding as of
December 31, 2006
|
|
|
112,039
|
|
|
$
|
27.11
|
|
|
|
|
|
Granted
|
|
|
7,060
|
|
|
|
|
|
|
|
|
|
Exercised (paid out)
|
|
|
(12,521
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDSUs outstanding as of
March 31, 2007
|
|
|
106,578
|
|
|
$
|
44.09
|
|
|
$
|
4,698,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007, a total of
12,521 DDSUs were paid out totaling $0.6 million in cash.
22
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Founders Performance Awards
In March 2005 (and amended and restated in March 2006 and
February 2007), 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 share price of $23.57 applies for the period
from March 24, 2005 to March 23, 2008. For the second
tranche, the target share price of $25.31 applies for the period
from March 24, 2006 to March 23, 2008. For the third
tranche, the target share price of $27.28 applies for the period
from March 24, 2007 to March 23, 2008. If awarded, a
particular tranche will be paid in cash on the later of six
months from the date the specific 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. Additionally, upon a change in control, all PSUs
awarded prior to the change in control event will be paid.
However, any PSUs that have not been awarded prior to the change
in control will be forfeited. In March 2006, our board of
directors amended the PSUs in order to clarify that PSUs would
only be awarded under the second and third tranches for
performance periods beginning in 2006 and 2007, respectively, if
the share price met the applicable threshold for 15 consecutive
days during an open trading window.
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 $2.7 million.
In February 2007, as a result of the potential acquisition of
our common stock by Hindalco, our board of directors recognized
that the applicable share price threshold had been (or would
likely be) met with respect to the second tranche and would
probably be met for the third tranche, but in light of the
insiders awareness of the possibility of a change in
control transaction, they have been subject to a trading
blackout. Moreover, it is unlikely that a 15 day open
trading window under the Novelis disclosure and insider trading
policies will arise prior to the potential closing of the change
in control transaction (which is expected to occur during the
second quarter of 2007). Accordingly, on February 10, 2007,
our board of directors further amended the PSUs in order to
provide that the applicable threshold for (a) the second
tranche will be met as of February 28, 2007, and
(b) the third tranche will be met as of March 26,
2007, for purposes of PSUs to be awarded.
During the three months ended March 31, 2007, a total of
8,500 PSUs from the third tranche were forfeited. The fair
value of each PSU as of March 31, 2007 was estimated to be
the average of the daily common share closing prices on the NYSE
for the last five trading days of the quarter, or
$44.07 per share, since the market conditions for both the
second and third tranches (represented by 94,450 and 85,950
PSUs, respectively) were effectively met as a result of the
amendment adopted on February 10, 2007 discussed above.
23
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Compensation
Cost
Total share-based compensation expense for the three months
ended March 31, 2007 and 2006, including amounts related to
the cumulative effect of an accounting change (exclusive of
income taxes) from adopting FASB Statement No. 123
(Revised) on January 1, 2006 (in the 2006 period), is
presented in the table below (in millions). These amounts are
included in Selling, general and administrative expenses
in our condensed consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Compensation to be Settled in
Stock:
|
|
|
|
|
|
|
|
|
Novelis 2006 Incentive Plan
|
|
$
|
0.9
|
|
|
$
|
|
|
Novelis Conversion Plan of 2005
|
|
|
0.3
|
|
|
|
0.8
|
|
Recognition Awards
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Compensation to be Settled in
Cash:
|
|
|
|
|
|
|
|
|
Novelis 2006 Incentive Plan (Stock
Appreciation Rights)
|
|
|
1.4
|
|
|
|
|
|
Stock Price Appreciation Unit Plan
|
|
|
4.4
|
|
|
|
1.5
|
|
Total Shareholder Returns
Performance Plan
|
|
|
|
|
|
|
(0.8
|
)
|
Deferred Share Unit Plan for
Non-Executive Directors
|
|
|
2.2
|
|
|
|
0.3
|
|
Novelis Founders Performance Awards
|
|
|
6.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.0
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Total Share-Based Compensation
Expense
|
|
$
|
15.7
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Postretirement
Benefit Plans
|
Components of net periodic benefit cost for all of our
significant plans are shown in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
12
|
|
|
|
10
|
|
|
|
2
|
|
|
|
2
|
|
Expected return on assets
|
|
|
(11
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial losses
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
prior service cost
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
14
|
|
|
$
|
13
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets is 7.5% in
2007.
24
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Employer
Contributions to Plans
For pension plans, our policy is to fund an amount required to
provide for contractual benefits attributed to service to date,
and amortize unfunded actuarial liabilities typically over
periods of 15 years or less.
We also participate in savings plans in Canada and the
U.S. as well as defined contribution pension plans in the
U.K., Canada, Germany, Malaysia and Brazil.
We contributed the following amounts to all plans, including the
Alcan plans that cover our employees (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Funded pension plans
|
|
$
|
10
|
|
|
$
|
9
|
|
Unfunded pension plans
|
|
|
6
|
|
|
|
3
|
|
Savings and defined contribution
pension plans
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total contributions
|
|
$
|
19
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
During the remainder of 2007, we expect to contribute an
additional $27 million to our funded pension plans,
$13 million to our unfunded pension plans and
$9 million to our savings and defined contribution plans.
|
|
13.
|
Currency
Losses (Gains)
|
The following currency losses (gains) are included in Other
(income) expenses net in the accompanying
condensed consolidated statements of operations (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net loss (gain) on change in fair
value of currency derivative instruments
|
|
$
|
(5
|
)
|
|
$
|
16
|
|
Net loss (gain) on translation of
monetary assets and liabilities
|
|
|
6
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
The following currency gains (losses) are included in
Accumulated other comprehensive income (loss) in the
accompanying condensed consolidated balance sheets (net of tax
effect, and in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cumulative currency translation
adjustment beginning of period
|
|
$
|
133
|
|
|
$
|
(35
|
)
|
Effect of changes in exchange rates
|
|
|
11
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Cumulative currency translation
adjustment end of period
|
|
$
|
144
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
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
25
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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. Alcan is
the principal counter-party to our aluminum forward contracts.
During the first quarter of 2006, we implemented hedge
accounting for certain of our cross-currency interest swaps with
respect to intercompany loans to several European subsidiaries
and forward exchange contracts. As of March 31, 2007, we
had $712 million of cross-currency swaps (euro
475 million, British pound (GBP) 62 million and Swiss
franc (CHF) 35 million) and $97 million of forward
foreign exchange contracts (226 million Brazilian real
(BRL)).
The euro and GBP cross-currency interest 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 ended
March 31, 2007, the change in fair value of the effective
and interest portions of our net investment hedges was a gain of
$1 million and the change in fair value of the effective
portion of our cash flow hedges was a gain of $6 million.
As of March 31, 2007, the amount of effective net gains and
losses expected to be realized during the next twelve months is
$11 million. No cash flow hedges were discontinued during
the three months ended March 31, 2007. 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 March 31, 2007 and December 31, 2006
were as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net Fair
|
|
|
|
Maturity Dates
|
|
Assets
|
|
|
Liabilities
|
|
|
Value
|
|
|
Foreign exchange forward contracts
|
|
2007 through 2011
|
|
$
|
16
|
|
|
$
|
(20
|
)
|
|
$
|
(4
|
)
|
Interest rate swaps
|
|
2007 through 2008
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Cross-currency swaps
|
|
2007 through 2015
|
|
|
6
|
|
|
|
(90
|
)
|
|
|
(84
|
)
|
Aluminum forward contracts
|
|
2007 through 2009
|
|
|
60
|
|
|
|
(8
|
)
|
|
|
52
|
|
Aluminum options
|
|
2007
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Electricity swap
|
|
2016
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
Embedded derivative instruments
|
|
2007
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Natural gas swaps
|
|
2007
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
|
147
|
|
|
|
(118
|
)
|
|
|
29
|
|
Less: current portion (A)
|
|
|
|
|
92
|
|
|
|
(33
|
)
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion (A)
|
|
|
|
$
|
55
|
|
|
$
|
(85
|
)
|
|
$
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Net Fair
|
|
|
|
Maturity Dates
|
|
Assets
|
|
|
Liabilities
|
|
|
Value
|
|
|
Foreign exchange forward contracts
|
|
2007 through 2011
|
|
$
|
12
|
|
|
$
|
(20
|
)
|
|
$
|
(8
|
)
|
Interest rate swaps
|
|
2007 through 2008
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Cross-currency swaps
|
|
2007 through 2015
|
|
|
4
|
|
|
|
(95
|
)
|
|
|
(91
|
)
|
Aluminum forward contracts
|
|
2007 through 2009
|
|
|
67
|
|
|
|
(12
|
)
|
|
|
55
|
|
Aluminum options
|
|
2007
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Electricity swap
|
|
2016
|
|
|
47
|
|
|
|
|
|
|
|
47
|
|
Embedded derivative instruments
|
|
2007
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Natural gas swaps
|
|
2007
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
|
150
|
|
|
|
(129
|
)
|
|
|
21
|
|
Less: current portion (A)
|
|
|
|
|
106
|
|
|
|
(42
|
)
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion (A)
|
|
|
|
$
|
44
|
|
|
$
|
(87
|
)
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
noncurrent 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. |
|
|
15.
|
Other
(Income) Expenses Net
|
Other (income) expenses net is comprised of the
following (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gains on change in fair value of
derivative instruments net
|
|
$
|
(30
|
)
|
|
$
|
(54
|
)
|
Sale transaction fees
|
|
|
32
|
|
|
|
|
|
Loss on disposal of business
|
|
|
|
|
|
|
15
|
|
Exchange (gains)
losses net
|
|
|
6
|
|
|
|
(5
|
)
|
Gains on disposals of property,
plant and equipment net
|
|
|
|
|
|
|
(1
|
)
|
Other (income)
expenses net
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
|
$
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
In connection with the potential acquisition of our common stock
by Hindalco as described in Note 2 Potential
Acquisition of Novelis Common Stock, we have incurred or will
incur fees and expenses, including a termination fee with an
unsuccessful bidder. During the first quarter of 2007, we
included expenses of $32 million in Other (income)
expenses net for those costs that have already
been incurred, and that are not contingent upon closing. Of this
amount, $22 million was paid during the first quarter of
2007 and the remaining amounts are expected to be paid during
the second quarter of 2007.
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
27
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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 for
taxes on income (loss) for the three months ended March 31,
2007 and 2006 were based on the estimated effective tax rates
applicable for the year ending December 31, 2007 and the
year ended December 31, 2006, respectively, after
considering items specifically related to the interim periods.
A reconciliation of the Canadian statutory tax rates to our
effective tax rates for the three months ended March 31,
2007 and 2006 is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Pre-tax income (loss) before
equity in net income of non-consolidated affiliates and minority
interests share
|
|
$
|
(58
|
)
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
Canadian statutory tax rate
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) at the
Canadian statutory rate
|
|
$
|
(19
|
)
|
|
$
|
8
|
|
Increase (decrease) in tax rate
resulting from:
|
|
|
|
|
|
|
|
|
Exchange translation items
|
|
|
6
|
|
|
|
10
|
|
Exchange remeasurement of deferred
income taxes
|
|
|
2
|
|
|
|
3
|
|
Change in valuation allowances
|
|
|
23
|
|
|
|
33
|
|
Expense/income items with no tax
effect net
|
|
|
1
|
|
|
|
3
|
|
Tax rate differences on foreign
earnings
|
|
|
(6
|
)
|
|
|
44
|
|
Other net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes on income
(loss)
|
|
$
|
7
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(12
|
)%
|
|
|
408
|
%
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, our effective
tax rate is less than the benefit at the Canadian statutory rate
due primarily to (1) a $23 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, (2) a
$6 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 and (3) $8 million
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 three months ended March 31, 2006, our effective
tax rate is greater than the Canadian statutory rate due
primarily to (1) a $44 million difference 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, (2) a
$33 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
28
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
(3) $13 million 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.
Cash taxes paid during the first quarter of 2007 and 2006 were
$18 million and $12 million, respectively.
Adoption
of FASB Interpretation No. 48
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes. FASB Interpretation No. 48 clarifies
the accounting for income taxes, by prescribing a minimum
recognition threshold a tax position is required to meet before
being recognized in the financial statements. FASB
Interpretation No. 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. Upon adoption as of January 1, 2007, we
increased our reserves for uncertain tax positions by
$1 million. We recognized the increase as a cumulative
effect adjustment to Shareholders equity, as an
increase to our Accumulated deficit. Including this
adjustment, reserves for uncertain tax positions totaled
$45 million as of January 1, 2007. Of this total,
$43 million represents the amount of unrecognized tax
benefits that, if recognized, would affect the effective income
tax rate in any future periods.
Tax authorities are currently examining certain prior
years tax returns for
1999-2003.
We are evaluating potential adjustments related to certain items
and we anticipate that it is reasonably possible that settlement
of the examination will result in a payment in the range of up
to $5 million and a corresponding decrease in unrecognized
tax benefits by December 31, 2007.
Separately, we are awaiting a court ruling regarding the
utilization of certain operating losses. We anticipate that it
is reasonably possible that this ruling will result in a
$10 million decrease in unrecognized tax benefits by
December 31, 2007 related to this matter. We have fully
funded this contingent liability through a judicial deposit,
which is included in Other long-term assets third
parties as of January 1, 2007.
With the exception of the ongoing tax examinations described
above, we are no longer subject to any income tax examinations
by any tax authorities for years before 2001. With few
exceptions, tax returns for all jurisdictions for all tax years
after 2000 are subject to examination by taxing authorities.
Our continuing practice and policy is to record potential
interest and penalties related to unrecognized tax benefits in
our Provision for taxes on income. As of January 1,
2007, we had $7 million accrued for potential interest on
income taxes and no amounts accrued for potential penalties. For
the three months ended March 31, 2007, our Provision for
taxes on income (loss) included a charge for an additional
$1 million of potential interest.
We use the treasury stock method to calculate the dilutive
effect of stock options and other common stock equivalents
(potentially dilutive shares), which recognizes the dilution of
earnings per share that would occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. These potentially dilutive shares include dilutive
stock options, DDSUs and Recognition Awards. As we incurred a
net loss for each of the three months ended March 31, 2007
and 2006, the potentially dilutive shares described below were
not included in our calculation of diluted loss per share, as
they would be anti-dilutive.
Options to purchase an aggregate of 2,122,802 of our common
shares were held by our employees and former employees as of
March 31, 2007. For the three months ended March 31,
2007, all of these options were potentially dilutive at an
average exercise price of $23.21. Additionally, there were
106,578 DDSUs and 145,800 Recognition Awards that were
considered potentially dilutive shares for the three months
ended March 31, 2007 (see Note 11
Share-Based Compensation).
29
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Options to purchase an aggregate of 2,686,600 of our common
shares were held by our employees and former employees as of
March 31, 2006. For the three months ended March 31,
2006, 741,999 of these options were potentially dilutive at an
average exercise price of $17.78. Additionally, there were
72,885 DDSUs that were considered potentially dilutive shares
for the three months ended March 31, 2006. A total of
1,944,601 anti-dilutive options were held by our employees as of
March 31, 2006 and were not included in our calculation of
diluted loss per share because their exercise prices were
greater than our average stock price during the quarter.
The following table shows the information used in the
calculation of basic and diluted loss per share.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss (in millions)
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of
outstanding shares basic
|
|
|
74,928,318
|
|
|
|
74,005,649
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
outstanding shares diluted
|
|
|
74,928,318
|
|
|
|
74,005,649
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Net loss per share
basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Commitments
and Contingencies
|
Primary
Supplier
Alcan is our primary supplier of prime and sheet ingot.
Purchases from Alcan for the three months ended March 31,
2007 and 2006 represented 45% and 41%, respectively, of our
total combined prime and sheet ingot purchases.
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
implied 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 until July 20, 2007 to complete their review, unless
that review time is extended by mutual agreement. In the
30
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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 on our consolidated balance
sheet of $71 million, with a corresponding charge against
earnings. We also recognized an insurance receivable included in
Prepaid expenses and other current assets on our
consolidated balance sheet 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 yet to
complete their review as described above. The $39 million
liability is included in Accrued expenses and other current
liabilities in our condensed consolidated balance sheets as
of March 31, 2007 and December 31, 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 our cash flows in the period of
resolution. Alternatively, the ultimate resolution could be
favorable, such that insurance coverage is in excess of the net
expense that 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.
Coke Lawsuits. A lawsuit was commenced against
Novelis Corporation on February 15, 2007 by Coca-Cola
Bottlers Sales and Services Company LLC
(CCBSS) in state court in Georgia. In addition, a
lawsuit was commenced against Novelis Corporation and Alcan
Corporation on April 3, 2007 by Coca-Cola Enterprises Inc,
Enterprises Acquisition Company, Inc., The Coca-Cola Company and
The Coca-Cola Trading Company, Inc (collectively,
CCE) in federal court in Georgia. Novelis intends to
defend these claims vigorously. Novelis believes that it has
good defenses, although there can be no certainty with respect
to the outcome of the litigation.
CCBSS is a consortium of Coca-Cola bottlers across the United
States, including Coca-Cola Enterprises Inc. CCBSS alleges that
Novelis Corporation breached an aluminum can stock supply
agreement between the parties, and seeks monetary damages in an
amount to be determined at trial and a declaration of its rights
under the agreement. The agreement includes a most favored
nations provision regarding certain pricing matters. CCBSS
alleges that Novelis Corporation breached the terms of the most
favored nations provision. The dispute will likely turn on the
facts that are presented to the court by the parties and the
courts finding as to how certain provisions of the
agreement ought to be interpreted. If CCBSS were to prevail in
this litigation, the amount of damages would likely be material.
Novelis Corporation has not yet filed its response to the
complaint. On February 20, 2007, Novelis Corporation
removed the CCBSS litigation to the federal court in Georgia. On
March 6, 2007, CCBSS moved to remand the case back to the
Georgia state court. That motion is pending.
The claim by CCE seeks monetary damages in an amount to be
determined at trial for breach of a prior aluminum can stock
supply agreement between CCE and Novelis Corporation, successor
to the rights and
31
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
obligations of Alcan Aluminum Corporation under the agreement.
According to its terms, that agreement with CCE terminated in
2006. The CCE supply agreement included a most favored
nations provision regarding certain pricing matters. CCE
alleges that Novelis Corporations entry into a supply
agreement with Anheuser-Busch, Inc. breached the most
favored nation provision of the CCE supply agreement. If
CCE were to prevail in this litigation, the amount of damages
would likely be material. The dispute will likely turn on the
facts that are presented to the court by the parties and the
courts finding as to how certain provisions of the supply
agreement ought to be interpreted. Novelis Corporation has not
yet filed its response to the complaint.
Anheuser-Busch Litigation. On
September 19, 2006, Novelis Corporation filed a lawsuit
against Anheuser-Busch, Inc. in federal court in Ohio.
Anheuser-Busch, Inc. subsequently filed suit against Novelis
Corporation and the Company in federal court in Missouri. On
January 3, 2007, Anheuser-Busch, Inc.s suit was
transferred to the Ohio federal court.
Novelis Corporation alleges that Anheuser-Busch, Inc. breached
the existing multi-year aluminum can stock supply agreement
between the parties, and we seek monetary damages and
declaratory relief. Among other claims, we assert that since
entering into the supply agreement, there has been a structural
change in market conditions that requires a change to the
pricing provisions under the agreement.
In its complaint, Anheuser-Busch, Inc. has asked for a
declaratory judgment that Anheuser-Busch, Inc. is not obligated
to modify the supply agreement as requested by Novelis
Corporation, and that Novelis Corporation must continue to
perform under the existing supply agreement.
The Anheuser-Busch, Inc. litigation is currently at the
discovery stage. Novelis Corporation has continued to perform
under the supply agreement during the litigation.
Environmental
Matters
Oswego North Ponds. As previously disclosed,
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 a Consent Order for the implementation
of the remediation plan was executed by NYSDEC and Novelis
Corporation, effective January 1, 2007. We believe that our
estimate of $19 million is reasonable, and that the
remediation plan will be designed and implemented in 2007 or
2008.
32
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Brazil
Tax Matters
Primarily as a result of legal proceedings with Brazils
Ministry of Treasury regarding certain taxes in South America,
as of March 31, 2007 and December 31, 2006, we had
cash deposits aggregating approximately $25 million and
$20 million, respectively, in judicial depository accounts
pending finalization of the related cases. The depository
accounts are in the name of the Brazilian government and will be
expended towards these legal proceeding or released to us,
depending on the outcome of the legal cases. These deposits are
included in Other long-term assets in our accompanying
condensed consolidated balance sheets. In addition, we are
involved in several disputes with Brazils Minister of
Treasury about various forms of manufacturing taxes and social
security contributions, for which we have made no judicial
deposits but for which we have established reserves ranging from
less than $1 million to approximately $54 million as
of March 31, 2007. In total, these reserves approximate
$88 million and are included in Other long-term
liabilities in our accompanying condensed consolidated
balance sheets.
Guarantees
of Indebtedness
We have issued guarantees on behalf of certain of our
subsidiaries and non-consolidated affiliates, including:
|
|
|
|
|
certain of our wholly-owned and majority-owned
subsidiaries; and
|
|
|
|
Aluminium Norf GmbH, which is a fifty percent (50%) owned joint
venture that does not meet the requirements for consolidation
under FASB Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities.
|
In the case of our wholly-owned subsidiaries, the indebtedness
guaranteed is for trade accounts payable to third parties. Some
of the guarantees have annual terms while others have no
expiration and have termination notice requirements. For our
majority-owned subsidiaries, the indebtedness guaranteed is for
short-term loan, overdraft and other debt facilities with
financial institutions, which are currently scheduled to expire
during the first half of 2007. Neither we nor any of our
subsidiaries or non-consolidated affiliates holds any assets of
any third parties as collateral to offset the potential
settlement of these guarantees.
Since we consolidate wholly-owned and majority-owned
subsidiaries in our 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.
The following table discloses information about our obligations
under guarantees of indebtedness as of March 31, 2007 (in
millions).
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential
|
|
|
Liability Carrying
|
|
Type of Entity
|
|
Future Payment
|
|
|
Value
|
|
|
Wholly-owned subsidiaries
|
|
$
|
76
|
|
|
$
|
60
|
|
Majority-owned subsidiaries
|
|
|
3
|
|
|
|
|
|
Aluminium Norf GmbH
|
|
|
13
|
|
|
|
|
|
|
|
19.
|
Segment
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
33
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
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 (losses) on disposals of property, plant and
equipment and businesses net; (i) corporate
selling, general and administrative expenses; (j) other
corporate costs net; (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 included in our
Annual Report on
Form 10-K
for the year ended December 31, 2006, 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
statements of operations, change 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.
In the third quarter of 2006, we added a line to our Regional
Income reconciliation to improve the disclosure of gains or
losses resulting from cash settlement of derivative instruments
that have been included in Regional Income. Accordingly, the
first quarter of 2006 has been revised to conform to the current
period presentation.
The tables below show selected segment financial information as
of and for the three months ended March 31, 2007 and 2006
(in millions). The Corporate and Other column in the
tables below includes functions that are managed directly from
our corporate office, which focuses on strategy development and
oversees governance, policy, legal compliance, human resources
and finance matters. It also includes consolidating and other
elimination accounts.
Selected
Segment Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Three
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended March 31, 2007
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
925
|
|
|
$
|
1,057
|
|
|
$
|
413
|
|
|
$
|
235
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,630
|
|
Intersegment sales
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
|
|
12
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
Regional Income (Loss)
|
|
|
(17
|
)
|
|
|
86
|
|
|
|
17
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
Depreciation and amortization
|
|
|
16
|
|
|
|
24
|
|
|
|
14
|
|
|
|
11
|
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
58
|
|
Capital expenditures
|
|
|
9
|
|
|
|
11
|
|
|
|
3
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
24
|
|
Total assets
|
|
|
1,566
|
|
|
|
2,543
|
|
|
|
1,110
|
|
|
|
821
|
|
|
|
(114
|
)
|
|
|
44
|
|
|
|
5,970
|
|
34
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
As of and for the Three
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Months Ended March 31, 2006
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
Net sales (to third parties)
|
|
$
|
895
|
|
|
$
|
826
|
|
|
$
|
394
|
|
|
$
|
209
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
2,319
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
Regional Income
|
|
|
58
|
|
|
|
57
|
|
|
|
25
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Depreciation and amortization
|
|
|
18
|
|
|
|
23
|
|
|
|
14
|
|
|
|
11
|
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
58
|
|
Capital expenditures
|
|
|
8
|
|
|
|
9
|
|
|
|
1
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
21
|
|
Total assets
|
|
|
1,600
|
|
|
|
2,296
|
|
|
|
1,038
|
|
|
|
798
|
|
|
|
(87
|
)
|
|
|
98
|
|
|
|
5,743
|
|
The following table shows the reconciliation from Total Regional
Income to Net loss for the three months ended March 31,
2007 and 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Regional Income
|
|
$
|
142
|
|
|
$
|
181
|
|
Interest expense and amortization
of debt issuance costs
|
|
|
(54
|
)
|
|
|
(51
|
)
|
Gains on cash settlement of
derivative instruments net, included in Regional
Income
|
|
|
(33
|
)
|
|
|
(53
|
)
|
Gains on change in fair value of
derivative instruments net
|
|
|
30
|
|
|
|
54
|
|
Depreciation and amortization
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Impairment charges on long-lived
assets
|
|
|
(8
|
)
|
|
|
|
|
Minority interests share
|
|
|
(2
|
)
|
|
|
|
|
Adjustment to eliminate
proportional consolidation (A)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Restructuring charges
net
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Loss on disposals of property,
plant and equipment and businesses net
|
|
|
|
|
|
|
(14
|
)
|
Corporate selling, general and
administrative expenses
|
|
|
(26
|
)
|
|
|
(26
|
)
|
Other corporate costs
net (B)
|
|
|
(30
|
)
|
|
|
4
|
|
Provision for taxes on income
(loss)
|
|
|
(7
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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 on our condensed consolidated
statements of operations. See Note 7 Investment
in and Advances to Non-consolidated Affiliates and Related Party
Transactions for further information about these
non-consolidated affiliates. |
|
(B) |
|
During the first quarter of 2007, we incurred expenses of $32
million in connection with the potential acquisition of our
common stock by Hindalco as described in Note 2
Potential Acquisition of Novelis Common Stock. |
35
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Information
about Major Customers
All of our operating segments had net sales to Rexam Plc
(Rexam), our largest customer. Net sales to Rexam and the
percentages of our total net sales for the three months ended
March 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net sales to Rexam (in millions)
|
|
$
|
407
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net sales
|
|
|
15.5
|
%
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
36
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
20.
|
Supplemental
Guarantor Information
|
In connection with the issuance of our Senior Notes, certain of
our wholly-owned subsidiaries provided guarantees of the Senior
Notes. These guarantees are full and unconditional as well as
joint and several. The guarantor subsidiaries (the Guarantors)
are comprised of the majority of our businesses in Canada, the
U.S, the U.K, Brazil and Switzerland, as well as certain
businesses in Germany. Certain Guarantors may be subject to
restrictions on their ability to distribute earnings to Novelis
Inc. (the Parent). The remaining subsidiaries (the
Non-Guarantors) of the Parent are not guarantors of the Senior
Notes.
The following information presents consolidating statements of
operations for the three months ended March 31, 2007 and
2006, consolidating balance sheets as of March 31, 2007 and
December 31, 2006, and consolidating statements of cash
flows for the three months ended March 31, 2007 and 2006 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.
Consolidating
Statement of Operations
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
378
|
|
|
$
|
2,228
|
|
|
$
|
723
|
|
|
$
|
(699
|
)
|
|
$
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
374
|
|
|
|
2,094
|
|
|
|
675
|
|
|
|
(696
|
)
|
|
|
2,447
|
|
Selling, general and
administrative expenses
|
|
|
10
|
|
|
|
69
|
|
|
|
20
|
|
|
|
|
|
|
|
99
|
|
Depreciation and amortization
|
|
|
3
|
|
|
|
38
|
|
|
|
17
|
|
|
|
|
|
|
|
58
|
|
Research and development expenses
|
|
|
5
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
8
|
|
Restructuring charges
net
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Impairment charges on long-lived
assets
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
7
|
|
|
|
39
|
|
|
|
4
|
|
|
|
|
|
|
|
50
|
|
Equity in net income (loss) of
affiliates
|
|
|
14
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
(3
|
)
|
Other (income)
expenses net
|
|
|
29
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
2,236
|
|
|
|
717
|
|
|
|
(710
|
)
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
taxes on income (loss) and minority interests share
|
|
|
(64
|
)
|
|
|
(8
|
)
|
|
|
6
|
|
|
|
11
|
|
|
|
(55
|
)
|
Provision for taxes on income
(loss)
|
|
|
|
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interests share
|
|
|
(64
|
)
|
|
|
(13
|
)
|
|
|
4
|
|
|
|
11
|
|
|
|
(62
|
)
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(64
|
)
|
|
$
|
(13
|
)
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Consolidating
Statement of Operations
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
370
|
|
|
$
|
1,960
|
|
|
$
|
673
|
|
|
$
|
(684
|
)
|
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
355
|
|
|
|
1,822
|
|
|
|
635
|
|
|
|
(677
|
)
|
|
|
2,135
|
|
Selling, general and
administrative expenses
|
|
|
13
|
|
|
|
63
|
|
|
|
16
|
|
|
|
|
|
|
|
92
|
|
Depreciation and amortization
|
|
|
4
|
|
|
|
38
|
|
|
|
16
|
|
|
|
|
|
|
|
58
|
|
Research and development expenses
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Restructuring charges
(recoveries) net
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
11
|
|
|
|
32
|
|
|
|
5
|
|
|
|
|
|
|
|
48
|
|
Equity in net income (loss) of
affiliates
|
|
|
31
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(31
|
)
|
|
|
(3
|
)
|
Other (income)
expenses net
|
|
|
17
|
|
|
|
(68
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
1,887
|
|
|
|
675
|
|
|
|
(708
|
)
|
|
|
2,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
taxes on income (loss) and minority interests share
|
|
|
(67
|
)
|
|
|
73
|
|
|
|
(2
|
)
|
|
|
24
|
|
|
|
28
|
|
Provision for taxes on income
(loss)
|
|
|
7
|
|
|
|
70
|
|
|
|
25
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interests share
|
|
|
(74
|
)
|
|
|
3
|
|
|
|
(27
|
)
|
|
|
24
|
|
|
|
(74
|
)
|
Minority interests share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(74
|
)
|
|
$
|
3
|
|
|
$
|
(27
|
)
|
|
$
|
24
|
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Consolidating
Balance Sheet
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6
|
|
|
$
|
71
|
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
128
|
|
Accounts receivable net
of allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
36
|
|
|
|
903
|
|
|
|
411
|
|
|
|
|
|
|
|
1,350
|
|
related parties
|
|
|
416
|
|
|
|
500
|
|
|
|
58
|
|
|
|
(949
|
)
|
|
|
25
|
|
Inventories
|
|
|
65
|
|
|
|
1,008
|
|
|
|
421
|
|
|
|
(3
|
)
|
|
|
1,491
|
|
Prepaid expenses and other current
assets
|
|
|
3
|
|
|
|
26
|
|
|
|
10
|
|
|
|
|
|
|
|
39
|
|
Current portion of fair value of
derivative instruments
|
|
|
|
|
|
|
88
|
|
|
|
4
|
|
|
|
|
|
|
|
92
|
|
Deferred income tax assets
|
|
|
3
|
|
|
|
12
|
|
|
|
4
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
529
|
|
|
|
2,608
|
|
|
|
959
|
|
|
|
(952
|
)
|
|
|
3,144
|
|
Property, plant and
equipment net
|
|
|
112
|
|
|
|
1,225
|
|
|
|
761
|
|
|
|
|
|
|
|
2,098
|
|
Goodwill
|
|
|
|
|
|
|
29
|
|
|
|
210
|
|
|
|
|
|
|
|
239
|
|
Intangible assets net
|
|
|
|
|
|
|
18
|
|
|
|
2
|
|
|
|
|
|
|
|
20
|
|
Investments
|
|
|
362
|
|
|
|
153
|
|
|
|
|
|
|
|
(362
|
)
|
|
|
153
|
|
Fair value of derivative
instruments net of current portion
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Deferred income tax assets
|
|
|
1
|
|
|
|
66
|
|
|
|
35
|
|
|
|
|
|
|
|
102
|
|
Other long-term assets
|
|
|
1,231
|
|
|
|
160
|
|
|
|
132
|
|
|
|
(1,364
|
)
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,235
|
|
|
$
|
4,314
|
|
|
$
|
2,099
|
|
|
$
|
(2,678
|
)
|
|
$
|
5,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
140
|
|
|
$
|
|
|
|
$
|
143
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
241
|
|
|
|
4
|
|
|
|
|
|
|
|
245
|
|
related parties
|
|
|
15
|
|
|
|
529
|
|
|
|
61
|
|
|
|
(605
|
)
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
116
|
|
|
|
938
|
|
|
|
560
|
|
|
|
|
|
|
|
1,614
|
|
related parties
|
|
|
69
|
|
|
|
240
|
|
|
|
84
|
|
|
|
(344
|
)
|
|
|
49
|
|
Accrued expenses and other current
liabilities
|
|
|
63
|
|
|
|
317
|
|
|
|
100
|
|
|
|
|
|
|
|
480
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
263
|
|
|
|
2,341
|
|
|
|
949
|
|
|
|
(949
|
)
|
|
|
2,604
|
|
Long-term debt net of
current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,659
|
|
|
|
496
|
|
|
|
2
|
|
|
|
|
|
|
|
2,157
|
|
related parties
|
|
|
|
|
|
|
1,116
|
|
|
|
248
|
|
|
|
(1,364
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
89
|
|
|
|
14
|
|
|
|
|
|
|
|
103
|
|
Accrued postretirement benefits
|
|
|
19
|
|
|
|
293
|
|
|
|
115
|
|
|
|
|
|
|
|
427
|
|
Other long-term liabilities
|
|
|
119
|
|
|
|
214
|
|
|
|
19
|
|
|
|
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,060
|
|
|
|
4,549
|
|
|
|
1,347
|
|
|
|
(2,313
|
)
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
(Accumulated deficit)/retained
earnings/owners net investment
|
|
|
(263
|
)
|
|
|
(458
|
)
|
|
|
575
|
|
|
|
(117
|
)
|
|
|
(263
|
)
|
Accumulated other comprehensive
income
|
|
|
10
|
|
|
|
223
|
|
|
|
25
|
|
|
|
(248
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
175
|
|
|
|
(235
|
)
|
|
|
600
|
|
|
|
(365
|
)
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,235
|
|
|
$
|
4,314
|
|
|
$
|
2,099
|
|
|
$
|
(2,678
|
)
|
|
$
|
5,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Consolidating
Balance Sheet
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
|
$
|
37
|
|
|
$
|
33
|
|
|
$
|
|
|
|
$
|
73
|
|
Accounts receivable net
of allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
40
|
|
|
|
864
|
|
|
|
417
|
|
|
|
|
|
|
|
1,321
|
|
related parties
|
|
|
399
|
|
|
|
414
|
|
|
|
52
|
|
|
|
(844
|
)
|
|
|
21
|
|
Inventories
|
|
|
56
|
|
|
|
963
|
|
|
|
372
|
|
|
|
|
|
|
|
1,391
|
|
Prepaid expenses and other current
assets
|
|
|
2
|
|
|
|
30
|
|
|
|
10
|
|
|
|
|
|
|
|
42
|
|
Current portion of fair value of
derivative instruments
|
|
|
|
|
|
|
102
|
|
|
|
4
|
|
|
|
|
|
|
|
106
|
|
Deferred income tax assets
|
|
|
2
|
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
502
|
|
|
|
2,411
|
|
|
|
894
|
|
|
|
(844
|
)
|
|
|
2,963
|
|
Property, plant and
equipment net
|
|
|
114
|
|
|
|
1,253
|
|
|
|
776
|
|
|
|
|
|
|
|
2,143
|
|
Goodwill
|
|
|
|
|
|
|
28
|
|
|
|
208
|
|
|
|
|
|
|
|
236
|
|
Intangible assets net
|
|
|
|
|
|
|
18
|
|
|
|
2
|
|
|
|
|
|
|
|
20
|
|
Investments
|
|
|
409
|
|
|
|
150
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
150
|
|
Fair value of derivative
instruments net of current portion
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Deferred income tax assets
|
|
|
17
|
|
|
|
22
|
|
|
|
37
|
|
|
|
|
|
|
|
76
|
|
Other long-term assets
|
|
|
1,224
|
|
|
|
161
|
|
|
|
129
|
|
|
|
(1,354
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,266
|
|
|
$
|
4,087
|
|
|
$
|
2,046
|
|
|
$
|
(2,607
|
)
|
|
$
|
5,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
141
|
|
|
$
|
|
|
|
$
|
144
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
129
|
|
|
|
4
|
|
|
|
|
|
|
|
133
|
|
related parties
|
|
|
7
|
|
|
|
502
|
|
|
|
63
|
|
|
|
(572
|
)
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
108
|
|
|
|
914
|
|
|
|
520
|
|
|
|
|
|
|
|
1,542
|
|
related parties
|
|
|
47
|
|
|
|
207
|
|
|
|
62
|
|
|
|
(272
|
)
|
|
|
44
|
|
Accrued expenses and other current
liabilities
|
|
|
96
|
|
|
|
320
|
|
|
|
92
|
|
|
|
|
|
|
|
508
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
60
|
|
|
|
1
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
258
|
|
|
|
2,135
|
|
|
|
883
|
|
|
|
(844
|
)
|
|
|
2,432
|
|
Long-term debt net of
current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
1,659
|
|
|
|
497
|
|
|
|
2
|
|
|
|
|
|
|
|
2,158
|
|
related parties
|
|
|
|
|
|
|
1,107
|
|
|
|
247
|
|
|
|
(1,354
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
16
|
|
|
|
49
|
|
|
|
16
|
|
|
|
|
|
|
|
81
|
|
Accrued postretirement benefits
|
|
|
21
|
|
|
|
296
|
|
|
|
108
|
|
|
|
|
|
|
|
425
|
|
Other long-term liabilities
|
|
|
117
|
|
|
|
204
|
|
|
|
22
|
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,071
|
|
|
|
4,288
|
|
|
|
1,278
|
|
|
|
(2,198
|
)
|
|
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398
|
|
Retained earnings/(accumulated
deficit)/owners net investment
|
|
|
(198
|
)
|
|
|
(410
|
)
|
|
|
585
|
|
|
|
(175
|
)
|
|
|
(198
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(5
|
)
|
|
|
209
|
|
|
|
25
|
|
|
|
(234
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
195
|
|
|
|
(201
|
)
|
|
|
610
|
|
|
|
(409
|
)
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,266
|
|
|
$
|
4,087
|
|
|
$
|
2,046
|
|
|
$
|
(2,607
|
)
|
|
$
|
5,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Consolidating
Statement of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(30
|
)
|
|
$
|
(55
|
)
|
|
$
|
50
|
|
|
$
|
(52
|
)
|
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2
|
)
|
|
|
(16
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
(24
|
)
|
Changes to investment in and
advances to non-consolidated affiliates
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Proceeds from loans
receivable net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related parties
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Net proceeds from settlement of
derivative instruments
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Short-term borrowings
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
related parties
|
|
|
7
|
|
|
|
5
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shareholders
|
|
|
|
|
|
|
(38
|
)
|
|
|
(14
|
)
|
|
|
52
|
|
|
|
|
|
Proceeds from the exercise of
employee stock options
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Windfall tax benefit on
share-based compensation
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
35
|
|
|
|
79
|
|
|
|
(26
|
)
|
|
|
52
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
3
|
|
|
|
34
|
|
|
|
18
|
|
|
|
|
|
|
|
55
|
|
Cash and cash
equivalents beginning of period
|
|
|
3
|
|
|
|
37
|
|
|
|
33
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of period
|
|
$
|
6
|
|
|
$
|
71
|
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Novelis
Inc.
NOTES TO
THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) (Continued)
Novelis
Inc.
Consolidating
Statement of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
14
|
|
|
$
|
145
|
|
|
$
|
48
|
|
|
$
|
(112
|
)
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(21
|
)
|
Disposal of business
net
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Proceeds from sales of assets
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Changes to investment in and
advances to non-consolidated affiliates
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Proceeds from loans
receivable net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related parties
|
|
|
60
|
|
|
|
7
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
7
|
|
Net proceeds from settlement of
derivative instruments
|
|
|
|
|
|
|
77
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
50
|
|
|
|
75
|
|
|
|
(11
|
)
|
|
|
(60
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
(29
|
)
|
|
|
(51
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
(112
|
)
|
related parties
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
60
|
|
|
|
|
|
Short-term borrowings
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third parties
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
related parties
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preference shares
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
12
|
|
|
|
|
|
common shareholders
|
|
|
(7
|
)
|
|
|
(85
|
)
|
|
|
(15
|
)
|
|
|
100
|
|
|
|
(7
|
)
|
minority interests
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
Debt issuance costs
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(37
|
)
|
|
|
(199
|
)
|
|
|
(63
|
)
|
|
|
172
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
27
|
|
|
|
21
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
22
|
|
Effect of exchange rate changes
on cash balances held in foreign currencies
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Cash and cash
equivalents beginning of period
|
|
|
2
|
|
|
|
34
|
|
|
|
64
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of period
|
|
$
|
29
|
|
|
$
|
55
|
|
|
$
|
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 consolidated financial statements and accompanying
notes included elsewhere in this quarterly report for a more
complete understanding of our financial condition and results of
operations. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to,
those discussed below, particularly in SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET
DATA.
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.
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, 2006, as amended, filed
with the United States Securities and Exchange Commission (SEC)
on March 1, 2007.
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 March 31, 2007, we had operations on four
continents: North America; South America; Asia and Europe,
through 33 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 technologically sophisticated products in all of these
geographic regions.
Potential
Acquisition of Novelis Common Stock
As previously disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2006, on February 10,
2007, Novelis Inc., Hindalco Industries Limited (Hindalco) and
AV Aluminum Inc., an indirect subsidiary of Hindalco, entered
into an Arrangement Agreement (the Arrangement Agreement). On
March 30, 2007, AV Aluminum Inc. assigned its interest in
the Arrangement Agreement to AV Metals Inc. (Acquisition Sub), a
subsidiary of Hindalco. Under the Arrangement Agreement,
Acquisition Sub will acquire all of the issued and outstanding
common shares of Novelis for cash at a per share price of
$44.93, without interest and less any required withholding taxes
(the Purchase Price), to be implemented by way of a
court-approved plan of arrangement (the Arrangement).
Pursuant to the Arrangement Agreement, at the effective time of
the Arrangement, each common share of Novelis issued and
outstanding immediately prior to the effective time (other than
common shares held by (i) Hindalco or Acquisition Sub or
any of their affiliates or (ii) any shareholders who
properly exercise dissent rights under the Canada Business
Corporations Act) will be transferred to Acquisition Sub in
exchange for the right to receive the Purchase Price. The
acquisition of Novelis is an all-cash transaction which values
Novelis at approximately $6 billion, including
approximately $2.4 billion of debt. The transaction is not
subject to a financing condition.
The consummation of the Arrangement is subject to various
customary conditions, including Novelis shareholder approval and
the receipt of regulatory approvals specified in the Arrangement
Agreement
and/or until
the expiration of all applicable waiting periods, including
antitrust approvals under the Competition Act (Canada), the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the European
Union or the relevant antitrust authorities in the applicable
European Union member states, as well as approval under the
Investment Canada Act and approval by the Agência Nacional
de Energia Eléctrica (ANEEL) for the transfer
43
of power generation concessions/authorizations in Brazil. As of
May 10, 2007, we have the necessary regulatory approval to
proceed with the transaction from all known parties. Subject to
final court approval, we expect that the Arrangement will close
on May 15, 2007.
The Arrangement Agreement contains customary representations and
warranties between Novelis and Hindalco and Acquisition Sub. The
Arrangement Agreement also contains customary covenants and
agreements, including covenants relating to (a) the conduct
of Novelis business between the date of the signing of the
Arrangement Agreement and the closing of the Arrangement,
(b) solicitation of competing acquisition proposals and
(c) the efforts of the parties to cause the Arrangement to
be completed. Additionally, Novelis shareholders approved the
Arrangement at its special meeting of shareholders on
May 10, 2007.
The Arrangement Agreement contains certain termination rights
and provides that, upon or following the termination of the
Arrangement Agreement, under specified circumstances involving a
competing acquisition proposal, Novelis may be required to pay
Acquisition Sub a termination fee of $100 million or, in
certain circumstances, to reimburse costs and expenses of
Hindalco and its affiliates, to a maximum of $15 million.
In connection with this process, Novelis has incurred or will
incur fees and expenses, including a termination fee with an
unsuccessful bidder. During the first quarter of 2007, we
included expenses of $32 million in Other (income)
expenses net, for those costs that have already been
incurred and that are not contingent upon closing. Of this
amount, $22 million was paid during the first quarter of
2007 and the remaining amounts are expected to be paid during
the second quarter of 2007.
HIGHLIGHTS
Significant highlights, events and factors impacting our
business during the three months ended March 31, 2007 and
2006 are presented briefly below. Each is discussed in further
detail throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
Shipments and selected financial information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Shipments (kt (A)):
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
732
|
|
|
|
741
|
|
Ingot products (B)
|
|
|
40
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
772
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
2,630
|
|
|
$
|
2,319
|
|
Net Loss
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
Increase (Decrease) in Total Debt
(C)
|
|
$
|
110
|
|
|
$
|
(103
|
)
|
(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.
|
|
|
(C)
|
Change in total debt since December 31, 2006 and 2005,
respectively.
|
|
|
|
|
|
Rolled products shipments decreased in 2007 in North
America and Asia, offset partially by increases in Europe and
South America. In North America, shipments declined due to
reduced demand from the original equipment manufacturers
(OEM)/distributor market and lower automotive demand with
U.S. manufacturers. In Asia, shipments declined as Chinese
export competition eroded sales in the industrial and light
gauge markets. European shipments increased into the can and
foil markets while South America benefited from higher can
shipments.
|
44
|
|
|
|
|
London Metal Exchange (LME) pricing for aluminum
(metal) was an average of 16% higher during the first quarter of
2007 than the same period for 2006.
|
|
|
|
Net sales for the first quarter ended March 31,
2007 increased from the same period for 2006 primarily due to
the rise in LME prices. However, the benefit of higher LME
prices was limited by metal price ceilings in sales contracts
representing approximately 10% of our total shipments in 2007
and 20% of our total shipments in 2006. During the first
quarters of 2007 and 2006, we were unable to pass through
approximately $80 million and $95 million,
respectively, of metal purchase costs associated with sales
under these contracts. The metal price ceilings are discussed in
more detail below.
|
|
|
|
Our total debt increased by $110 million during
the first quarter of 2007, principally as a result of increased
short-term borrowings necessary to fund working capital
requirements driven by higher metal prices. Our cumulative debt
reduction since our inception in January 2005 is
$406 million, or 14%.
|
|
|
|
During the first quarters of 2007 and 2006 we
recognized pre-tax gains of $30 million and
$54 million, respectively, related to the change in fair
value of derivative instruments. These amounts are included in
Other (income) expenses net in our accompanying
condensed consolidated statements of operations. Regional Income
includes approximately $33 million and $53 million of
cash-settled derivative gains for our first quarters ended
March 31, 2007 and 2006, respectively. These derivative
instruments and the related accounting are discussed in more
detail below.
|
OUR
BUSINESS
Business
Model and Key Concepts
Most of our business is conducted under a conversion model,
which allows us to pass through increases or decreases in the
price of metal 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.
METAL
PRICE CEILINGS
Sales contracts representing approximately 10% and 20% of our
total shipments for the first quarter of 2007 and 2006,
respectively, provide for a ceiling over which metal purchase
costs cannot contractually be passed through to certain
customers, unless adjusted. This negatively impacts our margins
when the price we pay for metal is above the ceiling price
contained in these contracts. During the first quarters of 2007
and 2006, we were unable to pass through approximately
$80 million and $95 million, respectively, of metal
purchase costs associated with sales under these contracts. We
calculate and report this difference to be approximately the
difference between the quoted purchase price on the LME
(adjusted for any local premiums and for any price lag
associated with purchasing or processing time), and the metal
price ceiling in our contracts. Cash flows from operations are
negatively impacted by the same amounts, adjusted for any timing
difference between customer receipts and vendor payments.
The contracts with metal price ceilings expire at varying times
and our estimated remaining exposure approximates 10% of
estimated shipments in 2007. Based on a March 31, 2007
aluminum price of $2,792 per tonne, and our best estimate
of a range of shipment volumes, we estimate that we will be
unable to pass through aluminum purchase costs of approximately
$185 $225 million for the remainder of 2007 and
$460 $525 million in the aggregate thereafter.
Under these scenarios, and ignoring working capital timing, we
expect that cash flows from operations will be impacted
negatively by these same amounts, offset partially by reduced
income taxes.
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, and we
45
refer to this timing difference as metal price lag. Metal price
lag benefited the first quarters of 2007 and 2006 by
approximately $8 million and $53 million, respectively.
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.
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. The positive or negative impact on
sales under these contracts has been included in the metal price
lag effect quantified above, without regard to fixed forward
instruments purchased to offset this risk as described below.
RISK
MITIGATION
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 sources of aluminum supply have
historically provided a benefit as these sources of metal are
typically less expensive than purchasing aluminum from third
party suppliers. We refer to these two sources 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 they have
historically. 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 UBCs.
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 both fixed
forward derivative instruments and put options, thereby creating
synthetic call options, to hedge our exposure to further metal
price increases in 2007. We have not entered into any synthetic
call options beyond 2007.
During the third quarter of 2006, we began selling short-term
LME forward contracts to reduce the cash flow volatility of
fluctuating metal prices associated with metal price lag. In
Europe, we enter into forward metal purchases simultaneous with
the contracts that contain fixed metal prices. These forward
metal purchases directly hedge the economic risk of future metal
price fluctuation associated with these contracts. The 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 net sales and Regional Income impacts are described
more fully in the Operations and Segment Review for our Europe
operating segment.
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. In those
cases, 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 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.
INTERNAL
CONTROLS
We previously reported in our Annual Report on
Form 10-K
for the year ended December 31, 2006 and continue to report
as of March 31, 2007, that we have a material weakness in
our internal control over
46
financial reporting as we did not maintain effective controls
over accounting for income taxes. 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, we executed a settlement
agreement with Alcan resolving the 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. As of March 31, 2007
there remains an outstanding matter related to two pension plans
for those employees who elected to transfer their past service
to Novelis, one in Canada and one in the U.K. We expect this
transfer will take place during the second quarter of 2007, and
we expect that the plan assets transferred will approximate the
liabilities assumed. To the extent that they are different, we
will record an adjustment to Additional paid-in capital as a
post-transaction adjustment.
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 from Alcan of 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. See Item 1. Business
in our Annual Report on
Form 10-K
for the year ended December 31, 2006 for additional
information.
OPERATIONS
AND SEGMENT REVIEW
The following discussion and analysis is based on our condensed
consolidated statements of operations, which reflect our results
of operations for the quarters ended March 31, 2007 and
2006, as prepared in accordance with generally accepted
accounting principles in the United States of America (GAAP).
The following tables present our shipments, our results of
operations, prices for aluminum, oil and natural gas and key
currency exchange rates for the quarters ended March 31,
2007 and 2006, as well as the percentage changes from period to
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Shipments
(kt)
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products, including tolling
(the conversion of customer-owned metal)
|
|
|
732
|
|
|
|
741
|
|
|
|
(1.2
|
)%
|
Ingot products, including primary
and secondary ingot and recyclable aluminum
|
|
|
40
|
|
|
|
41
|
|
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
772
|
|
|
|
782
|
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,630
|
|
|
$
|
2,319
|
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization shown below)
|
|
|
2,447
|
|
|
|
2,135
|
|
|
|
14.6
|
%
|
Selling, general and
administrative expenses
|
|
|
99
|
|
|
|
92
|
|
|
|
7.6
|
%
|
Depreciation and amortization
|
|
|
58
|
|
|
|
58
|
|
|
|
|
%
|
Research and development expenses
|
|
|
8
|
|
|
|
9
|
|
|
|
(11.1
|
)%
|
Restructuring charges
net
|
|
|
9
|
|
|
|
1
|
|
|
|
800.0
|
%
|
Impairment charges on long-lived
assets
|
|
|
8
|
|
|
|
|
|
|
|
n.m.
|
|
Interest expense and amortization
of debt issuance costs net
|
|
|
50
|
|
|
|
48
|
|
|
|
4.2
|
%
|
Equity in net income of
non-consolidated affiliates
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
%
|
Other (income)
expenses net
|
|
|
9
|
|
|
|
(49
|
)
|
|
|
(118.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,685
|
|
|
|
2,291
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
taxes on income (loss) and minority interests share
|
|
|
(55
|
)
|
|
|
28
|
|
|
|
(296.4
|
)%
|
Provision for taxes on income
(loss)
|
|
|
7
|
|
|
|
102
|
|
|
|
(93.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority
interests share
|
|
|
(62
|
)
|
|
|
(74
|
)
|
|
|
(16.2
|
)%
|
Minority interests share
|
|
|
(2
|
)
|
|
|
|
|
|
|
n.m.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
|
|
(13.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n.m. = not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
London Metal Exchange
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum (per metric tonne, and
presented in U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing cash price as of
March 31,
|
|
$
|
2,792
|
|
|
$
|
2,513
|
|
|
|
11.1
|
%
|
Average cash price during the
quarters ended March 31,
|
|
$
|
2,800
|
|
|
$
|
2,420
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar
|
|
|
|
First Quarter
|
|
|
Strengthen/
|
|
|
|
2007
|
|
|
2006
|
|
|
(Weaken)
|
|
|
Federal Reserve Bank of New
York Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
Average of the month end rates for
the first quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar per Euro
|
|
|
1.320
|
|
|
|
1.207
|
|
|
|
(9.4
|
)%
|
Brazilian real per U.S. dollar
|
|
|
2.100
|
|
|
|
2.166
|
|
|
|
(3.0
|
)%
|
South Korean won per
U.S. dollar
|
|
|
941
|
|
|
|
967
|
|
|
|
(2.7
|
)%
|
Canadian dollar per
U.S. dollar
|
|
|
1.167
|
|
|
|
1.150
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
New York Mercantile
Exchange Energy Price Quotations
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Sweet Crude
|
|
|
|
|
|
|
|
|
|
|
|
|
Average settlement price (per
barrel)
|
|
$
|
57.54
|
|
|
$
|
62.48
|
|
|
|
(7.9
|
)%
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Henry Hub contract
settlement price (per MMBTU) (A)
|
|
$
|
6.77
|
|
|
$
|
8.97
|
|
|
|
(24.5
|
)%
|
_
_
(A) One MMBTU is the equivalent of one decatherm, or one
million British Thermal Units (BTUs).
48
RESULTS
OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2007 COMPARED
TO THE QUARTER ENDED MARCH 31, 2006
Shipments
Rolled products shipments decreased in 2007 in North America and
Asia, offset partially by increases in Europe and South America.
In North America, shipments declined due to reduced demand from
the OEM/distributor market and lower automotive demand with U.S.
manufacturers. In Asia, shipments declined as Chinese export
competition eroded sales in the industrial and light gauge
markets. European shipments increased into the can and foil
markets while South America benefited from higher can shipments.
Net
sales
Higher net sales in the first quarter of 2007 resulted primarily
from the increase in LME metal pricing, which was 16% higher on
average during the first quarter of 2007 than the comparable
2006 quarter. Metal represents approximately 60% 70%
of the sales value of our products. Net sales for the first
quarter of 2007 were adversely impacted in North America due to
price ceilings on certain can contracts, which limited our
ability to pass through approximately $80 million of metal
purchase costs. In comparison, we were unable to pass through
approximately $95 million of metal purchase costs in the
first quarter of 2006, for a net favorable impact of
approximately $15 million.
Costs and
expenses
The following table presents our costs and expenses for the
quarters ended March 31, 2007 and 2006, in
U.S. dollars and expressed as percentages of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$ in millions
|
|
|
net sales
|
|
|
$ in millions
|
|
|
net sales
|
|
|
Cost of goods sold (exclusive of
depreciation and amortization)
|
|
$
|
2,447
|
|
|
|
93.0
|
%
|
|
$
|
2,135
|
|
|
|
92.1
|
%
|
Selling, general and
administrative expenses
|
|
|
99
|
|
|
|
3.8
|
%
|
|
|
92
|
|
|
|
4.0
|
%
|
Depreciation and amortization
|
|
|
58
|
|
|
|
2.2
|
%
|
|
|
58
|
|
|
|
2.5
|
%
|
Research and development expenses
|
|
|
8
|
|
|
|
0.3
|
%
|
|
|
9
|
|
|
|
0.4
|
%
|
Restructuring charges
net
|
|
|
9
|
|
|
|
0.3
|
%
|
|
|
1
|
|
|
|
|
%
|
Impairment charges on long-lived
assets
|
|
|
8
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
%
|
Interest expense and amortization
of debt issuance costs net
|
|
|
50
|
|
|
|
1.9
|
%
|
|
|
48
|
|
|
|
2.0
|
%
|
Equity in net income of
non-consolidated affiliates
|
|
|
(3
|
)
|
|
|
(0.1
|
)%
|
|
|
(3
|
)
|
|
|
(0.1
|
)%
|
Other (income)
expenses net
|
|
|
9
|
|
|
|
0.3
|
%
|
|
|
(49
|
)
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,685
|
|
|
|
102.0
|
%
|
|
$
|
2,291
|
|
|
|
98.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold. Metal represents
approximately 70% 80% of our input costs, and the
increase in cost of goods sold in U.S. dollar terms is
primarily due to the impact of higher LME prices. Cost of goods
sold was adversely impacted in both periods due to price
ceilings on certain can contracts, which limited our ability to
pass through approximately $80 million of metal purchase
costs during the first quarter of 2007 as described above. In
comparison, we were unable to pass through approximately
$95 million of metal purchase costs during the first
quarter of 2006.
Selling, general and administrative expenses
(SG&A). Compared to the prior year,
SG&A increased approximately $13 million as a result
of increased share-based compensation expense driven by the
increase in our share price. Many of our compensation plans must
be revalued every quarter using the current stock price as one
valuation variable, and at the end of the first quarter of 2007
our shares were trading at $44.11 as compared to a year ago when
they were trading at $20.57. This increase in SG&A was
partially offset by
49
lower corporate spending on third party consultants, as well as
reductions in Europe due to previously implemented restructuring
actions.
Restructuring. In March 2007, management
approved the proposed restructuring of our facilities in
Bridgnorth, U.K. These proposed actions are intended to bring
the capacity of our U.K. operations in line with local market
demand and to reduce the cost of our U.K. operations. Certain
production lines will be shut down in the U.K. and volume will
be relocated to other European plants. For the quarter ended
March 31, 2007, we recorded $8 million in impairment
charges on long-lived assets in the U.K. that will no longer be
used, and we recorded restructuring charges of approximately
$8 million relating primarily to severance costs. We expect
all actions related to the Bridgnorth, U.K. restructuring to be
completed in early 2008.
Interest expense and amortization of debt issuance
costs net. Interest expense increased
in the first quarter of 2007, compared to the first quarter of
2006, primarily as a result of higher short-term borrowings,
offset slightly by the absence of penalty interest and waiver
fees that were incurred during the first quarter of 2006.
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 March 31,
2006
|
|
$
|
(49
|
)
|
Sale transaction fees in 2007
|
|
|
32
|
|
Gains of $30 million on the
change in fair value of derivative instruments in 2007, compared
to gains of $54 million in 2006
|
|
|
24
|
|
Loss on disposal of business in
2006 of $15 million
|
|
|
(15
|
)
|
Exchange losses of $6 million
in 2007 compared to gains of $5 million in 2006
|
|
|
11
|
|
Other net
|
|
|
6
|
|
|
|
|
|
|
Other (income)
expenses net for the quarter ended March 31,
2007
|
|
$
|
9
|
|
|
|
|
|
|
In connection with the potential acquisition of Novelis common
stock by Hindalco as described above, we have incurred or will
incur fees and expenses, including a termination fee with an
unsuccessful bidder. During the first quarter of 2007, we
included expenses of $32 million in Other (income)
expenses net, shown above as sale transaction fees,
for those costs that have already been incurred and that are not
contingent upon closing. Of this amount, $22 million was
paid during the first quarter of 2007 and the remaining amounts
are expected to be paid during the second quarter of 2007.
Provision
for taxes on income (loss)
For the three months ended March 31, 2007, we recorded a
$7 million provision for taxes on our pre-tax loss of
$58 million, before our equity in net income of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of (12)%. Our effective
tax rate is less than the benefit at the Canadian statutory rate
due primarily to (1) a $23 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, (2) a
$6 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 and (3) $8 million
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 three months ended March 31, 2006, we recorded a
$102 million provision for taxes on our pre-tax income of
$25 million, before our equity in net income of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of 408%. Our effective
tax rate is greater than the Canadian statutory rate due
primarily to (1) a $44 million difference between the
Canadian statutory and
50
foreign effective tax rates resulting from the application of an
annual effective tax rate to profit and loss entities in
different jurisdictions, (2) a $33 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
(3) $13 million 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
loss
We reported a net loss of $64 million, or basic and diluted
loss per share of $(0.85) for the quarter ended March 31,
2007, compared to a net loss of $74 million, or basic and
diluted loss per share of $(1.00) for the quarter ended
March 31, 2006.
OPERATING
SEGMENT REVIEW FOR THE QUARTER ENDED MARCH 31, 2007
COMPARED TO THE QUARTER ENDED MARCH 31, 2006
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 each
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 (losses) on disposals
of property, plant and equipment and businesses net;
(i) corporate selling, general and administrative expenses;
(j) other corporate costs net;
(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
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.
In the third quarter of 2006, we added a line to our Regional
Income reconciliation to improve the disclosure of gains or
losses resulting from cash settlement of derivative instruments
that have been included in Regional Income. Accordingly, the
first quarter of 2006 has been revised to conform to the current
period presentation.
51
Reconciliation
The following table presents Regional Income (Loss) by operating
segment and reconciles Total Regional Income to Net loss (in
millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
Regional Income
(Loss)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(17
|
)
|
|
$
|
58
|
|
Europe
|
|
|
86
|
|
|
|
57
|
|
Asia
|
|
|
17
|
|
|
|
25
|
|
South America
|
|
|
56
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total Regional Income
|
|
|
142
|
|
|
|
181
|
|
Interest expense and amortization
of debt issuance costs
|
|
|
(54
|
)
|
|
|
(51
|
)
|
Gains on cash settlement of
derivative instruments net, included in Regional
Income
|
|
|
(33
|
)
|
|
|
(53
|
)
|
Gains on change in fair value of
derivative instruments net
|
|
|
30
|
|
|
|
54
|
|
Depreciation and amortization
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Impairment charges on long-lived
assets
|
|
|
(8
|
)
|
|
|
|
|
Minority interests share
|
|
|
(2
|
)
|
|
|
|
|
Adjustment to eliminate
proportional consolidation (A)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Restructuring charges
net
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Losses on disposals of property,
plant and equipment and businesses net
|
|
|
|
|
|
|
(14
|
)
|
Corporate selling, general and
administrative expenses
|
|
|
(26
|
)
|
|
|
(26
|
)
|
Other corporate costs
net (B)
|
|
|
(30
|
)
|
|
|
4
|
|
Provision for taxes on income
(loss)
|
|
|
(7
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64
|
)
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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 statements of operations. See
Note 7 Investment in and Advances to
Non-consolidated Affiliates and Related Party Transactions to
our condensed consolidated financial statements for further
information about these non-consolidated affiliates. |
|
(B) |
|
During the first quarter of 2007, we incurred expenses of
$32 million in connection with the potential acquisition of
our common stock by Hindalco as described in
Note 2 Potential Acquisition of Novelis Common
Stock in the accompanying condensed and consolidated financial
statements. |
OPERATING
SEGMENT RESULTS
North
America
As of March 31, 2007, North America manufactured aluminum
sheet and light gauge products through 10 aluminum rolled
products facilities and two dedicated recycling facilities.
Important end-use applications include beverage cans, containers
and packaging, automotive and other transportation applications,
building products and other industrial applications.
52
The following table presents key financial and operating
information for North America for the quarters ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
268
|
|
|
|
289
|
|
|
|
(7.3
|
)%
|
Ingot products
|
|
|
18
|
|
|
|
17
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
286
|
|
|
|
306
|
|
|
|
(6.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
925
|
|
|
$
|
895
|
|
|
|
3.4
|
%
|
Regional Income (Loss)
|
|
$
|
(17
|
)
|
|
$
|
58
|
|
|
|
(129.3
|
)%
|
Total assets
|
|
$
|
1,566
|
|
|
$
|
1,600
|
|
|
|
(2.1
|
)%
|
Shipments
Rolled products shipments decreased primarily due to a slowdown
in the housing market thereby reducing sales to the
OEM/distributor market and lower automotive demand with
U.S. manufacturers.
Net
sales
Net sales increased primarily as a result of higher metal
prices, which were 16% higher on average in the first quarter of
2007 compared to 2006, offset partially by lower shipments.
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 first quarter of 2007 by approximately
$80 million. During the first quarter of 2006, we were
unable to pass through approximately $95 million of metal
purchase costs, for a net favorable comparable impact of
approximately $15 million.
Regional
Income
As compared to the first quarter of 2006, Regional Income for
2007 was negatively impacted by the following three factors.
First, the benefit we received from metal price lag during the
first quarter of 2007 was approximately $53 million less
than the benefit we received during the first quarter of 2006.
Second, lower volume in 2007 reduced Regional Income by
approximately $24 million. Third and finally, realized
gains from the cash-settlement of derivatives in 2007 were
approximately $39 million lower than the comparable period
in 2006. These negative impacts were partially offset by the
following items. First and as described above, the negative
impact of metal price ceilings during the first quarter of 2007
was approximately $15 million less than in the first
quarter of 2006 resulting in a favorable impact when comparing
quarterly results year over year. Second and third, price
increases of approximately $13 million and other
operational cost savings of approximately $13 million
improved Regional Income in 2007.
Europe
As of March 31, 2007, our European segment provided
European markets with value-added sheet and light gauge products
through its 13 aluminum rolled products facilities and one
dedicated recycling facility. Europe serves a broad range of
aluminum rolled product end-use markets in various applications
including can, automotive, lithographic and painted products.
53
The following table presents key financial and operating
information for Europe for the quarters ended March 31,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
($ in millions)
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
282
|
|
|
|
266
|
|
|
|
6.0
|
%
|
Ingot products
|
|
|
5
|
|
|
|
8
|
|
|
|
(37.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
287
|
|
|
|
274
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,057
|
|
|
$
|
826
|
|
|
|
28.0
|
%
|
Regional Income
|
|
$
|
86
|
|
|
$
|
57
|
|
|
|
50.9
|
%
|
Total assets
|
|
$
|
2,543
|
|
|
$
|
2,296
|
|
|
|
10.8
|
%
|
Shipments
Rolled products shipments increased primarily due to increases
in the can and foil markets. Strong demand in the can market was
driven by conversion of steel lines to aluminum and market share
gains. Ingot shipments declined due to the closure of our
Borgofranco facility during the first quarter of 2006.
Net
sales
Net sales increased primarily as a result of a 16% increase in
average LME metal prices, incremental volume and currency
benefits. These factors contributed approximately
$125 million, $60 million and $45 million,
respectively, to net sales when compared to 2006.
Regional
Income
Regional Income was favorably impacted in 2007 primarily by
increased volume, operational improvements and currency benefits
as the euro strengthened against the U.S. dollar. These
factors improved Regional Income approximately $17 million,
$10 million and $9 million, respectively, as compared
to 2006. These positive factors were partially offset by
unfavorable sales mix.