UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March
31, 2008
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Or
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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
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(I.R.S. Employer
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incorporation or
organization)
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Identification Number)
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3399 Peachtree Road NE, Suite 1500,
Atlanta, GA
(Address of principal
executive offices)
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30326
(Zip Code)
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(404) 814-4200
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 (the Exchange
Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one) (Do not check if a smaller
reporting company):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 30, 2008, the registrant had 77,459,658 common
shares outstanding. All of the Registrants outstanding
shares were held indirectly by Hindalco Industries Ltd., the
Registrants parent company.
DOCUMENTS INCORPORATED BY REFERENCE
None
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET
DATA
This document contains forward-looking statements that are based
on current expectations, estimates, forecasts and projections
about the industry in which we operate, and beliefs and
assumptions made by our management. Such statements include, in
particular, statements about our plans, strategies and prospects
under the headings Item 1. Business,
Item 1A. Risk Factors and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Words such as
expect, anticipate, intend,
plan, believe, seek,
estimate and variations of such words and similar
expressions are intended to identify such forward-looking
statements. Examples of forward-looking statements in this
Annual Report on
Form 10-K
include, but are not limited to, our expectations with respect
to the impact of metal price movements on our financial
performance; our metal price ceiling exposure; the effectiveness
of our hedging programs and controls; and our future borrowing
availability. These statements are based on beliefs and
assumptions of Novelis management, which in turn are based
on currently available information. These statements are not
guarantees of future performance and involve assumptions and
risks and uncertainties that are difficult to predict.
Therefore, actual outcomes and results may differ materially
from what is expressed, implied or forecasted in such
forward-looking statements. We do not intend, and we disclaim
any obligation, to update any forward-looking statements,
whether as a result of new information, future events or
otherwise.
This document also contains information concerning our markets
and products generally, which is forward-looking in nature and
is based on a variety of assumptions regarding the ways in which
these markets and product categories will develop. These
assumptions have been derived from information currently
available to us and to the third party industry analysts quoted
herein. This information includes, but is not limited to,
product shipments and share of production. Actual market results
may differ from those predicted. We do not know what impact any
of these differences may have on our business, our results of
operations, financial condition, and cash flow. Factors that
could cause actual results or outcomes to differ from the
results expressed or implied by forward-looking statements
include, among other things:
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the level of our indebtedness and our ability to generate cash;
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changes in the prices and availability of aluminum (or premiums
associated with such prices) or other materials and raw
materials we use;
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the effect of metal price ceilings in certain of our sales
contracts;
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the effectiveness of our metal hedging activities, including our
internal used beverage can (UBC) and smelter hedges;
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relationships with, and financial and operating conditions of,
our customers, suppliers and other stakeholders;
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integration with Hindalco Industries Limited;
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fluctuations in the supply of, and prices for, energy in the
areas in which we maintain production facilities;
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our ability to access financing for future capital requirements;
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continuing obligations and other relationships resulting from
our spin-off from Alcan, Inc.;
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changes in the relative values of various currencies and the
effectiveness of our currency hedging activities;
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factors affecting our operations, such as litigation,
environmental remediation and
clean-up
costs, labor relations and negotiations, breakdown of equipment
and other events;
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economic, regulatory and political factors within the countries
in which we operate or sell our products, including changes in
duties or tariffs;
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competition from other aluminum rolled products producers as
well as from substitute materials such as steel, glass, plastic
and composite materials;
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changes in general economic conditions;
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our ability to maintain effective internal control over
financial reporting and disclosure controls and procedures in
the future;
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changes in the fair value of derivative instruments;
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cyclical demand and pricing within the principal markets for our
products as well as seasonality in certain of our
customers industries;
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changes in government regulations, particularly those affecting
taxes, environmental, health or safety compliance;
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changes in interest rates that have the effect of increasing the
amounts we pay under our principal credit agreement and other
financing agreements; and
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the effect of taxes and changes in tax rates.
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The above list of factors is not exhaustive. These and other
factors are discussed in more detail under Item 1A.
Risk Factors and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
In this Annual Report on
Form 10-K,
unless otherwise specified, the terms we,
our, us, Company,
Novelis and Novelis Group refer to
Novelis Inc., a company incorporated in Canada under the
Canadian Business Corporations Act (CBCA) and its subsidiaries.
References herein to Hindalco refer to Hindalco
Industries Limited. In October 2007, Rio Tinto Group purchased
all of the outstanding shares of Alcan, Inc. References herein
to Alcan refer to Rio Tinto Alcan Inc.
Exchange
Rate Data
We prepare our financial statements in United States (U.S.)
dollars. The following table sets forth exchange rate
information expressed in terms of Canadian dollars per
U.S. dollar at the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York. You should
note the rates set forth below may differ from the actual rates
used in our accounting processes and in the preparation of our
consolidated and combined financial statements.
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Period
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At Period End
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Average Rate(1)
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High
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Low
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Year Ended December 31, 2003
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1.2923
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1.3916
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1.5750
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1.2923
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Year Ended December 31, 2004
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1.2034
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1.2984
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1.3970
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1.1775
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Year Ended December 31, 2005
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1.1656
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1.2083
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1.2703
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1.1507
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Year Ended December 31, 2006
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1.1652
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1.1310
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1.1726
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1.0955
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Three Months Ended March 31, 2007(2)
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1.1530
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1.1674
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1.1852
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1.1530
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April 1, 2007 Through May 15, 2007(2)
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1.0976
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1.1022
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1.1583
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1.0976
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May 16, 2007 Through March 31, 2008(2)
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1.0275
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1.0180
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1.1028
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0.9168
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(1) |
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The average of the noon buying rates on the last day of each
month during the period. |
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See Note 1 Business and Summary of Significant
Accounting Policies to our accompanying consolidated and
combined financial statements. |
All dollar figures herein are in U.S. dollars unless
otherwise indicated.
Commonly
Referenced Data
As used in this Annual Report, total shipments
refers to shipments to third parties of aluminum rolled products
as well as ingot shipments, and references to aluminum
rolled products shipments or shipments do not
include ingot shipments. All tonnages are stated in metric
tonnes. One metric tonne is equivalent to 2,204.6 pounds. One
kilotonne (kt) is 1,000 metric tonnes. The term aluminum
rolled products is synonymous with the terms flat
rolled products and FRP commonly used by
manufacturers and third party analysts in our industry.
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PART I
Overview
We are the worlds leading aluminum rolled products
producer based on shipment volume in fiscal 2008, with total
shipments of approximately 3,150 kt. With operations on four
continents comprised of 33 operating plants, one research
facility and several market-focused innovation centers in 11
countries as of March 31, 2008. We are the only company of
our size and scope focused solely on aluminum rolled products
markets and capable of local supply of technically sophisticated
aluminum products in all of these geographic regions. We had net
sales of approximately $11.2 billion on a combined basis
for the twelve months ended March 31, 2008 (see
Acquisition of Novelis Common Stock and Predecessor and
Successor Reporting below).
Change
in Fiscal Year End
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. Accordingly, these consolidated and combined
financial statements present our financial position as of
March 31, 2008 and 2007, and the results of our operations,
cash flows and changes in shareholders/invested equity for
the periods from May 16, 2007 through March 31, 2008
and from April 1, 2007 through May 15, 2007, the three
months ended March 31, 2007 and the years ended
December 31, 2006 and 2005.
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, 2008, we had operations on four continents: North
America; South America; Asia; and Europe, through 33 operating
plants, one research facility and several market-focused
innovation centers in 11 countries. In addition to aluminum
rolled products plants, our South American businesses include
bauxite mining, alumina refining, primary aluminum smelting and
power generation facilities that are integrated with our rolling
plants in Brazil.
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 rolling facilities in Europe whose
end-use markets and customers were similar.
The spin-off occurred on January 6, 2005, following
approval by Alcans board of directors and shareholders,
and legal and regulatory approvals. Alcan shareholders received
one Novelis common share for every five Alcan common shares
held. Our common shares began trading on a when
issued basis on the Toronto (TSX) and New York (NYSE)
stock exchanges on January 6, 2005, with a distribution
record date of January 11, 2005. Regular Way
trading began on the TSX on January 7, 2005, and on the
NYSE on January 19, 2005.
Prior to January 6, 2005, Alcan was considered a related
party due to its parent-subsidiary relationship with the Novelis
entities. Following the spin-off, Alcan is no longer a related
party as defined in Financial Accounting Standards Board (FASB)
Statement No. 57, Related Party Disclosures.
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Acquisition
of Novelis Common Stock and Predecessor and Successor
Reporting
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary AV Metals Inc.
(Acquisition Sub) pursuant to a plan of arrangement (the
Arrangement) entered into on February 10, 2007 and approved
by the Ontario Superior Court of Justice on May 14, 2007
(see Note 2 Acquisition of Novelis Common Stock
in the accompanying consolidated and combined financial
statements).
Subsequent to completion of the Arrangement on May 15,
2007, all of our common shares were indirectly held by Hindalco.
We are a domestic issuer for purposes of the Securities Exchange
Act of 1934, as amended, because our 7.25% senior unsecured
debt securities are registered with the Securities and Exchange
Commission.
Our acquisition by Hindalco was recorded in accordance with
Staff Accounting Bulletin (SAB) No. 103, Push Down Basis
of Accounting Required in Certain Limited Circumstances
(SAB No. 103). Accordingly, in the accompanying
March 31, 2008 consolidated balance sheet, the
consideration and related costs paid by Hindalco in connection
with the acquisition have been pushed down to us and
have been allocated to the assets acquired and liabilities
assumed in accordance with FASB Statement No. 141,
Business Combinations. Due to the impact of push down
accounting, the Companys consolidated financial statements
and certain note presentations for our fiscal year ended
March 31, 2008 are presented in two distinct periods to
indicate the application of two different bases of accounting
between the periods presented: (1) the period up to, and
including, the acquisition date (April 1, 2007 through
May 15, 2007, labeled Predecessor) and
(2) the period after that date (May 16, 2007 through
March 31, 2008, labeled Successor). All periods
including and prior to the three months ended March 31,
2007 are also labeled Predecessor. The accompanying
consolidated and combined financial statements include a black
line division which indicates that the Predecessor and Successor
reporting entities shown are not comparable.
Our
Industry
The aluminum rolled products market represents the global supply
of and demand for aluminum sheet, plate and foil produced either
from sheet ingot or continuously cast roll-stock in rolling
mills operated by independent aluminum rolled products producers
and integrated aluminum companies alike.
Aluminum rolled products are semi-finished aluminum products
that constitute the raw material for the manufacture of finished
goods ranging from automotive body panels to household foil.
There are two major types of manufacturing processes for
aluminum rolled products differing mainly in the process used to
achieve the initial stage of processing:
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hot mills that require sheet ingot, a
rectangular slab of aluminum, as starter material; and
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continuous casting mills that can convert
molten metal directly into semi-finished sheet.
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Both processes require subsequent rolling, which we call cold
rolling, and finishing steps such as annealing, coating,
leveling or slitting to achieve the desired thicknesses and
metal properties. Most customers receive shipments in the form
of aluminum coil, a large roll of metal, which can be fed into
their fabrication processes.
There are two sources of input material: (1) primary
aluminum, such as molten metal, re-melt ingot and sheet ingot;
and (2) recycled aluminum, such as recyclable material from
fabrication processes, which we refer to as recycled process
material, used beverage cans (UBCs) and other post-consumer
aluminum.
Primary aluminum can generally be purchased at prices set on the
London Metal Exchange (LME), plus a premium that varies by
geographic region of delivery, form (ingot or molten metal) and
purity.
Recycled aluminum is also an important source of input material.
Aluminum is infinitely recyclable and recycling it requires only
approximately 5% of the energy needed to produce primary
aluminum. As a result, in regions where aluminum is widely used,
manufacturers and customers are active in setting up collection
processes in which UBCs and other recyclable aluminum are
collected for re-melting at purpose-built plants.
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Manufacturers may also enter into agreements with customers who
return recycled process material and pay to have it re-melted
and rolled into the same product again.
There has been a long-term industry trend towards lighter gauge
(thinner) rolled products, which we refer to as
downgauging, where customers request products with
similar properties using less metal in order to reduce costs and
weight. For example, aluminum rolled products producers and can
fabricators have continuously developed thinner walled cans with
similar strength as previous generation containers, resulting in
a lower cost per unit. As a result of this trend, aluminum
tonnage across the spectrum of aluminum rolled products, and
particularly for the beverage and food cans end-use market, has
declined on a per unit basis, but actual rolling machine hours
per unit have increased. Because the industry has historically
tracked growth based on aluminum tonnage shipped, we believe the
downgauging trend may contribute to an understatement of the
actual growth of revenue attributable to rolling in some end-use
markets.
End-use
Markets
Aluminum rolled products companies produce and sell a wide range
of aluminum rolled products, which can be grouped into four
end-use markets based upon similarities in end-use applications:
(1) construction and industrial; (2) beverage and food
cans; (3) foil products and (4) transportation. Within
each end-use market, aluminum rolled products are manufactured
with a variety of alloy mixtures; a range of tempers (hardness),
gauges (thickness) and widths; and various coatings and
finishes. Large customers typically have customized needs
resulting in the development of close relationships with their
supplying mills and close technical development relationships.
Construction and Industrial. Construction is
the largest application within this end-use market. Aluminum
rolled products developed for the construction industry are
often decorative and non-flammable, offer insulating properties,
are durable and corrosion resistant, and have a high
strength-to-weight
ratio. Aluminum siding, gutters, and downspouts comprise a
significant amount of construction volume. Other applications
include doors, windows, awnings, canopies, facades, roofing and
ceilings.
Aluminums ability to conduct electricity and heat and to
offer corrosion resistance makes it useful in a wide variety of
electronic and industrial applications. Industrial applications
include electronics and communications equipment, process and
electrical machinery and lighting fixtures. Uses of aluminum
rolled products in consumer durables include microwaves, coffee
makers, flat screen televisions, air conditioners, pleasure
boats and cooking utensils.
Another industrial application is lithographic sheet. Print
shops, printing houses and publishing groups use lithographic
sheet to print books, magazines, newspapers and promotional
literature. In order to meet the strict quality requirements of
the end-users, lithographic sheet must meet demanding
metallurgical, surface and flatness specifications.
Beverage and Food Cans. Beverage cans are the
single largest aluminum rolled products application, accounting
for approximately 22% of total worldwide shipments in the
calendar year ended December 31, 2007, according to market
data from Commodity Research Unit International Limited (CRU),
an independent business analysis and consultancy group focused
on the mining, metals, power, cables, fertilizer and chemical
sectors. The recyclability of aluminum cans enables them to be
used, collected, melted and returned to the original product
form many times, unlike steel, paper or polyethylene
terephthalate plastic (PET plastic), which deteriorate with
every iteration of recycling. Aluminum beverage cans also offer
advantages in fabricating efficiency and product shelf life.
Fabricators are able to produce and fill beverage cans at very
high speeds, and non-porous aluminum cans provide longer shelf
life than PET plastic containers. Aluminum cans are light,
stackable and use space efficiently, making them convenient and
cost efficient to ship.
Downgauging and changes in can design help to reduce total costs
on a per can basis and contribute to making aluminum more
competitive with substitute materials.
Beverage can sheet is sold in coil form for the production of
can bodies, ends and tabs. The material can be ordered as
rolled, degreased, pre-lubricated, pre-treated
and/or
lacquered. Typically, can makers define their own specifications
for material to be delivered in terms of alloy, gauge, width and
surface finish.
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Other applications in this end-use market include food cans and
screw caps for the beverage industry.
Foil Products. Aluminum, because of its
relatively light weight, recyclability and formability, has a
wide variety of uses in packaging. Converter foil is very thin
aluminum foil, plain or printed, that is typically laminated to
plastic or paper to form an internal seal for a variety of
packaging applications, including juice boxes, pharmaceuticals,
food pouches, cigarette packaging and lid stock. Customers order
coils of converter foil in a range of thicknesses from 6 microns
to 60 microns.
Household foil includes home and institutional aluminum foil
wrap sold as a branded or generic product. Known in the industry
as packaging foil, it is manufactured in thicknesses ranging
from 11 microns to 23 microns. Container foil is used to
produce semi-rigid containers such as pie plates and take-out
food trays and is usually ordered in a range of thicknesses
ranging from 60 microns to 200 microns.
Transportation. Heat exchangers, such as
radiators and air conditioners, are an important application for
aluminum rolled products in the truck and automobile categories
of the transportation end-use market. Original equipment
manufacturers (OEM) also use aluminum sheet with specially
treated surfaces and other specific properties for interior and
exterior applications. Newly developed alloys are being used in
transportation tanks and rigid containers that allow for safer
and more economical transportation of hazardous and corrosive
materials.
There has been recent growth in certain geographic markets in
the use of aluminum rolled products in automotive body panel
applications, including hoods, deck lids, fenders and lift
gates. These uses typically result from co-operative efforts
between aluminum rolled products manufacturers and their
customers that yield tailor-made solutions for specific
requirements in alloy selection, fabrication procedure, surface
quality and joining. We believe the recent growth in automotive
body panel applications is due in part to the lighter weight,
better fuel economy and improved emissions performance
associated with these applications.
Aluminum rolled products are also used in aerospace
applications, a segment of the transportation market in which we
are not allowed to compete until January 6, 2010, pursuant
to a non-competition agreement we entered into with Alcan in
connection with the spin-off, as described under the heading
Business Arrangements Between Novelis and
Alcan Non-competition. However,
aerospace-related consumption of aluminum rolled products has
historically represented a relatively small portion of total
aluminum rolled products market shipments.
Aluminum is also used in the construction of ships hulls
and superstructures and passenger rail cars because of its
strength, light weight, formability and corrosion resistance.
Market
Structure
The aluminum rolled products industry is characterized by
economies of scale, significant capital investments required to
achieve and maintain technological capabilities and demanding
customer qualification standards. The service and efficiency
demands of large customers have encouraged consolidation among
suppliers of aluminum rolled products.
While our customers tend to be increasingly global, many
aluminum rolled products tend to be produced and sold on a
regional basis. The regional nature of the markets is influenced
in part by the fact that not all mills are equipped to produce
all types of aluminum rolled products. For instance, only a few
mills in North America, Europe, Asia, and only one mill in
South America produce beverage can body and end stock. In
addition, individual aluminum rolling mills generally supply a
limited range of products for end-use applications, and seek to
maximize profits by producing high volumes of the highest margin
mix per mill hour given available capacity and equipment
capabilities.
Certain multi-purpose, common alloy and plate rolled products
are imported into Europe and North America from producers
in emerging markets, such as Brazil, South Africa, Russia and
China. However, at this time we believe that most of these
producers are generally unable to produce flat rolled products
that meet the quality requirements, lead times and
specifications of customers with more demanding applications. In
addition, high freight costs, import duties, inability to take
back recycled aluminum, lack of technical service capabilities
and
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long lead-times mean that many developing market exporters are
viewed as second-tier suppliers. Therefore, many of our
customers in the Americas, Europe and Asia do not look to
suppliers in these emerging markets for a significant portion of
their requirements.
Competition
The aluminum rolled products market is highly competitive. We
face competition from a number of companies in all of the
geographic regions and end-use markets in which we operate. Our
primary competitors are as follows:
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North America
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Asia
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Alcoa, Inc. (Alcoa)
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Furukawa-Sky Aluminum Corp.
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Aleris International, Inc. (Aleris)
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Sumitomo Light Metal Company, Ltd.
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Arco Aluminium, (a subsidiary of BP plc)
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Southwest Aluminum Co. Ltd.
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Norandal Aluminum
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Kobe Steel Ltd.
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Wise Metal Group LLC
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Alcoa
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Alcan
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Europe
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South America
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Hydro A.S.A.
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Companhia Brasileira de Alumínio
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Alcan
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Alcoa
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Alcoa
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Aleris
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The factors influencing competition vary by region and end-use
market, but generally we compete on the basis of our value
proposition, including price, product quality, the ability to
meet customers specifications, range of products offered,
lead times, technical support and customer service. In some
end-use markets, competition is also affected by
fabricators requirements that suppliers complete a
qualification process to supply their plants. This process can
be rigorous and may take many months to complete. As a result,
obtaining business from these customers can be a lengthy and
expensive process. However, the ability to obtain and maintain
these qualifications can represent a competitive advantage.
In addition to competition from others within the aluminum
rolled products industry, we, as well as the other aluminum
rolled products manufacturers, face competition from
non-aluminum material producers, as fabricators and end-users
have, in the past, demonstrated a willingness to substitute
other materials for aluminum. In the beverage and food cans
end-use market, aluminum rolled products primary
competitors are glass, PET plastic, and in some regions, steel.
In the transportation end-use market, aluminum rolled products
compete mainly with steel and composites. Aluminum competes with
wood, plastic, cement and steel in building products
applications. Factors affecting competition with substitute
materials include price, ease of manufacture, consumer
preference and performance characteristics.
Key
Factors Affecting Supply and Demand
The following factors have historically affected the supply of
aluminum rolled products:
Production Capacity. As in most manufacturing
industries with high fixed costs, production capacity has the
largest impact on supply in the aluminum rolled products
industry. In the aluminum rolled products industry, the addition
of production capacity requires large capital investments and
significant plant construction or expansion, and typically
requires long lead-time equipment orders.
Alternative Technology. Advances in
technological capabilities allow aluminum rolled products
producers to better align product portfolio and supply with
industry demand. As an example, continuous casting offers the
ability to increase capacity in smaller increments than is
possible with hot mill additions. This enables production
capacity to better adjust to small
year-over-year
increases in demand. However, the continuous casting process
results in the production of a more limited range of products.
8
Trade. Some trade flows do occur between
regions despite shipping costs, import duties and the need for
localized customer support. Higher value-added, specialty
products such as lithographic sheet and some foils are more
likely to be traded internationally, especially if demand in
certain markets exceeds local supply. With respect to less
technically demanding applications, emerging markets with low
cost inputs may export commodity aluminum rolled products to
larger, more mature markets. Accordingly, regional changes in
supply, such as plant expansions, may have some effect on the
worldwide supply of commodity aluminum rolled products.
The following factors have historically affected the demand for
aluminum rolled products:
Economic Growth. We believe that economic
growth is currently the single largest driver of aluminum rolled
products demand. In mature markets, growth in demand has
typically correlated closely with growth in industrial
production. In emerging markets such as China, growth in demand
typically exceeds industrial production growth largely because
of expanding infrastructures, capital investments and rising
incomes that often accompany economic growth in these markets.
Substitution Trends. Manufacturers
willingness to substitute other materials for aluminum in their
products and competition from substitution materials suppliers
also affect demand. For example, in North America,
competition from PET plastic containers and glass bottles, and
changes in marketing channels and consumer preferences in
beverage containers, have, in recent years, reduced the growth
rate of aluminum can sheet in North America from the high rates
experienced in the 1970s and 1980s. Despite changes in consumer
preferences, North American aluminum beverage can shipments have
remained at approximately 100 billion cans per year since
1994 according to the Can Manufacturers Institute.
Downgauging. Increasing technological and
asset sophistication has enabled aluminum rolling companies to
offer consistent or even improved product strength using less
material, providing customers with a more cost-effective
product. This continuing trend reduces raw material
requirements, but also effectively increases rolled
products plant utilization rates and reduces available
capacity, because to produce the same number of units requires
more rolling hours to achieve thinner gauges. As utilization
rates increase, revenues rise as pricing tends to be based on
machine hours used rather than on the volume of material rolled.
On balance, we believe that downgauging has maintained or
enhanced overall market economics for both users and producers
of aluminum rolled products.
Seasonality. While demand for certain aluminum
rolled products is affected by seasonal factors, such as
increases in consumption of beer and soft drinks packaged in
aluminum cans and the use of aluminum sheet used in the
construction and industrial end-use market during summer months,
our presence in both the northern and southern hemispheres tends
to dampen the impact of seasonality on our business.
Our
Business Strategy
Our primary objective is to deliver value to our shareholder by
being the most innovative and profitable aluminum rolled
products company in the world. We intend to achieve this
objective through the following areas of focus.
Grow
our premium product portfolio
|
|
|
|
|
Optimize our portfolio of rolled products, improving our product
mix and margins by leveraging our assets and technical
capabilities into products and markets that have higher margins,
stability, barriers to entry and growth. Supply these
differentiated and demanding higher value rolled products in all
regions in which we operate.
|
|
|
|
Grow through the development of new market applications and
through the substitution of existing market applications, such
as our Novelis
Fusiontm
technology, where our customers benefit from superior
characteristics
and/or a
substitution to a higher value product. Novelis
Fusiontm
technology allows us to produce a high quality ingot with a core
of one aluminum alloy, combined with one or more layers of
different aluminum alloy(s). The ingot can then be rolled into a
sheet product with
|
9
|
|
|
|
|
different properties on the inside and the outside, allowing
previously unattainable performance for flat rolled products and
creating opportunity for new applications as well as improved
performance and efficiency in existing operations.
|
|
|
|
|
|
Move towards more technologically advanced and profitable
end-use markets by delivering proprietary products and processes
that will be unique and attractive to our customers.
|
Expand
our global leadership position in recycling
|
|
|
|
|
Grow our global leadership position as the largest recycler of
aluminum cans and other forms of aluminum. In fiscal 2008, we
recycled approximately 36 billion cans. We are striving to
increase the availability of recycled metal, focusing on
recycling programs and education in the U.S., Europe, and Brazil.
|
Drive
constant improvement in our operations
|
|
|
|
|
Continue to embrace Lean Six Sigma as our formal approach to
continuous improvement, and implement these techniques
throughout the Company. We continue to expect significant
improvements in our business results globally from our full-time
dedicated continuous improvement staff.
|
|
|
|
Drive best practice sharing and implementation in all
administrative and operational functions.
|
Our
Operating Segments
Due in part to the regional nature of supply and demand of
aluminum rolled products and in order to best serve our
customers, we manage our activities on the basis of geographical
areas and are organized under four operating segments: North
America; Europe; Asia and South America.
As a result of the acquisition by Hindalco, and based on the way
our President and Chief Operating Officer (our chief operating
decision-maker) reviews the results of segment operations, we
changed our segment performance measure to Segment Income, as
discussed in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and in Note 20 Segment,
Geographical Area and Major Customer Information in the
accompanying consolidated and combined financial statements. As
a result, certain prior period amounts have been reclassified to
conform to the new segment performance measure.
Net sales and expenses are measured in accordance with the
policies and procedures described in Note 1
Business and Summary of Significant Accounting Policies in the
accompanying consolidated and combined financial statements.
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 consolidated statements
of operations, changes in the fair value of derivative
instruments not accounted for as hedges under FASB Statement
No. 133 are recognized in Net income (loss) in (Gain) loss
on change in fair value of derivative instruments
net. These gains or losses may or may not result from cash
settlement. For Segment Income purposes we only include the
impact of the derivative gains or losses to the extent they are
settled in cash (i.e., realized) during that period.
The following is a description of our operating segments:
|
|
|
|
|
North America. Headquartered in Cleveland,
Ohio, this segment manufactures aluminum sheet and light gauge
products and operates 12 plants, including two fully dedicated
recycling facilities, in two countries.
|
|
|
|
Europe. Headquartered in Zurich, Switzerland,
this segment manufactures aluminum sheet and light gauge
products and operates 14 plants, including one recycling
facility, in six countries.
|
10
|
|
|
|
|
Asia. Headquartered in Seoul, South Korea,
this segment manufactures aluminum sheet and light gauge
products and operates three plants in two countries.
|
|
|
|
South America. Headquartered in Sao Paulo,
Brazil, this segment comprises bauxite mining, alumina refining,
smelting operations, power generation, carbon products, aluminum
sheet and light gauge products and operates four plants in
Brazil.
|
Adjustment to Eliminate Proportional
Consolidation. The financial information for our
segments includes the assets and results of our non-consolidated
affiliates on a proportionately consolidated basis, which is
consistent with the way we manage our business segments.
However, under accounting principles generally accepted in the
United States (GAAP), these non-consolidated affiliates are
accounted for using the equity method of accounting. Therefore,
in order to reconcile the financial information for the segments
shown in the tables below to the GAAP-based measure, we must
remove our proportional share of each line item that we included
in the segment amounts. See Note 8 Investment
in and Advances to Non-Consolidated Affiliates and Related Party
Transactions in the accompanying consolidated and combined
financial statements for further information about these
non-consolidated affiliates.
For a discussion of Segment Income and a reconciliation of
Segment Income to Net income (loss), see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations in this Annual Report on
Form 10-K
and Note 20 Segment, Geographical Area and
Major Customer Information in the accompanying consolidated and
combined financial statements.
The tables below show selected segment financial and operating
information. Rolled products shipments include conversion of
customer-owned metal (tolling) (all amounts in millions, except
shipments, which are in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,655
|
|
|
|
$
|
446
|
|
|
$
|
925
|
|
|
$
|
3,691
|
|
|
$
|
3,265
|
|
Intersegment sales
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Segment Income (Loss)
|
|
|
266
|
|
|
|
|
(24
|
)
|
|
|
(17
|
)
|
|
|
20
|
|
|
|
193
|
|
Total shipments
|
|
|
1,032
|
|
|
|
|
134
|
|
|
|
286
|
|
|
|
1,229
|
|
|
|
1,194
|
|
Rolled product shipments
|
|
|
974
|
|
|
|
|
128
|
|
|
|
268
|
|
|
|
1,156
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,828
|
|
|
|
$
|
510
|
|
|
$
|
1,057
|
|
|
$
|
3,620
|
|
|
$
|
3,093
|
|
Intersegment sales
|
|
|
3
|
|
|
|
|
|
|
|
|
1
|
|
|
|
5
|
|
|
|
31
|
|
Segment Income
|
|
|
241
|
|
|
|
|
32
|
|
|
|
85
|
|
|
|
245
|
|
|
|
195
|
|
Total shipments
|
|
|
974
|
|
|
|
|
132
|
|
|
|
287
|
|
|
|
1,073
|
|
|
|
1,081
|
|
Rolled product shipments
|
|
|
940
|
|
|
|
|
131
|
|
|
|
282
|
|
|
|
1,055
|
|
|
|
1,009
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,602
|
|
|
|
$
|
216
|
|
|
$
|
413
|
|
|
$
|
1,692
|
|
|
$
|
1,391
|
|
Intersegment sales
|
|
|
10
|
|
|
|
|
1
|
|
|
|
3
|
|
|
|
15
|
|
|
|
8
|
|
Segment Income
|
|
|
46
|
|
|
|
|
6
|
|
|
|
16
|
|
|
|
82
|
|
|
|
106
|
|
Total shipments
|
|
|
471
|
|
|
|
|
59
|
|
|
|
117
|
|
|
|
516
|
|
|
|
524
|
|
Rolled product shipments
|
|
|
437
|
|
|
|
|
54
|
|
|
|
107
|
|
|
|
471
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
South America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
885
|
|
|
|
$
|
109
|
|
|
$
|
235
|
|
|
$
|
863
|
|
|
$
|
630
|
|
Intersegment sales
|
|
|
27
|
|
|
|
|
7
|
|
|
|
12
|
|
|
|
50
|
|
|
|
41
|
|
Segment Income
|
|
|
143
|
|
|
|
|
18
|
|
|
|
57
|
|
|
|
165
|
|
|
|
112
|
|
Total shipments
|
|
|
310
|
|
|
|
|
38
|
|
|
|
82
|
|
|
|
305
|
|
|
|
288
|
|
Rolled product shipments
|
|
|
289
|
|
|
|
|
35
|
|
|
|
75
|
|
|
|
278
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminate
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
South
|
|
|
Proportional
|
|
|
Corporate
|
|
|
|
|
Total Assets
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
America
|
|
|
Consolidation
|
|
|
and Other
|
|
|
Total
|
|
|
March 31, 2008 (Successor)
|
|
$
|
3,892
|
|
|
$
|
4,430
|
|
|
$
|
1,082
|
|
|
$
|
1,478
|
|
|
$
|
(149
|
)
|
|
$
|
213
|
|
|
$
|
10,946
|
|
|
|
March 31, 2007 (Predecessor)
|
|
|
1,566
|
|
|
|
2,543
|
|
|
|
1,110
|
|
|
|
821
|
|
|
|
(114
|
)
|
|
|
44
|
|
|
|
5,970
|
|
December 31, 2006 (Predecessor)
|
|
|
1,476
|
|
|
|
2,474
|
|
|
|
1,078
|
|
|
|
821
|
|
|
|
(117
|
)
|
|
|
60
|
|
|
|
5,792
|
|
December 31, 2005 (Predecessor)
|
|
|
1,547
|
|
|
|
2,139
|
|
|
|
1,002
|
|
|
|
790
|
|
|
|
(85
|
)
|
|
|
83
|
|
|
|
5,476
|
|
12
The table below shows net sales and total shipments by segments
as a percentage of our consolidated net sales and consolidated
total shipments (all amounts in millions, except shipments,
which are in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
May 15,
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(A)
|
|
$
|
9,965
|
|
|
|
$
|
1,281
|
|
|
$
|
2,630
|
|
|
$
|
9,849
|
|
|
$
|
8,363
|
|
Total shipments
|
|
|
2,787
|
|
|
|
|
363
|
|
|
|
772
|
|
|
|
3,123
|
|
|
|
3,087
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
36.6
|
%
|
|
|
|
34.8
|
%
|
|
|
35.2
|
%
|
|
|
37.5
|
%
|
|
|
39.0
|
%
|
Total shipments
|
|
|
37.0
|
%
|
|
|
|
36.9
|
%
|
|
|
37.0
|
%
|
|
|
39.4
|
%
|
|
|
38.7
|
%
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
38.4
|
%
|
|
|
|
39.8
|
%
|
|
|
40.2
|
%
|
|
|
36.8
|
%
|
|
|
37.0
|
%
|
Total shipments
|
|
|
34.9
|
%
|
|
|
|
36.4
|
%
|
|
|
37.2
|
%
|
|
|
34.4
|
%
|
|
|
35.0
|
%
|
Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
16.1
|
%
|
|
|
|
16.9
|
%
|
|
|
15.7
|
%
|
|
|
17.2
|
%
|
|
|
16.6
|
%
|
Total shipments
|
|
|
16.9
|
%
|
|
|
|
16.3
|
%
|
|
|
15.2
|
%
|
|
|
16.5
|
%
|
|
|
17.0
|
%
|
South America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
8.9
|
%
|
|
|
|
8.5
|
%
|
|
|
8.9
|
%
|
|
|
8.8
|
%
|
|
|
7.5
|
%
|
Total shipments
|
|
|
11.2
|
%
|
|
|
|
10.4
|
%
|
|
|
10.6
|
%
|
|
|
9.8
|
%
|
|
|
9.3
|
%
|
|
|
|
(A) |
|
Consolidated Net sales include the results of our
non-consolidated affiliates on a proportionately consolidated
basis, which is consistent with the way we manage our business
segments. These Net sales were $5 million,
$17 million, and $16 million for the period from
May 16, 2007 through March 31, 2008 and for the years
ended December 31, 2006 and 2005, respectively. There were
less than $1 million of Net sales from our non-consolidated
affiliates in each of the periods from April 1, 2007
through May 15, 2007, and the three months ended
March 31, 2007. |
We have highly automated, flexible and advanced manufacturing
capabilities in operating facilities around the globe. In
addition to the aluminum rolled products plants, our South
America segment operates bauxite mining, alumina refining,
hydro-electric power plants and smelting facilities. We believe
our facilities have the assets required for efficient production
and are well managed and maintained. For a further discussion of
financial information by geographic area, refer to
Note 20 Segment, Geographical Area and Major
Customer Information to our consolidated and combined financial
statements.
North
America
Through 12 aluminum rolled products facilities, including two
fully dedicated recycling facilities as of March 31, 2008,
North America manufactures aluminum sheet and light gauge
products. Important end-use applications for this segment
include beverage cans, containers and packaging, automotive and
other transportation applications, building products and other
industrial applications.
The majority of North Americas efforts are directed
towards the beverage can sheet market. The beverage can end-use
application is technically demanding to supply and pricing is
competitive. We believe we have a competitive advantage in this
market due to our low-cost and technologically advanced
manufacturing facilities and technical support capability.
Recycling is important in the manufacturing process and
North America has three facilities that re-melt
post-consumer aluminum and recycled process material. Most of
the recycled material is from used beverage cans and the
material is cast into sheet ingot for North Americas
can sheet production plants (at Logan, Kentucky and Oswego, New
York).
13
On March 28, 2008, we announced that we will cease
production of light gauge converter foil products at our
Louisville, Kentucky plant, and we will close the plant by the
end of June 2008.
Europe
Europe produces value-added sheet and light gauge products
through 14 operating plants as of March 31, 2008, including
one recycling facility.
Europe serves a broad range of aluminum rolled product end-use
applications including: construction and industrial; beverage
and food can; foil and technical products; lithographic;
automotive and other. Construction and industrial represents the
largest end-use market in terms of shipment volume by Europe.
This segment supplies plain and painted sheet for building
products such as roofing, siding, panel walls and shutters, and
supplies lithographic sheet to a worldwide customer base.
Europe also has packaging facilities at four locations, and in
addition to rolled product plants, has distribution centers in
Italy and France together with sales offices in several European
countries.
Asia
Asia operates three manufacturing facilities as of
March 31, 2008 and manufactures a broad range of sheet and
light gauge products.
Asia production is balanced between foil, construction and
industrial, and beverage and food can end-use applications. We
believe that Asia is well-positioned to benefit from further
economic development in China as well as other parts of Asia.
South
America
South America operates two rolling plants, two primary aluminum
smelters, bauxite mines, one alumina refinery, and
hydro-electric power plants as of March 31, 2008, all of
which are located in Brazil. South America manufactures
various aluminum rolled products, including can stock,
automotive and industrial sheet and light gauge for the beverage
and food can, construction and industrial and transportation and
packaging end-use markets.
The primary aluminum produced by South Americas mines,
refinery and smelters is used by our Brazilian aluminum rolled
products operations, with any excess production being sold on
the market in the form of aluminum billets. South America
generates a portion of its own power requirements.
Raw
Materials and Suppliers
The raw materials that we use in manufacturing include primary
aluminum, recycled aluminum, sheet ingot, alloying elements and
grain refiners. Our smelters also use alumina, caustic soda and
calcined petroleum coke and resin. These raw materials are
generally available from several sources and are not generally
subject to supply constraints under normal market conditions. We
also consume considerable amounts of energy in the operation of
our facilities.
Aluminum
We obtain aluminum from a number of sources, including the
following:
Primary Aluminum Sourcing. We purchased or
tolled approximately 2,100kt of primary aluminum in fiscal 2008
in the form of sheet ingot, standard ingot and molten metal, as
quoted on the London Metal Exchange (LME), approximately 46% of
which we purchased from Alcan. Following our spin-off from
Alcan, we have continued to purchase aluminum from Alcan
pursuant to the metal supply agreements described under
Item 1. Arrangements Between Novelis and Alcan.
Our primary aluminum contracts with Alcan were renegotiated and
the amended agreements took effect on January 1, 2008. For
more information, see Item 1. Arrangements Between
Novelis and Alcan below.
14
Primary Aluminum Production. We produced
approximately 102kt of our own primary aluminum requirements in
fiscal 2008 through our smelter and related facilities in Brazil.
Recycled Aluminum Products. We operate
facilities in several plants to recycle post-consumer aluminum,
such as UBCs collected through recycling programs. In addition,
we have agreements with several of our large customers where we
take recycled processed material from their fabricating activity
and re-melt, cast and roll it to re-supply them with aluminum
sheet. Other sources of recycled material include lithographic
plates, where over 90% of aluminum used is recycled, and
products with longer lifespans, like cars and buildings, which
are just starting to become high volume sources of recycled
material. We purchased or tolled approximately 1,000kt of
recycled material inputs in fiscal 2008.
The majority of recycled material we re-melt is directed back
through can-stock plants. The net effect of these activities in
terms of total shipments of rolled products is that
approximately 34% of our aluminum rolled products production for
fiscal 2008 was made with recycled material.
Energy
We use several sources of energy in the manufacture and delivery
of our aluminum rolled products. In fiscal 2008, natural gas and
electricity represented approximately 72% of our energy
consumption by cost. We also use fuel oil and transport fuel.
The majority of energy usage occurs at our casting centers, at
our smelters in South America and during the hot rolling of
aluminum. Our cold rolling facilities require relatively less
energy. We purchase our natural gas on the open market, which
subjects us to market pricing fluctuations. Recent higher
natural gas prices in the United States have increased our
energy costs. We have in the past and may continue to seek to
stabilize our future exposure to natural gas prices through the
purchase of derivative instruments. Natural gas prices in
Europe, Asia and South America have historically been more
stable than in the United States.
A portion of our electricity requirements are purchased pursuant
to long-term contracts in the local regions in which we operate.
A number of our facilities are located in regions with regulated
prices, which affords relatively stable costs.
Our South America segment has its own hydroelectric facilities
that meet approximately 25% of its total electricity
requirements for smelting operations. As a result of supply
constraints, electricity prices in South America have been
volatile, with spot prices increasing dramatically. We have a
mixture of
self-generated
electricity, long term fixed contracts and shorter term
semi-variable contracts. Although spot prices have returned to
normal levels, we may continue to face challenges renewing our
South American energy supply contracts at effective rates to
enable profitable operation of our full smelter capacity.
Others
We also have bauxite and alumina requirements. We will satisfy
some of our alumina requirements for the near term pursuant to
the alumina supply agreement we have entered into with Alcan as
discussed below under Item 1. Arrangements Between
Novelis and Alcan.
Our
Customers
Although we provide products to a wide variety of customers in
each of the markets that we serve, we have experienced
consolidation trends among our customers in many of our key
end-use markets. In fiscal 2008, approximately 45% of our total
net sales were to our ten largest customers, most of whom we
have been supplying for more than 20 years. To address
consolidation trends, we focus significant efforts at developing
and maintaining close working relationships with our customers
and end-users.
Our major customers include Agfa-Gevaert N.V., Alcans
packaging business group, Anheuser-Busch Companies, Inc.,
affiliates of Ball Corporation, Can-Pack S.A., various bottlers
of the
Coca-Cola
system, Crown Cork & Seal Company, Inc., Daching
Holdings Limited, Ford Motor Company, Hyundai, Lotte Aluminum
Co. Ltd., Kodak Polychrome Graphics GmbH, Pactiv Corporation,
Rexam Plc, Ryerson Inc. and Tetra Pak Ltd.
15
In our single largest end-use market, beverage can sheet, we
sell directly to beverage makers and bottlers as well as to can
fabricators that sell the cans they produce to bottlers. In
certain cases, we also operate under umbrella agreements with
beverage makers and bottlers under which they direct their can
fabricators to source their requirements for beverage can body,
end and tab stock from us. Among these umbrella agreements is an
agreement, referred to as the CC agreement, with several North
American bottlers of
Coca-Cola
branded products, including
Coca-Cola
Bottlers Sales and Services. Under the CC agreement, we
shipped approximately 356kt of beverage can sheet (including
tolled metal) during fiscal 2008. These shipments were made to,
and we received payment from, our direct customers, being the
beverage can fabricators that sell beverage cans to the
Coca-Cola
associated bottlers. Under the CC agreement, bottlers in the
Coca-Cola
system may join the CC agreement by committing a specified
percentage of the can sheet required by their can fabricators to
us.
Purchases by Rexam Plc and its affiliates represented
approximately 15.3%, 13.5%, 15.5%, 14.1% and 12.5% of our total
net sales for the period from May 16, 2007 through
March 31, 2008; the period from April 1, 2007 through
May 15, 2007; the three months ended March 31, 2007;
and the years ended December 31, 2006 and 2005,
respectively.
Distribution
and Backlog
We have two principal distribution channels for the end-use
markets in which we operate: direct sales and distributors.
Approximately 90%, 91%, 89%, 87% and 88% of our total net sales
were derived from direct sales to our customers and
approximately 10%, 9%, 11%, 13% and 12% of our total net sales
were derived from distributors for the period from May 16,
2007 through March 31, 2008; the period from April 1,
2007 through May 15, 2007; the three months ended
March 31, 2007; and the years ended December 31, 2006
and 2005, respectively.
Direct
Sales
We supply various end-use markets all over the world through a
direct sales force that operates from individual plants or sales
offices, as well as from regional sales offices in 22 countries.
The direct sales channel typically involves very large,
sophisticated fabricators and original equipment manufacturers.
Longstanding relationships are maintained with leading companies
in industries that use aluminum rolled products. Supply
contracts for large global customers generally range from one to
five years in length and historically there has been a high
degree of renewal business with these customers. Given the
customized nature of products and in some cases, large order
sizes, switching costs are significant, thus adding to the
overall consistency of the customer base.
We also use third party agents or traders in some regions to
complement our own sales force. They provide service to our
customers in countries where we do not have local expertise. We
tend to use third party agents in Asia more frequently than in
other regions.
Distributors
We also sell our products through aluminum distributors,
particularly in North America and Europe. Customers of
distributors are widely dispersed, and sales through this
channel are highly fragmented. Distributors sell mostly
commodity or less specialized products into many end-use markets
in small quantities, including the construction and industrial
and transportation markets. We collaborate with our distributors
to develop new end-use applications and improve the supply chain
and order efficiencies.
Backlog
We believe that order backlog is not a material aspect of our
business.
16
Research
and Development
The table below summarizes our research and development expense
in our plants and modern research facilities, which included
mini-scale production lines equipped with hot mills, can lines
and continuous casters (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
May 16, 2007
|
|
|
April 1, 2007
|
|
Months
|
|
|
|
|
|
|
Through
|
|
|
Through
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
May 15,
|
|
March 31,
|
|
Year Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
|
Successor
|
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
Research and development expenses
|
|
$
|
46
|
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
40
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $12 million increase in our research development costs
from $40 million for the year ended December 31, 2006
to $52 million for the combined period from April 1,
2007 through March 31, 2008, was due in part to the
accounting associated with our acquisition by Hindalco (see
Note 1 Business and Summary of
Significant Accounting Policies and Note 2
Acquisition of Novelis Common Stock in the
accompanying consolidated and combined financial statements).
Subsequent to the Arrangement, we recorded a charge of
$9 million for the estimated value of acquired in-process
research and development projects that had not yet reached
technological feasibility.
In August 2006, we announced the closure of the Neuhausen,
Switzerland site, where we had continued to share research and
development facilities with Alcan. We created three
market-focused innovation centers in Europe. Through December
2006, we incurred restructuring costs of approximately
$4 million. During the year ended March 31, 2008, we
completed the transition from Neuhausen to our market-focused
innovation centers and incurred no additional costs.
We conduct research and development activities at our mills in
order to satisfy current and future customer requirements,
improve our products and reduce our conversion costs. Our
customers work closely with our research and development
professionals to improve their production processes and market
options. We have approximately 200 employees dedicated to
research and development, located in many of our plants and
research center.
17
Our
Executive Officers
The following table sets forth information for persons currently
serving as executive officers of our company. Biographical
details for each of our executive officers are also set forth
below.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Martha Finn Brooks
|
|
|
49
|
|
|
President and Chief Operating Officer
|
Steven Fisher
|
|
|
37
|
|
|
Chief Financial Officer
|
Leslie J. Parrette, Jr.
|
|
|
46
|
|
|
General Counsel, Corporate Secretary and Compliance Officer
|
Jean-Marc Germain
|
|
|
42
|
|
|
Senior Vice President and President North America
|
Thomas Walpole
|
|
|
53
|
|
|
Senior Vice President and President Asia
|
Antonio Tadeu Coelho Nardocci
|
|
|
50
|
|
|
Senior Vice President and President South America
|
Arnaud de Weert
|
|
|
44
|
|
|
Senior Vice President and President Europe
|
Robert Virtue
|
|
|
56
|
|
|
Vice President, Human Resources
|
Jeffrey Schwaneke
|
|
|
33
|
|
|
Vice President and Controller
|
Brenda Pulley
|
|
|
50
|
|
|
Vice President, Corporate Affairs and Communication
|
Nick Madden
|
|
|
51
|
|
|
Vice President, Global Procurement Metal Management
|
Martha Finn Brooks is our President and Chief Operating
Officer. Ms. Brooks joined Alcan as the President and Chief
Executive Officer of Alcans Rolled Products Americas and
Asia business group in August 2002. Ms. Brooks led
three of Alcans business units, namely North America, Asia
and Latin America. Prior to joining Alcan, Ms. Brooks was
the Vice President, Engine Business, Global Marketing and Sales
at Cummins Inc., a global leader in the manufacture of electric
power generation systems, engines and related products. She was
with Cummins Inc. for 16 years, where she held a variety of
positions in strategy, international business development,
marketing and sales, engineering and general management.
Ms. Brooks is a member of the board of directors of
International Paper Company, a member of the Board of Trustees
of Manufacturers Alliance, a director of Keep America Beautiful,
a Trustee of the Yale China Association and a
Trustee of the Hathaway Brown School. Ms. Brooks holds a
B.A. in Economics and Political Science and a Masters of Public
and Private Management specializing in international business
from Yale University.
Steven Fisher is our Chief Financial
Officer. Mr. Fisher joined Novelis in February
2006 as Vice President, Strategic Planning and Corporate
Development. He was appointed Chief Financial Officer in
May 2007 following the acquisition of Novelis by Hindalco.
Mr. Fisher served as Vice President and Controller for TXU
Energy, the non-regulated subsidiary of TXU Corp. at its
headquarters in Dallas, Texas from July 2005 to February
2006. Prior to joining TXU Energy, Mr. Fisher served in
various senior finance rolls at Aquila, Inc., including Vice
President, Controller and Strategic Planning, from 2001 to 2005.
Mr. Fisher is a graduate of the University of Iowa in 1993,
where he earned a B.B.A. in Finance and Accounting. He is a
Certified Public Accountant.
Leslie J. Parrette, Jr. joined Novelis as General
Counsel in March 2005. From July 2000 until February 2005,
he served as Senior Vice President and General Counsel of
Aquila, Inc., an international electric and gas utility and
energy trading company. From September 2001 to February 2005, he
also served as Corporate Secretary of Aquila. Prior to joining
Aquila, Mr. Parrette was a partner in the Kansas City-based
law firm of Blackwell Sanders Peper Martin LLP from April 1992
through June 2000. Mr. Parrette holds an A.B., magna cum
laude in Sociology from Harvard College and received his
J.D. from Harvard Law School.
Jean-Marc Germain was appointed Senior Vice President and
the President of our North American operations following the
retirement of Kevin Greenawalt on May 31, 2008.
Mr. Germain was Vice President Global Can for Novelis Inc.
from January 2007 until May 2008, and he was previously Vice
President and General Manager of Light Gauge Products for
Novelis North America from September 2004 to December
18
2006. Prior to that Mr. Germain held a number of senior
positions with Alcan Inc. and Pechiney S.A. From January 2004 to
August 2004 he served as co-lead of the Integration Leadership
Team for the Alcan and Pechiney merger, which occurred in 2004.
Prior to that, he served as Senior Vice President &
General Manager Foil, Strip and Specialties Division for
Pechiney from September 2001 to December 2003. Before his time
at Alcan and Pechiney, Mr. Germain worked for GE Capital
and Bain & Company. Mr. Germain is a graduate
from École Polytechnique in Paris, France.
Thomas Walpole is a Senior Vice President and the
President of our Asian operations. Mr. Walpole was our Vice
President and General Manager, Can Products Business Unit from
January 2005 until February 2006. Mr. Walpole has over
twenty-five years of aluminum industry experience having worked
for Alcan since 1979. Prior to his recent assignment,
Mr. Walpole held international positions within Alcan in
Europe and Asia until 2004. He began as Vice President, Sales,
Marketing & Business Development for Alcan Taihan
Aluminum Ltd. and most recently was President of the Litho/Can
and Painted Products for the European region. Mr. Walpole
graduated from State University of New York at Oswego with a
B.S. in Accounting, and holds a Master of Business from Case
Western Reserve University.
Antonio Tadeu Coelho Nardocci is a Senior Vice President
and the President of our South American operations.
Mr. Nardocci joined Alcan in 1980. Mr. Nardocci was
the President of Rolled Products South America from March
2002 until January 2005. Prior to that, he was a Vice President
of Rolled Products operations in Southeast Asia and Managing
Director of the Aluminium Company of Malaysia in
Kuala Lumpur, Malaysia. Mr. Nardocci graduated from
the University of São Paulo in Brazil with a degree in
metallurgy. Mr. Nardocci is a member of the executive board
of the Brazilian Aluminum Association.
Arnaud de Weert joined Novelis in May 2006 as Senior Vice
President and the President of our European operations. Mr. de
Weert was previously chief executive officer of Ontex,
Europes largest manufacturer of private label hygienic
disposables. Prior to joining Ontex in 2004, Mr. de Weert was
President, Europe, Middle East and Africa, for
U.S.-based
tools manufacturer, Stanley Works. From 1993 to 2001, he held
executive roles with GE Power Controls in Europe, reaching the
position of Vice President Sales and Marketing. He attended
Erasmus University Rotterdam and received a doctorate in
business economics.
Robert Virtue is our Vice President, Human
Resources. In this position, he has global
responsibilities for all aspects of our organizations
human resources function. Mr. Virtue has served several
roles in our human resources department from January 2005
through May 2006 and October 2006 to the present, including Vice
President, Compensation and Benefits; Acting Vice President,
Human Resources and Director of Compensation. Prior to Novelis,
he was Vice President, Executive Compensation with Wal-Mart from
May 2006 through October 2006. He was Director Compensation and
Benefits for American Retail Group from 1997 through January
2005. Mr. Virtue also spent 15 years with British
Petroleum PLC in a variety of domestic and international human
resources roles with assignments in chemicals, coal, refining,
transportation, marketing and corporate functions.
Mr. Virtue earned a B.S. in Business from Boston University
and an MBA from Indiana University.
Jeffrey Schwaneke was appointed our Vice President and
Controller on October 22, 2007. Mr. Schwaneke served
as our Assistant Controller from May 2006 until October 2007. He
previously worked for SPX Corporation from November 2002 to May
2006, where he served most recently as Segment Controller in
addition to a number of other senior finance roles. Prior to
that, Mr. Schwaneke worked for PricewaterhouseCoopers.
Mr. Schwaneke is a Certified Public Accountant and earned a
Bachelor of Science degree in Accounting from the University of
Missouri.
Brenda D. Pulley is our Vice President, Corporate Affairs
and Communications. She has global responsibility for our
organizations corporate affairs and communication efforts,
which include branding, strategic internal and external
communications and government relations. Prior to our spin-off
from Alcan, Ms. Pulley was Vice President, Corporate
Affairs and Government Relations of Alcan from September 2000 to
2004. Upon joining Alcan in 1998, Ms. Pulley was named
Director, Government Relations. She has served as Legislative
Assistant to Congressman Ike Skelton of Missouri and to the
U.S. House of Representatives Subcommittee on Small
Business, specializing in energy, environment, and international
trade issues. She also served as Executive Director for the
National Association of Chemical Recyclers, and as Director,
Federal
19
Government Relations for Safety-Kleen Corp. Ms. Pulley
currently serves on the board of directors for the Junior
Achievement of Georgia and is the past Chairperson for America
Recycles Day. Ms. Pulley earned her B.S. majoring in Social
Science, with a minor in Communications from Central Missouri
State University.
Nick Madden is Vice President of Global Procurement and
Metal Management. Prior to this role, which he assumed in
October 2006, Mr. Madden served as President of Novelis
Europes Can, Litho and Recycling business unit from
October 2004. Prior to that he was Vice President of Metal
Management and Procurement for Alcans Rolled Products
division in Europe from December 2000 until September 2004 and
was also responsible for the secondary recycling business.
Mr. Madden holds a B.Sc. (Hons) degree in Economics and
Social Studies from University College in Cardiff, Wales.
Our
Employees
As of March 31, 2008, we had approximately
12,700 employees. Approximately 6,000 are employed in
Europe, approximately 3,200 are employed in North America,
approximately 1,500 are employed in Asia and approximately 2,000
are employed in South America and other areas. Approximately
three-quarters of our employees are represented by labor unions
and their employment conditions governed by collective
bargaining agreements. Collective bargaining agreements are
negotiated on a site, regional or national level, and are of
different durations. We believe that we have good labor
relations in all our operations and have not experienced a
significant labor stoppage in any of our principal operations
during the last decade.
Intellectual
Property
In connection with our spin-off, Alcan has assigned or licensed
to us a number of important patents, trademarks and other
intellectual property rights owned or previously owned by Alcan
and required for our business. Ownership of intellectual
property that is used by both us and Alcan is owned by one of
us, and licensed to the other. Certain specific intellectual
property rights, which have been determined to be exclusively
useful to us or which were required to be transferred to us for
regulatory reasons, have been assigned to us with no license
back to Alcan.
We actively review intellectual property arising from our
operations and our research and development activities and, when
appropriate, we apply for patents in the appropriate
jurisdictions, including the United States and Canada. We
currently hold patents on approximately 185 different items of
intellectual property. While these patents are important to our
business on an aggregate basis, no single patent is deemed to be
material to our business.
We have applied for or received registrations for the
Novelis word trademark and the Novelis logo
trademark in approximately 50 countries where we have
significant sales or operations.
We have also registered the word Novelis and several
derivations thereof as domain names in numerous top level
domains around the world to protect our presence on the World
Wide Web.
Environment,
Health and Safety
We own and operate numerous manufacturing and other facilities
in various countries around the world. Our operations are
subject to environmental laws and regulations from various
jurisdictions, which govern, among other things, air emissions,
wastewater discharges, the handling, storage and disposal of
hazardous substances and wastes, the remediation of contaminated
sites, natural resource damages, and employee health and safety.
Future environmental regulations may be expected to impose
stricter compliance requirements on the industries in which we
operate. Additional equipment or process changes at some of our
facilities may be needed to meet future requirements. The cost
of meeting these requirements may be significant. Failure to
comply with such laws and regulations could subject us to
administrative, civil or criminal penalties, obligations to pay
damages or other costs, and injunctions and other orders,
including orders to cease operations.
We are involved in proceedings under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, also
known as CERCLA or Superfund, or analogous state provisions
regarding our liability
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arising from the usage, storage, treatment or disposal of
hazardous substances and wastes at a number of sites in the
United States, as well as similar proceedings under the laws and
regulations of the other jurisdictions in which we have
operations, including Brazil and certain countries in the
European Union. Many of these jurisdictions have laws that
impose joint and several liability without regard to fault or
the legality of the original conduct, for the costs of
environmental remediation, natural resource damages, third party
claims, and other expenses, on those parties who contributed to
the release of a hazardous substance into the environment. In
addition, we are, from time to time, subject to environmental
reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating
environmental loss contingencies, including those arising from
environmental reviews and investigations and any other
environmental remediation or compliance matters. We believe we
have a reasonable basis for evaluating these environmental loss
contingencies, and we also believe we have made reasonable
estimates for the costs that are likely to be ultimately borne
by us for these environmental loss contingencies. Accordingly,
we have established reserves based on our reasonable estimates
for the currently anticipated costs associated with these
environmental matters. Management has determined that the
currently anticipated costs associated with these environmental
matters will not, individually or in the aggregate, materially
impair our operations or materially adversely affect our
financial condition.
We expect that our total expenditures for capital improvements
regarding environmental control facilities for the years ending
March 31, 2009 and 2010 will be approximately
$16 million and $14 million, respectively.
Arrangements
Between Novelis and Alcan
In connection with our spin-off from Alcan, we and Alcan entered
into a separation agreement and several ancillary agreements to
complete the transfer of the businesses contributed to us by
Alcan and the distribution of our shares to Alcan common
shareholders. We may in the future enter into other commercial
agreements with Alcan, the terms of which will be determined at
the relevant times.
Separation
Agreement
The separation agreement sets forth the agreement between us and
Alcan with respect to: the principal corporate transactions
required to affect our spin-off from Alcan; the transfer to us
of the contributed businesses; the distribution of our shares to
Alcan shareholders; and other agreements governing the
relationship between Alcan and us following the spin-off. Under
the terms of the separation agreement, we assume and agree to
perform and fulfill the liabilities and obligations of the
contributed businesses and of the entities through which such
businesses were contributed, including liabilities and
obligations related to discontinued rolled products businesses
conducted by Alcan prior to the spin-off, in accordance with
their respective terms.
Releases
and Indemnification
The separation agreement provides for a full and complete mutual
release and discharge of all liabilities existing or arising
from all acts and events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all
conditions existing or alleged to have existed on or before the
spin-off, between or among us or any of our subsidiaries, on the
one hand, and Alcan or any of its subsidiaries other than us, on
the other hand, except as expressly set forth in the agreement.
The liabilities released or discharged include liabilities
arising under any contractual agreements or arrangements
existing or alleged to exist between or among any such members
on or before the spin-off, other than the separation agreement,
the ancillary agreements described below and the other
agreements referred to in the separation agreement.
We have agreed to indemnify Alcan and its subsidiaries and each
of their respective directors, officers and employees, against
liabilities relating to, among other things:
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the contributed businesses, liabilities or contracts;
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liabilities or obligations associated with the contributed
businesses, as defined in the separation agreement, or otherwise
assumed by us pursuant to the separation agreement; and
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any breach by us of the separation agreement or any of the
ancillary agreements we entered into with Alcan in connection
with the spin-off.
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Alcan has agreed to indemnify us and our subsidiaries and each
of our respective directors, officers and employees against
liabilities relating to:
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liabilities of Alcan other than those of an entity forming part
of our group or otherwise assumed by us pursuant to the
separation agreement;
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any liability of Alcan or its subsidiaries, other than us,
retained by Alcan under the separation agreement; and
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any breach by Alcan of the separation agreement or any of the
ancillary agreements we entered into with Alcan in connection
with the spin-off.
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The separation agreement also specifies procedures with respect
to claims subject to indemnification and related matters.
Further
Assurances
Both we and Alcan agreed to use our commercially reasonable
efforts after the spin-off, to take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably
necessary or advisable under applicable laws and agreements to
complete the transactions contemplated by the agreement and the
other ancillary agreements described below.
Non-competition
We have agreed not to engage, directly or indirectly, in any
manner whatsoever, until January 6, 2010, in the
manufacturing, production and sale of certain products for the
plate and aerospace markets, unless expressly permitted to do so
under the terms of the agreement.
Change of
Control
We have agreed, in the event of a change of control (including a
change of control achieved in an indirect manner) during the
four-year period beginning January 6, 2006 and ending
January 6, 2010, to provide Alcan, within 30 days
thereafter with a written undertaking of the acquirer that such
acquirer shall be bound by the non-compete covenants set forth
in the separation agreement during the remainder of the
four-year
period, to the same extent as if it had been an original party
to the agreement.
If a change of control event occurs at any time during the
four-year period following the first anniversary of the spin-off
and the person or group of persons who acquired control of our
company fails to execute and deliver the undertaking mentioned
above or refuses, neglects or fails to comply with any of its
obligations pursuant to such undertaking, Alcan will have a
number of remedies, including terminating any or all of the
metal supply agreements, the technical services agreements, or
the intellectual property licenses granted to us or any of our
subsidiaries in the intellectual property agreements, or the
transitional services agreement.
On June 14, 2007, Hindalco, AV Metals Inc., AV Aluminum
(Acquisition Sub) and AV Minerals (Netherlands) B.V., (the
parent company of Acquisition Sub) and directly held
wholly-owned subsidiary of Hindalco, jointly delivered to Alcan
the requisite change in control undertaking described above.
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Ancillary
Agreements
In connection with our spin-off from Alcan, we entered into a
number of ancillary agreements with Alcan governing certain
terms of our spin-off as well as various aspects of our
relationship with Alcan following the spin-off. These ancillary
agreements include:
Transitional Services and Similar
Agreements. Pursuant to a collection of
approximately 130 individual transitional services
agreements, Alcan has provided to us and we have provided to
Alcan, as applicable, on an interim, transitional basis, various
services, including, but not limited to, treasury
administration, selected benefits administration functions,
employee compensation and information technology services. The
agreed upon charges for these services generally allow us or
Alcan, as applicable, to recover fully the allocated costs of
providing the services, plus all
out-of-pocket
costs and expenses plus a margin of five percent. No margin is
added to the cost of services supplied by external suppliers.
The majority of the individual service agreements, which began
on the spin-off date, terminated on or prior to
December 31, 2005. However, we have a continuing agreement
with Alcan through 2008 to use certain information technology
hosting services to support our financial accounting systems for
the Nachterstedt and Goettingen plants.
Metal Supply Agreements. We and Alcan have
entered into four multi-year metal supply agreements pursuant to
which Alcan supplies us with specified quantities of re-melt
ingot, molten metal and sheet ingot in North America and Europe
on terms and conditions determined primarily by Alcan. We
believe these agreements provide us with the ability to cover
some metal requirements through a pricing formula pursuant to
our spin-off agreement with Alcan. In addition, an ingot supply
agreement in effect between Alcan and Novelis Korea Ltd. prior
to the spin-off remains in effect following the spin-off.
On February 26, 2008, we and Alcan agreed to amend and
restate four existing multi-year metal supply agreements, which
took effect as of January 1, 2008.
The amended and restated metal supply agreement for the supply
of re-melt aluminum ingot amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of remelt ingot to be supplied and purchased subject to
adjustment, establishes certain delivery requirements, changes
certain pricing provisions, and revises certain payment terms,
among other standard terms and conditions.
The amended and restated molten metal supply agreement for the
supply of molten metal to the Companys Saguenay Works
Facility amends and restates the supply agreement dated
January 5, 2005 between the parties. This amended agreement
changes certain pricing provisions, and revises certain payment
terms, among other standard terms and conditions.
The amended and restated metal supply agreement for the supply
of sheet ingot in North America amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of sheet ingot to be supplied and purchased subject to
adjustment, changes certain pricing provisions, and revises
certain payment terms, among other standard terms and conditions.
The amended and restated metal supply agreement for the supply
of sheet ingot in Europe amends and restates the supply
agreement dated January 5, 2005 between the parties. This
amended agreement extends the term, establishes an annual
quantity of sheet ingot to be supplied and purchased subject to
adjustment, and changes certain pricing provisions, among other
standard terms and conditions.
Foil Supply Agreements. In 2005, we entered
into foil supply agreements with Alcan for the supply of foil
from our facilities located in Norf, Ludenscheid and Ohle,
Germany to Alcans packaging facility located in Rorschach,
Switzerland as well as from our facilities located in Utinga,
Brazil to Alcans packaging facility located in Maua,
Brazil. These agreements are for five-year terms during the
course of which we will supply specified percentages of
Alcans requirements for its facilities described above (in
the case of Alcans Rorschach facility, 94% in 2006, 93% in
2007, 92% in 2008 and 90% in 2009, and in
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the case of Alcans Maua facility, 70%). In addition, we
will continue to supply certain of Alcans European
operations with foil under the terms of two agreements that were
in effect prior to the
spin-off.
Alumina Supply Agreements. We have entered
into a ten-year alumina supply agreement with Alcan pursuant to
which we purchase from Alcan, and Alcan supplies to us, alumina
for our primary aluminum smelter located in Aratu, Brazil. The
annual quantity of alumina to be supplied under this agreement
is between 85kt and 126kt. In addition, an alumina supply
agreement between Alcan and Novelis Deutschland GmbH that was in
effect prior to the spin-off remains in effect following the
spin-off.
Intellectual Property Agreements. We and Alcan
have entered into intellectual property agreements pursuant to
which Alcan has assigned or licensed to us a number of important
patents, trademarks and other intellectual property rights owned
by Alcan and required for our business. Ownership of
intellectual property that is used by both us and Alcan is owned
by one of us and licensed to the other. Certain specific
intellectual property rights which were determined to be
exclusively useful to us or which were required to be
transferred to us for regulatory reasons have been assigned to
us with no license back to Alcan.
Sierre Agreements. We and Alcan entered into a
number of agreements pursuant to which:
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Alcan transferred to us certain assets and liabilities of the
automotive and other aluminum rolled products businesses
relating to the sales and marketing output of the Sierre North
Building, which comprises a portion of the Sierre facility in
Switzerland. Pursuant to the terms of the separation and asset
transfer agreements, the transfer price was determined by a
valuation;
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Alcan leased to us the Sierre North Building and the machinery
and equipment located in the Sierre North Building (including
the hot and cold mills) for a term of 15 years, renewable
at our option for additional five-year periods, at an annual
base rent in an amount equal to 8.5% of the then current book
value of the Sierre North Building, the leased machinery or
equipment, as applicable, pursuant to the terms of the real
estate lease and equipment lease agreements;
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We and Alcan have access to, and use of, property and assets
that are common to each of our respective operations at the
Sierre facility, pursuant to the terms of the access and
easement agreement;
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Alcan agreed to supply us with all our requirements of aluminum
rolling ingots for the production of aluminum rolled products at
the Sierre facility for a term of ten years, subject to
availability, and provided the aluminum rolling slabs meet
applicable quality standards and are competitively priced,
pursuant to the terms of the metal supply agreement;
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Alcan provides certain services to us at the Sierre facility,
including services consisting of or relating to environmental
testing, chemical laboratory services, utilities, waste
disposal, facility safety and security, medical services,
employee food service and rail transportation, and we provide
certain services to Alcan at the Sierre facility, including
services consisting of or relating to hydraulic and mechanical
maintenance, roll grinding and recycled process material for a
two-year
renewable term, pursuant to the terms of the shared services
agreement; and
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Alcan retains access to all of the total plate production
capacity of the Sierre facility, which represents a portion of
Sierres total hot mill production capacity. The formula
for the price to be charged to Alcan for products from the
Sierre hot mill is based upon its proportionate share of the
fixed production costs relating to the Sierre hot mill
(determined by reference to actual production hours utilized by
Alcan) and the variable production costs (determined by
reference to the volume of product produced for Alcan). Under
the tolling agreement, we have agreed to maintain the
pre-spin-off standards of maintenance, management and operation
of the Sierre hot mill.
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With respect to the use of the machinery or equipment in the
Sierre North Building, we have agreed to refrain from making or
authorizing any use of it which may benefit any business
relating to the sale, marketing, manufacturing, development or
distribution of plate or aerospace products.
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Neuhausen Agreements. We have entered into an
agreement with Alcan pursuant to which (1) Alcan
transferred to us various laboratory and testing equipment used
in the aluminum rolling sheet business located in Neuhausen,
Switzerland and (2) approximately 35 employees
transferred from Alcan to us at the Neuhausen facility. In
addition, we have assumed certain obligations in connection with
the operations of the Neuhausen facility, including (1) the
obligation to reimburse Alcan for 100% of its actual and direct
costs incurred in terminating employees, cancelling third party
agreements, and discontinuing the use of assets in the event we
request Alcan to discontinue or terminate services under the
services agreement, (2) the obligation to reimburse Alcan
for 20% of the costs to close the Neuhausen facility in certain
circumstances, and (3) the obligation to indemnify Alcan
for (a) all liabilities arising from the ownership,
operation, maintenance, use, or occupancy of the Neuhausen
facility
and/or the
equipment at any time after the spin-off date and resulting from
our acts or omissions or our violation of applicable laws,
including environmental laws, (b) all liabilities relating
to the employees who transfer from Alcan to us after the
spin-off date, and (c) an amount equal to 20% of all
environmental legacy costs related to the Neuhausen facility
that occurred on or before December 31, 2004.
In August 2006, we announced the closure of the Neuhausen,
Switzerland site, where we had continued to share research and
development facilities with Alcan. We created market-focused
innovation centers at key plants throughout Europe. For beverage
and food can and lithographic and painted sheet, the
market-focused innovation center is in Goettingen, Germany; for
automotive and other specialties in Sierre,
Switzerland; and for foil and packaging in
Dudelange, Luxembourg. Through December 2006, we incurred costs
of approximately $4 million. During the year ended
March 31, 2008, we completed the transition from Neuhausen
to our market-focused innovation centers and incurred no
additional costs.
Tax Sharing and Disaffiliation Agreement. The
tax sharing and disaffiliation agreement provides an
indemnification if certain factual representations are breached
or if certain transactions are undertaken or certain actions are
taken that have the effect of negatively affecting the tax
treatment of the spin-off. It further governs the disaffiliation
of the tax matters of Alcan and its subsidiaries or affiliates
other than us, on the one hand, and us and our subsidiaries or
affiliates, on the other hand. In this respect it allocates
taxes accrued prior to and after the spin-off, as well as
transfer taxes resulting from the spin-off. It also allocates
obligations for filing tax returns and the management of certain
pending or future tax contests and creates mutual collaboration
obligations with respect to tax matters.
Employee Matters Agreement. Pursuant to the
employee matters agreement, assets, liabilities and
responsibilities with respect to certain employee compensation,
pension and benefit plans, programs and arrangements and certain
employment matters were allocated between Novelis and Alcan. The
employee matters agreement also sets out the terms and
conditions pertaining to the transfer to us of certain Alcan
employees. As of the spin-off date, we hired or employed all of
the employees of Alcan and its affiliates who were then involved
in the businesses transferred to us by Alcan. Employees who
transferred to us from Alcan received credit for their years of
service with Alcan prior to the spin-off. Effective as of the
spin-off date, we generally assumed all employment compensation
and employee benefit liabilities relating to our employees.
Ohle Agreement. We and Alcan have entered into
an agreement pursuant to which we supply pet food containers to
Alcan, which Alcan markets in connection with its related
packaging activities. We have agreed for a period of five years
not to, directly or indirectly, for ourselves or others, in any
way work in or for, or have an interest in, any company or
person or organization within the European market which conducts
activities competing with the activities of Alcan Packaging
Zutphen B.V., a subsidiary of Alcan, related to its pet food
containers business.
Foil Supply and Distribution
Agreement. Pursuant to the two year foil supply
and distribution agreement, we (1) manufacture and supply
to, or on behalf of, Alcan certain retail and industrial
packages of Alcan brand aluminum foil and (2) provide
certain services to Alcan in respect of the foil we supply to
Alcan under this agreement, such as marketing and payment
collection. We receive a service fee based on a percentage of
the foil sales under the agreement. Pursuant to the terms of the
agreement, we have agreed we will not market retail packages of
foil in Canada under a brand name that competes directly with
the Alcan brand during the term of the agreement.
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Available
Information
We are subject to the reporting and information requirements of
the Securities Exchange Act of 1934, as amended (Exchange Act)
and, as a result, we file periodic reports and other information
with the SEC. We make these filings available on our website
free of charge, the URL of which is
http://www.novelis.com,
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. The SEC maintains
a website
(http://www.sec.gov)
that contains our annual, quarterly and current reports and
other information we file electronically with the SEC. You can
read and copy any materials we file with the SEC at the
SECs Public Reference Room at 100 F Street,
N.E., Room 1850, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
Information on our website does not constitute part of this
Annual Report on
Form 10-K.
Risks
Related to our Business and the Market Environment
If we
fail to successfully integrate with Hindalco, our financial
condition and results of operations could be adversely
affected.
On May 15, 2007, we were acquired by Hindalco, Asias
largest integrated primary producer of aluminium based in
Mumbai, India. We face significant administrative and
operational challenges in relation to the acquisition. The
integration of the operations of Novelis and Hindalco involves
alignment of corporate cultures, management philosophies,
strategic plans and policies. Achieving the anticipated benefits
of our business combination will depend in part upon our ability
to address the above issues in an efficient and effective
manner. The integration of the two businesses which have
previously operated separately faces significant challenges such
as, but not limited to:
1. Alignment with Hindalcos management policies
including, but not limited to, internal controls, risk
management policies, management information systems, capital
expenditure policies, corporate governance policies and
reporting procedures
2. The need to coordinate geographically dispersed
organizations and integrate different corporate cultures and
management philosophies.
3. Integration of information technology and financial
control systems
4. Retention, hiring and training of our key personnel.
Certain
of our customers are significant to our revenues, and we could
be adversely affected by changes in the business or financial
condition of these significant customers or by the loss of their
business.
Our ten largest customers accounted for approximately 45%, 47%,
and 43% of our total net sales for the period May 16, 2007
through March, 31, 2008; April 1, 2007 to May 15,
2007; and for the three months ended March 31, 2007,
respectively, with Rexam Plc and its affiliates representing
approximately 15.3%, 13.5%, and 15.5% of our total net sales in
the respective periods. A significant downturn in the business
or financial condition of our significant customers could
materially adversely affect our results of operations. In
addition, if our existing relationships with significant
customers materially deteriorate or are terminated in the
future, and we are not successful in replacing business lost
from such customers, our results of operations could be
adversely affected. Some of the longer term contracts under
which we supply our customers, including under umbrella
agreements such as those described under Item 1.
Business Our Customers, are subject to
renewal, renegotiation or re-pricing at periodic intervals or
upon changes in competitive supply conditions. Our failure to
successfully renew, renegotiate or re-price such agreements
could result in a reduction or loss in customer purchase volume
or revenue, and if we are not successful in replacing business
lost from such customers, our results of operations could be
adversely affected. The markets in which we operate are
competitive and customers may seek to consolidate supplier
relationships or change suppliers to obtain cost savings and
other benefits.
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Our
profitability could be adversely affected by our inability to
pass through metal price increases due to metal price ceilings
in certain of our sales contracts.
Prices for metal are volatile, have recently been impacted by
structural changes in the market, and may increase from time to
time. Nearly all of our products have a price structure with two
components: (i) a pass-through aluminum price based on the
LME plus local market premiums and (ii) a conversion
premium price based on the conversion cost to produce the
rolled product and the competitive market conditions for that
product. Sales contracts representing approximately 10% of our
total fiscal 2008 shipments provide for a ceiling over which
metal prices 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 twelve months ended
March 31, 2008 and 2007; December 31, 2006 and 2005,
we were unable to pass through approximately $230 million
and $460 million; $475 million and $75 million,
respectively, of metal purchase costs associated with sales
under theses 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,
and offset partially by reduced income taxes.
Our exposure to metal price ceilings approximates 8% of
estimated total shipments for the fiscal year 2009. Based on a
March 31, 2008 aluminum price of $2,935 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 $286 $312 million in fiscal 2009
and $215 $233 million in the aggregate
thereafter.
Our
efforts to mitigate risk from our metal price ceiling contracts
may not be effective.
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.
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 derivative
instruments on projected aluminum volume requirements above our
assumed internal hedge position. We currently purchase forward
derivative instruments to hedge our exposure to further metal
price increases.
Our
results can be negatively impacted by timing differences between
the prices we pay under purchase contracts and metal prices we
charge our customers.
In some of our contracts there is a timing difference between
the metal prices we pay under our purchase contracts and the
metal prices we charge our customers. As a result, changes in
metal prices impact our results, since during such periods we
bear the additional cost or benefit of metal price changes,
which could have a material effect on our profitability.
Our
operations consume energy and our profitability may decline if
energy costs were to rise, or if our energy supplies were
interrupted.
We consume substantial amounts of energy in our rolling
operations, our cast house operations and our Brazilian smelting
operations. The factors that affect our energy costs and supply
reliability tend to be specific to each of our facilities. A
number of factors could materially adversely affect our energy
position including:
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increases in costs of natural gas;
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significant increases in costs of supplied electricity or fuel
oil related to transportation;
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interruptions in energy supply due to equipment failure or other
causes; and
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the inability to extend energy supply contracts upon expiration
on economical terms.
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If energy costs were to rise, or if energy supplies or supply
arrangements were disrupted, our profitability could decline.
We may
not have sufficient cash to repay indebtedness and we may be
limited in our ability to access financing for future capital
requirements, which may prevent us from increasing our
manufacturing capability, improving our technology or addressing
any gaps in our product offerings.
Although historically our cash flow from operations has been
sufficient to repay indebtedness, satisfy working capital
requirements and fund capital expenditure and research and
development requirements, in the future we may need to incur
additional debt or issue equity in order to fund these
requirements as well as to make acquisitions and other
investments. To the extent we are unable to raise new capital,
we may be unable to increase our manufacturing capability,
improve our technology or address any gaps in our product
offerings. If we raise funds through the issuance of debt or
equity, any debt securities or preferred shares issued may have
rights and preferences and privileges senior to those of our
common shares. The terms of the debt securities may impose
restrictions on our operations that have an adverse impact on
our financial condition.
Our
substantial indebtedness could adversely affect our business and
therefore make it more difficult for us to fulfill our
obligations under our New Credit Facilities and our Senior
Notes.
On July 6, 2007, we entered into new senior secured credit
(New Credit Facilities) providing for aggregate borrowings of up
to $1.76 billion. The New Credit Facilities consist of
(1) a $960 million
seven-year
Term Loan facility (Term Loan facility) and (2) an
$800 million five year multi-currency asset-based revolving
credit line and letter of credit facility (ABL facility). As of
March 31, 2008, we had total indebtedness of
$2.7 billion, including our $1.4 billion of senior
unsecured debt securities (Senior Notes) (excluding unamortized
fair value adjustments recorded as a result of the Arrangement).
Our substantial indebtedness and interest expense could have
important consequences to our Company and holders of our Senior
Notes, including:
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limiting our ability to borrow additional amounts for working
capital, capital expenditures, debt service requirements,
execution of our growth strategy, or other general corporate
purposes;
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limiting our ability to use operating cash flow in other areas
of our business because we must dedicate a substantial portion
of these funds to service the debt;
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increasing our vulnerability to general adverse economic and
industry conditions;
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placing us at a competitive disadvantage as compared to our
competitors that have less leverage;
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limiting our ability to capitalize on business opportunities and
to react to competitive pressures and adverse changes in
government regulation;
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limiting our ability or increasing the costs to refinance
indebtedness; and
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limiting our ability to enter into marketing, hedging,
optimization and trading transactions by reducing the number of
counterparties with whom we can enter into such transactions as
well as the volume of those transactions.
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The
covenants in our New Credit Facilities and the indenture
governing our Senior Notes impose significant operating and
financial restrictions on us.
The New Credit Facilities and the indenture governing the Senior
Notes impose significant operating and financial restrictions on
us. These restrictions limit our ability and the ability of our
restricted subsidiaries, among other things, to:
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incur additional debt and provide additional guarantees;
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pay dividends beyond certain amounts and make other restricted
payments;
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create or permit certain liens;
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make certain asset sales;
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use the proceeds from the sales of assets and subsidiary stock;
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create or permit restrictions on the ability of our restricted
subsidiaries to pay dividends or make other distributions to us;
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engage in certain transactions with affiliates;
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enter into sale and leaseback transactions;
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designate subsidiaries as unrestricted subsidiaries; and
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consolidate, merge or transfer all or substantially all of our
assets or the assets of our restricted subsidiaries.
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The New Credit Facilities also contains various affirmative
covenants, with which we are required to comply.
Although we currently expect to comply with these covenants, we
may be unable to comply with these covenants in the future. If
we do not comply with these covenants and are unable to obtain
waivers from our lenders, we would be unable to make additional
borrowings under these facilities, our indebtedness under these
agreements would be in default and could be accelerated by our
lenders and could cause a cross-default under our other
indebtedness, including our Senior Notes. If our indebtedness is
accelerated, we may not be able to repay our indebtedness or
borrow sufficient funds to refinance it. In addition, if we
incur additional debt in the future, we may be subject to
additional covenants, which may be more restrictive than those
that we are subject to now.
A
deterioration of our financial position or a downgrade of our
ratings by a credit rating agency could increase our borrowing
costs and our business relationships could be adversely
affected.
A deterioration of our financial position or a downgrade of our
ratings for any reason could increase our borrowing costs and
have an adverse effect on our business relationships with
customers and suppliers. From time to time, we enter into
various forms of hedging activities against currency or metal
price fluctuations and trade metal contracts on the LME.
Financial strength and credit ratings are important to the
pricing of these hedging and trading activities. As a result,
any downgrade of our credit ratings may make it more costly for
us to engage in these activities, and changes to our level of
indebtedness may make it more costly for us to engage in these
activities in the future.
Adverse
changes in currency exchange rates could negatively affect our
financial results and the competitiveness of our aluminum rolled
products relative to other materials.
Our businesses and operations are exposed to the effects of
changes in the exchange rates of the U.S. dollar, the euro,
the British pound, the Brazilian real, the Canadian dollar, the
Korean won and other currencies. We have implemented a hedging
policy that attempts to manage currency exchange rate risks to
an acceptable level based on our managements judgment of
the appropriate trade-off between risk, opportunity and cost;
however, this hedging policy may not successfully or completely
eliminate the effects of currency exchange rate fluctuations
which could have a material adverse effect on our financial
results.
We prepare our consolidated and combined financial statements in
U.S. dollars, but a portion of our earnings and
expenditures are denominated in other currencies, primarily the
euro, the Korean won and the Brazilian real. Changes in exchange
rates will result in increases or decreases in our reported
costs and earnings, and may also affect the book value of our
assets located outside the U.S.
29
Most
of our facilities are staffed by a unionized workforce, and
union disputes and other employee relations issues could
materially adversely affect our financial results.
Approximately three-quarters of our employees are represented by
labor unions under a large number of collective bargaining
agreements with varying durations and expiration dates. We may
not be able to satisfactorily renegotiate our collective
bargaining agreements when they expire. In addition, existing
collective bargaining agreements may not prevent a strike or
work stoppage at our facilities in the future, and any such work
stoppage could have a material adverse effect on our financial
results.
Our
operations have been and will continue to be exposed to various
business and other risks, changes in conditions and events
beyond our control in countries where we have operations or sell
products.
We are, and will continue to be, subject to financial,
political, economic and business risks in connection with our
global operations. We have made investments and carry on
production activities in various emerging markets, including
Brazil, Korea and Malaysia, and we market our products in these
countries, as well as China and certain other countries in Asia,
the Middle East and emerging markets in South America. While we
anticipate higher growth or attractive production opportunities
from these emerging markets, they also present a higher degree
of risk than more developed markets. In addition to the business
risks inherent in developing and servicing new markets, economic
conditions may be more volatile, legal and regulatory systems
less developed and predictable, and the possibility of various
types of adverse governmental action more pronounced. In
addition, inflation, fluctuations in currency and interest
rates, competitive factors, civil unrest and labor problems
could affect our revenues, expenses and results of operations.
Our operations could also be adversely affected by acts of war,
terrorism or the threat of any of these events as well as
government actions such as controls on imports, exports and
prices, tariffs, new forms of taxation, or changes in fiscal
regimes and increased government regulation in the countries in
which we operate or service customers. Unexpected or
uncontrollable events or circumstances in any of these markets
could have a material adverse effect on our financial results.
We
could be adversely affected by disruptions of our
operations.
Breakdown of equipment or other events, including catastrophic
events such as war or natural disasters, leading to production
interruptions in our plants could have a material adverse effect
on our financial results. Further, because many of our customers
are, to varying degrees, dependent on planned deliveries from
our plants, those customers that have to reschedule their own
production due to our missed deliveries could pursue financial
claims against us. We may incur costs to correct any of these
problems, in addition to facing claims from customers. Further,
our reputation among actual and potential customers may be
harmed, resulting in a loss of business. While we maintain
insurance policies covering, among other things, physical
damage, business interruptions and product liability, these
policies may not cover all of our losses.
We may
not be able to successfully develop and implement new technology
initiatives in a timely manner.
We have invested in, and are involved with, a number of
technology and process initiatives. Several technical aspects of
these initiatives are still unproven and the eventual commercial
outcomes cannot be assessed with any certainty. Even if we are
successful with these initiatives, we may not be able to deploy
them in a timely fashion. Accordingly, the costs and benefits
from our investments in new technologies and the consequent
effects on our financial results may vary from present
expectations.
Loss
of our key management and other personnel, or an inability to
attract such management and other personnel, could impact our
business.
We depend on our senior executive officers and other key
personnel to run our business. The loss of any of these officers
or other key personnel could materially adversely affect our
operations. Competition for qualified employees among companies
that rely heavily on engineering and technology is intense, and
the loss of qualified employees or an inability to attract,
retain and motivate additional highly skilled employees
30
required for the operation and expansion of our business could
hinder our ability to improve manufacturing operations, conduct
research activities successfully and develop marketable products.
Past
and future acquisitions or divestitures may adversely affect our
financial condition.
Historically, we have grown partly through the acquisition of
other businesses, including businesses acquired by Alcan in its
2000 acquisition of the Alusuisse Group Ltd. and its 2003
acquisition of Pechiney, both of which were integrated aluminum
companies. As part of our strategy for growth, we may continue
to pursue acquisitions, divestitures or strategic alliances,
which may not be completed or, if completed, may not be
ultimately beneficial to us. There are numerous risks commonly
encountered in business combinations, including the risk that we
may not be able to complete a transaction that has been
announced, effectively integrate businesses acquired or generate
the cost savings and synergies anticipated. Failure to do so
could have a material adverse effect on our financial results.
We
could be required to make unexpected contributions to our
defined benefit pension plans as a result of adverse changes in
interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit
pension plans for our employees in the U.S., the U.K. and
Canada, unfunded pension benefits in Germany, and lump sum
indemnities payable to our employees in France, Italy, Korea and
Malaysia upon retirement or termination. Our pension plan assets
consist primarily of listed stocks and bonds. Our estimates of
liabilities and expenses for pensions and other postretirement
benefits incorporate a number of assumptions, including expected
long-term rates of return on plan assets and interest rates used
to discount future benefits. Our results of operations,
liquidity or shareholders equity in a particular period
could be adversely affected by capital market returns that are
less than their assumed long-term rate of return or a decline of
the rate used to discount future benefits.
If the assets of our pension plans do not achieve assumed
investment returns for any period, such deficiency could result
in one or more charges against our earnings for that period. In
addition, changing economic conditions, poor pension investment
returns or other factors may require us to make unexpected cash
contributions to the pension plans in the future, preventing the
use of such cash for other purposes.
We
face risks relating to certain joint ventures and subsidiaries
that we do not entirely control. Our ability to generate cash
from these entities may be more restricted than if such entities
were wholly-owned subsidiaries.
Some of our activities are, and will in the future be, conducted
through entities that we do not entirely control or wholly own.
These entities include our Norf, Germany and Logan, Kentucky
joint ventures, as well as our majority-owned Korean and
Malaysian subsidiaries. Our Malaysian subsidiary is a public
company whose shares are listed for trading on the Bursa
Malaysia Securities Berhad. Under the governing documents or
agreements of, securities laws applicable to or stock exchange
listing rules relative to certain of these joint ventures and
subsidiaries, our ability to fully control certain operational
matters may be limited. With respect to Logan, our joint venture
partner, Arco Aluminum Inc., has filed a complaint seeking to
resolve a perceived dispute over management and control of the
joint venture following Hindalcos acquisition of Novelis.
In addition, we do not solely determine certain key matters,
such as the timing and amount of cash distributions from these
entities. As a result, our ability to generate cash from these
entities may be more restricted than if they were wholly-owned
entities.
Risks
Related to Operating Our Business Following Our Spin-off from
Alcan
Our
agreements with Alcan do not reflect the same terms and
conditions to which two unaffiliated parties might have
agreed.
The allocation of assets, liabilities, rights, indemnifications
and other obligations between Alcan and us under the separation
and ancillary agreements we entered into with Alcan do not
reflect what two unaffiliated parties might have otherwise
agreed. Had these agreements been negotiated with unaffiliated
third parties, their terms may have been more favorable, or less
favorable, to us.
31
We
have supply agreements with Alcan for a portion of our raw
materials requirements. If Alcan is unable to deliver sufficient
quantities of these materials or if it terminates these
agreements, our ability to manufacture products on a timely
basis could be adversely affected.
The manufacture of our products requires sheet ingot that has
historically been, in part, supplied by Alcan. For the year
ended March 31, 2008, we purchased the majority of our
third party sheet ingot requirements from Alcans primary
metal group. In connection with the spin-off, we entered into
metal supply agreements with Alcan upon terms and conditions
substantially similar to market terms and conditions for the
continued purchase of sheet ingot from Alcan, which were amended
in March 2008. If Alcan is unable to deliver sufficient
quantities of this material on a timely basis or if Alcan
terminates one or more of these agreements, our production may
be disrupted and our net sales and profitability could be
materially adversely affected. Although aluminum is traded on
the world markets, developing alternative suppliers for that
portion of our raw material requirements we expect to be
supplied by Alcan could be time consuming and expensive.
Our continuous casting operations at our Saguenay Works, Canada
facility depend upon a local supply of molten aluminum from
Alcan. For the fiscal year ended March 31, 2008,
Alcans primary metal group supplied approximately 179kt of
such material to us, representing most of the molten aluminum
used at Saguenay Works. In connection with the spin-off, we
entered into a metal supply agreement on terms determined
primarily by Alcan for the continued purchase of molten aluminum
from Alcan. If this supply were to be disrupted, our Saguenay
Works production could be interrupted and our net sales and
profitability materially adversely affected.
We may
lose key rights if a change in control of our voting shares were
to occur.
Our separation agreement with Alcan provides that if we
experience a change in control in our voting shares during the
five years following the spin-off and if the entity acquiring
control does not refrain from using the Novelis assets to
compete against Alcan in the plate and aerospace products
markets, Alcan may terminate any or all of certain agreements we
currently have with Alcan. Hindalco delivered the requisite
non-compete agreement to Alcan on June 14, 2007, following
its acquisition of our common shares. However, if Hindalco were
to sell its controlling interest in Novelis before
January 6, 2010, a new acquirer would be required to
provide a similar agreement.
The termination of any of these agreements could deprive any
potential acquirer of certain services, resources or rights
necessary to the conduct of our business. Replacement of these
assets could be difficult or impossible, resulting in a material
adverse effect on our business operations, net sales and
profitability. In addition, the potential termination of these
agreements could prevent us from entering into future business
transactions such as acquisitions or joint ventures at terms
favorable to us or at all.
We
could incur significant tax liability, or be liable to Alcan, if
certain transactions occur which violate tax-free spin-off
rules.
Under Section 55 of the Income Tax Act (Canada), we
and/or Alcan
will recognize a taxable gain on our spin-off from Alcan if,
among other specified circumstances, (1) within three years
of our spin-off from Alcan, we engage in a subsequent spin-off
or split-up
transaction under Section 55; (2) a shareholder who
(together with non-arms length persons and certain other
persons) owns 10% or more of our common shares or Alcan common
shares, disposes to a person unrelated to such shareholder of
any such shares (or property that derives 10% or more of its
value from such shares or property substituted therefore) as
part of the series of transactions which includes our spin-off
from Alcan; (3) there is a change of control of us or of
Alcan that is part of the series of transactions that includes
our spin-off from Alcan; (4) we sell to a person unrelated
to us (otherwise than in the ordinary course of operations) as
part of the series of transactions that includes our spin-off
from Alcan, property acquired in our spin-off from Alcan that
has a value greater than 10% of the value of all property
received in the spin-off from Alcan; (5) within three years
of our spin-off from Alcan, Alcan completes a
split-up
(but not spin-off) transaction under Section 55;
(6) Alcan made certain acquisitions of property before and
in contemplation of our spin-off from Alcan; (7) certain
shareholders of Alcan and certain other persons acquired shares
of Alcan (other than in specified permitted transactions) in
contemplation
32
of our spin-off from Alcan or (8) Alcan sells to a person
unrelated to it (otherwise than in the ordinary course of
operations) as part of the series of transactions or events
which includes our spin-off from Alcan, property retained by
Alcan on the spin-off that has value greater than 10% of the
value of all property retained by Alcan on our spin-off from
Alcan. We would generally be required to indemnify Alcan for tax
liabilities incurred by Alcan under the tax sharing and
disaffiliation agreement if Alcans tax liability arose
because of (i) a breach of our representations, warranties
or covenants in the tax sharing and disaffiliation agreement,
(ii) certain acts or omissions by us (such as a transaction
described in (1) above), or (iii) an acquisition of
control of us. Alcan would generally be required to indemnify us
for tax under the tax sharing and disaffiliation agreement if
our tax liability arose because of (i) a breach of
Alcans representations, warranties or covenants in the tax
sharing and disaffiliation agreement, or (ii) certain acts
or omissions by Alcan (such as a transaction described in
(5) above). These liabilities and the related indemnity
payments could be significant and could have a material adverse
effect on our financial results.
We may
be required to satisfy certain indemnification obligations to
Alcan, or may not be able to collect on indemnification rights
from Alcan.
In connection with the spin-off, we and Alcan agreed to
indemnify each other for certain liabilities and obligations
related to, in the case of our indemnity, the business
transferred to us, and in the case of Alcans indemnity,
the business retained by Alcan. These indemnification
obligations could be significant. We cannot determine whether we
will have to indemnify Alcan for any substantial obligations in
the future or the outcome of any disputes over spin-off matters.
We also cannot be assured that if Alcan has to indemnify us for
any substantial obligations, Alcan will be able to satisfy those
obligations.
We may
have potential business conflicts of interest with Alcan with
respect to our past and ongoing relationships that could harm
our business operations.
A number of our commercial arrangements with Alcan that existed
prior to the spin-off transaction, our spin-off arrangements and
our post-spin-off commercial agreements with Alcan could be the
subject of differing interpretation and disagreement in the
future. These agreements may be resolved in a manner different
from the manner in which disputes were resolved when we were
part of the Alcan group. This could in turn affect our
relationship with Alcan and ultimately harm our business
operations.
Our
agreement not to compete with Alcan in certain end-use markets
may hinder our ability to take advantage of new business
opportunities.
In connection with the spin-off, we agreed not to compete with
Alcan for a period of five years from the spin-off date in the
manufacture, production and sale of certain products for use in
the plate and aerospace markets. As a result, it may be more
difficult for us to pursue successfully new business
opportunities, which could limit our potential sources of
revenue and growth. See Item 1. Business
Arrangements Between Novelis and Alcan Separation
Agreement.
Our
historical financial information may not be representative of
results we would have achieved as an independent company or our
future results.
The historical financial information in our combined financial
statements prior to January 6, 2005 has been derived from
Alcans consolidated financial statements and does not
necessarily reflect what our results of operations, financial
position or cash flows would have been had we been an
independent company during the periods presented. For this
reason, as well as the inherent uncertainties of our business,
the historical financial information does not necessarily
indicate what our results of operations, financial position and
cash flows will be in the future.
33
Risks
Related to Our Industry
We
face significant price and other forms of competition from other
aluminum rolled products producers, which could hurt our results
of operations.
Generally, the markets in which we operate are highly
competitive. We compete primarily on the basis of our value
proposition, including price, product quality, ability to meet
customers specifications, range of products offered, lead
times, technical support and customer service. Some of our
competitors may benefit from greater capital resources, have
more efficient technologies, or have lower raw material and
energy costs and may be able to sustain longer periods of price
competition.
In addition, our competitive position within the global aluminum
rolled products industry may be affected by, among other things,
the recent trend toward consolidation among our competitors,
exchange rate fluctuations that may make our products less
competitive in relation to the products of companies based in
other countries (despite the U.S. dollar-based input cost
and the marginal costs of shipping) and economies of scale in
purchasing, production and sales, which accrue to the benefit of
some of our competitors.
Increased competition could cause a reduction in our shipment
volumes and profitability or increase our expenditures, either
of which could have a material adverse effect on our financial
results.
The
end-use markets for certain of our products are highly
competitive and customers are willing to accept substitutes for
our products.
The end-use markets for certain aluminum rolled products are
highly competitive. Aluminum competes with other materials, such
as steel, plastics, composite materials and glass, among others,
for various applications, including in beverage and food cans
and automotive end-use applications. In the past, customers have
demonstrated a willingness to substitute other materials for
aluminum. For example, changes in consumer preferences in
beverage containers have increased the use of polyethylene
terephthalate plastic (PET plastic) containers and glass bottles
in recent years. These trends may continue. The willingness of
customers to accept substitutes for aluminum products could have
a material adverse effect on our financial results.
A
downturn in the economy could have a material adverse effect on
our financial results.
Certain end-use applications for aluminum rolled products, such
as construction and industrial and transportation applications,
experience demand cycles that are highly correlated to the
general economic environment, which is sensitive to a number of
factors outside our control. A recession or a slowing of the
economy in any of the geographic segments in which we operate,
including China where significant economic growth is expected,
or a decrease in manufacturing activity in industries such as
automotive, construction and packaging and consumer goods, could
have a material adverse effect on our financial results. We are
not able to predict the timing, extent and duration of the
economic cycles in the markets in which we operate.
The
seasonal nature of some of our customers industries could
have a material adverse effect on our financial
results.
The construction industry and the consumption of beer and soda
are sensitive to weather conditions and as a result, demand for
aluminum rolled products in the construction industry and for
can feedstock can be seasonal. Our quarterly financial results
could fluctuate as a result of climatic changes, and a prolonged
series of cold summers in the different regions in which we
conduct our business could have a material adverse effect on our
financial results.
We are
subject to a broad range of environmental, health and safety
laws and regulations in the jurisdictions in which we operate,
and we may be exposed to substantial environmental, health and
safety costs and liabilities.
We are subject to a broad range of environmental, health and
safety laws and regulations in the jurisdictions in which we
operate. These laws and regulations impose increasingly
stringent environmental, health and safety protection standards
and permitting requirements regarding, among other things, air
34
emissions, wastewater storage, treatment and discharges, the use
and handling of hazardous or toxic materials, waste disposal
practices, and the remediation of environmental contamination
and working conditions for our employees. Some environmental
laws, such as Superfund and comparable laws in U.S. states
and other jurisdictions worldwide, impose joint and several
liability for the cost of environmental remediation, natural
resource damages, third party claims, and other expenses,
without regard to the fault or the legality of the original
conduct, on those persons who contributed to the release of a
hazardous substance into the environment.
The costs of complying with these laws and regulations,
including participation in assessments and remediation of
contaminated sites and installation of pollution control
facilities, have been, and in the future could be, significant.
In addition, these laws and regulations may also result in
substantial environmental liabilities associated with divested
assets, third party locations and past activities. In certain
instances, these costs and liabilities, as well as related
action to be taken by us, could be accelerated or increased if
we were to close, divest of or change the principal use of
certain facilities with respect to which we may have
environmental liabilities or remediation obligations. Currently,
we are involved in a number of compliance efforts, remediation
activities and legal proceedings concerning environmental
matters, including certain activities and proceedings arising
under Superfund and comparable laws in U.S. states and
other jurisdictions worldwide.
We have established reserves for environmental remediation
activities and liabilities where appropriate. However, the cost
of addressing environmental matters (including the timing of any
charges related thereto) cannot be predicted with certainty, and
these reserves may not ultimately be adequate, especially in
light of potential changes in environmental conditions, changing
interpretations of laws and regulations by regulators and
courts, the discovery of previously unknown environmental
conditions, the risk of governmental orders to carry out
additional compliance on certain sites not initially included in
remediation in progress, our potential liability to remediate
sites for which provisions have not been previously established
and the adoption of more stringent environmental laws. Such
future developments could result in increased environmental
costs and liabilities and could require significant capital
expenditures, any of which could have a material adverse effect
on our financial condition or results. Furthermore, the failure
to comply with our obligations under the environmental laws and
regulations could subject us to administrative, civil or
criminal penalties, obligations to pay damages or other costs,
and injunctions or other orders, including orders to cease
operations. In addition, the presence of environmental
contamination at our properties could adversely affect our
ability to sell property, receive full value for a property or
use a property as collateral for a loan.
Some of our current and potential operations are located or
could be located in or near communities that may regard such
operations as having a detrimental effect on their social and
economic circumstances. Environmental laws typically provide for
participation in permitting decisions, site remediation
decisions and other matters. Concern about environmental justice
issues may affect our operations. Should such community
objections be presented to government officials, the
consequences of such a development may have a material adverse
impact upon the profitability or, in extreme cases, the
viability of an operation. In addition, such developments may
adversely affect our ability to expand or enter into new
operations in such location or elsewhere and may also have an
effect on the cost of our environmental remediation projects.
We use a variety of hazardous materials and chemicals in our
rolling processes, as well as in our smelting operations in
Brazil and in connection with maintenance work on our
manufacturing facilities. Because of the nature of these
substances or related residues, we may be liable for certain
costs, including, among others, costs for health-related claims
or removal or re-treatment of such substances. Certain of our
current and former facilities incorporate asbestos-containing
materials, a hazardous substance that has been the subject of
health-related claims for occupation exposure. In addition,
although we have developed environmental, health and safety
programs for our employees, including measures to reduce
employee exposure to hazardous substances, and conduct regular
assessments at our facilities, we are currently, and in the
future may be, involved in claims and litigation filed on behalf
of persons alleging injury predominantly as a result of
occupational exposure to substances or other hazards at our
current or former facilities. It is not possible to predict the
ultimate outcome of these claims and lawsuits due to the
unpredictable nature of personal injury
35
litigation. If these claims and lawsuits, individually or in the
aggregate, were finally resolved against us, our results of
operations and cash flows could be adversely affected.
We may
be exposed to significant legal proceedings or
investigations.
From time to time, we are involved in, or the subject of,
disputes, proceedings and investigations with respect to a
variety of matters, including environmental, health and safety,
product liability, employee, tax, personal injury, contractual
and other matters as well as other disputes and proceedings that
arise in the ordinary course of business. Certain of these
matters are discussed in the preceding risk factor and certain
others are discussed below under Item 3. Legal
Proceedings. Any claims against us or any investigations
involving us, whether meritorious or not, could be costly to
defend or comply with and could divert managements
attention as well as operational resources. Any such dispute,
litigation or investigation, whether currently pending or
threatened or in the future, may have a material adverse effect
on our financial results and cash flows.
Product
liability claims against us could result in significant costs or
negatively impact our reputation and could adversely affect our
business results and financial condition.
We are sometimes exposed to warranty and product liability
claims. There can be no assurance that we will not experience
material product liability losses arising from such claims in
the future and that these will not have a negative impact on our
net sales and profitability. We generally maintain insurance
against many product liability risks, but there can be no
assurance that this coverage will be adequate for any
liabilities ultimately incurred. In addition, there is no
assurance that insurance will continue to be available on terms
acceptable to us. A successful claim that exceeds our available
insurance coverage could have a material adverse effect on our
financial results and cash flows.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our executive offices are located in Atlanta, Georgia. We have
33 operating facilities, one research facility and several
market-focused innovation centers in 11 countries as of
March 31, 2008. We believe our facilities are generally
well-maintained and in good operating condition and have
adequate capacity to meet our current business needs. Our
principal properties and assets have been pledged to banks
pursuant to our senior secured credit facilities, as described
in Description of Material Indebtedness.
36
The following tables provide information, by operating segment,
about the plant locations, processes and major end-use
markets/applications for the aluminum rolled products, recycling
and primary metal facilities we operated during all or part of
the year ended March 31, 2008.
North
America
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Berea, Kentucky
|
|
Recycling
|
|
Recycled ingot
|
Burnaby, British Columbia
|
|
Finishing
|
|
Foil containers
|
Fairmont, West Virginia
|
|
Cold rolling, finishing
|
|
Foil, HVAC material
|
Greensboro, Georgia
|
|
Recycling
|
|
Recycled ingot
|
Kingston, Ontario
|
|
Cold rolling, finishing
|
|
Automotive, construction/industrial
|
Logan, Kentucky(i)
|
|
Hot rolling, cold rolling, finishing
|
|
Can stock
|
Louisville, Kentucky(ii)
|
|
Cold rolling, finishing
|
|
Foil, converter foil
|
Oswego, New York
|
|
Hot rolling, cold rolling, recycling, finishing
|
|
Can stock, construction/industrial, semi-finished coil
|
Saguenay, Quebec
|
|
Continuous casting
|
|
Semi-finished coil
|
Terre Haute, Indiana
|
|
Cold rolling, finishing
|
|
Foil
|
Toronto, Ontario
|
|
Finishing
|
|
Foil, foil containers
|
Warren, Ohio
|
|
Coating
|
|
Can end stock
|
|
|
|
(i) |
|
We own 40% of the outstanding common shares of Logan Aluminum
Inc., but we have made subsequent equipment investments such
that we now have rights to approximately 64% of Logans
total production capacity. |
|
(ii) |
|
The Louisville, Kentucky plant is scheduled to be closed by
June 30, 2008. |
Our Oswego, New York facility operates modern equipment for used
beverage can recycling, ingot casting, hot rolling, cold rolling
and finishing. In March 2006, we commenced commercial production
using our Novelis
Fusiontm
technology able to produce a high quality ingot with
a core of one aluminum alloy, combined with one or more layers
of different aluminum alloy(s). The ingot can then be rolled
into a sheet product with different properties on the inside and
the outside, allowing previously unattainable performance for
flat rolled products and creating opportunity for new, premium
applications. Oswego produces can stock as well as building and
industrial products. Oswego also provides feedstock to our
Kingston, Ontario facility, which produces heat-treated
automotive sheet, and to our Fairmont, West Virginia facility,
which produces light gauge sheet.
The Logan, Kentucky facility is a processing joint venture
between us and Arco Aluminum (ARCO), a subsidiary of BP plc. Our
equity investment in the joint venture is 40%, while ARCO holds
the remaining 60% interest. Subsequent equipment investments
have resulted in us now having access to approximately 64% of
Logans total production capacity. Logan, which was built
in 1985, is the newest and largest hot mill in North America.
Logan operates modern and high-speed equipment for ingot
casting, hot-rolling, cold-rolling and finishing. Logan is a
dedicated manufacturer of aluminum sheet products for the can
stock market with modern equipment, efficient workforce and
product focus. A portion of the can end stock is coated at
North Americas Warren, Ohio facility, in addition to
Logans
on-site
coating assets. Together with ARCO, we operate Logan as a
production cooperative, with each party supplying its own
primary metal inputs for transformation at the facility. The
transformed product is then returned to the supplying party at
cost. Logan does not own any of the primary metal inputs or any
of the transformed products. All of the fixed assets at Logan
are directly owned by us and ARCO in varying ownership
percentages or solely by us. As discussed in
Note 1 Business and Summary of Significant
Accounting Policies in the accompanying consolidated and
combined financial statements, our consolidated balance sheets
include the assets and liabilities of Logan.
37
We share control of the management of Logan with ARCO through a
seven-member board of directors on which we appoint four members
and ARCO appoints three members. Management of Logan is led
jointly by two executive officers who are subject to approval by
at least five members of the board of directors.
Our Saguenay, Quebec facility operates the worlds largest
continuous caster, which produces feedstock for our three foil
rolling plants located in Terre Haute, Indiana; Fairmont, West
Virginia and Louisville, Kentucky. The continuous caster was
developed through internal research and development and we own
the process technology. Our Saguenay facility sources molten
metal under long-term supply arrangements we have with Alcan.
In March 2008, management approved the closure of our light
gauge converter products facility in Louisville, Kentucky. The
closure is intended to bring the capacity of our North American
operations in line with local market demand. We expect the
action to be completed by December 2008.
Our Burnaby, British Columbia and Toronto, Ontario facilities
spool and package household foil products and report to our foil
business unit based in Toronto, Ontario.
Along with our recycling center in Oswego, New York, we own two
other fully dedicated recycling facilities in North America,
located in Berea, Kentucky and Greensboro, Georgia. Each offers
a modern, cost-efficient process to recycle used beverage cans
and other recycled aluminum into sheet ingot to supply our hot
mills in Logan and Oswego. Berea is the largest used beverage
can recycling facility in the world.
Europe
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Berlin, Germany
|
|
Converting
|
|
Packaging
|
Bresso, Italy
|
|
Finishing
|
|
Painted sheet
|
Bridgnorth, United Kingdom
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Dudelange, Luxembourg
|
|
Continuous casting, cold rolling, finishing
|
|
Foil
|
Göttingen, Germany
|
|
Cold rolling, finishing
|
|
Can end, lithographic, painted sheet
|
Latchford, United Kingdom
|
|
Recycling
|
|
Sheet ingot from recycled metal
|
Ludenscheid, Germany(i)
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Nachterstedt, Germany
|
|
Cold rolling, finishing
|
|
Automotive, industrial
|
Norf, Germany(ii)
|
|
Hot rolling, cold rolling
|
|
Can stock, foilstock, reroll
|
Ohle, Germany(i)
|
|
Cold rolling, finishing, converting
|
|
Foil, packaging
|
Pieve, Italy
|
|
Continuous casting, cold rolling
|
|
Paintstock, industrial
|
Rogerstone, United Kingdom
|
|
Hot rolling, cold rolling
|
|
Foilstock, paintstock, reroll, industrial
|
Rugles, France
|
|
Continuous casting, cold rolling, finishing
|
|
Foil
|
Sierre, Switzerland(iii)
|
|
Hot rolling, cold rolling
|
|
Automotive sheet, industrial
|
|
|
|
(i) |
|
We reorganized our plants in Ohle and Ludenscheid, Germany,
including the closure of two non-core business lines located
within those facilities as of May 2006. |
|
(ii) |
|
Operated as a 50/50 joint venture between us and Hydro Aluminium
Deutschland GmbH (Hydro). |
|
(iii) |
|
We have entered into an agreement with Alcan pursuant to which
Alcan retains access to the plate production capacity, which
represents a portion of the total production capacity of the
Sierre hot mill. |
Aluminium Norf GmbH (Norf) in Germany, a 50/50
production-sharing joint venture between us and Hydro, is a
large scale, modern manufacturing hub for several of our
operations in Europe, and is the largest aluminum rolling mill
in the world. Norf supplies hot coil for further processing
through cold rolling to some of our other plants, including
Goettingen and Nachterstedt in Germany and provides foilstock to
our plants in
38
Ohle and Ludenscheid in Germany and Rugles in France. Together
with Hydro, we operate Norf as a production cooperative, with
each party supplying its own primary metal inputs for
transformation at the facility. The transformed product is then
transferred back to the supplying party on a pre-determined
cost-plus basis. The facilitys capacity is shared 50/50.
We own 50% of the equity interest in Norf and Hydro owns the
other 50%. We share control of the management of Norf with Hydro
through a jointly-controlled shareholders committee.
Management of Norf is led jointly by two managing executives,
one nominated by us and one nominated by Hydro.
The Rogerstone mill in the United Kingdom supplies Bridgnorth
and other foil plants with foilstock and produces hot coil for
Nachterstedt and Pieve. In addition, Rogerstone produces
standard sheet and coil for the European distributor market. The
Pieve plant, located near Milan, Italy, mainly produces
continuous cast coil that is cold rolled into paintstock and
sent to the Bresso plant for painting, also located near Milan.
The Dudelange and Rugles foil plants in Luxembourg and France
utilize continuous twin roll casting equipment and are two of
the few foil plants in the world capable of producing 6 micron
foil for aseptic packaging applications from continuous cast
material. The Sierre hot rolling plant in Switzerland, along
with Nachterstedt in Germany, are Europes leading
producers of automotive sheet in terms of shipments. Sierre also
supplies plate stock to Alcan.
Our recycling operations in Latchford, United Kingdom is the
only major recycling plant in Europe dedicated to used beverage
cans.
European operations also include Novelis PAE in Voreppe, France,
which sells casthouse technology, including liquid metal
treatment devices, such as degassers and filters, chill sheet
ingot casters and twin roll continuous casters, in many parts of
the world.
Asia
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Bukit Raja, Malaysia(i)
|
|
Continuous casting, cold rolling
|
|
Construction/industrial, foilstock foil, finstock
|
Ulsan, Korea(ii)
|
|
Hot rolling, cold rolling, recycling
|
|
Can stock, construction/industrial, foilstock, recycled ingot
|
Yeongju, Korea(iii)
|
|
Hot rolling, cold rolling
|
|
Can stock, construction/industrial, foilstock
|
|
|
|
(i) |
|
Ownership of the Bukit Raja plant corresponds to our 58% equity
interest in Aluminium Company of Malaysia Berhad. |
|
(ii) |
|
We hold a 68% equity interest in the Ulsan plant. |
|
(iii) |
|
We hold a 68% equity interest in the Yeongju plant. |
Our Korean subsidiary, in which we hold a 68% interest, was
formed through acquisitions in 1999 and 2000. Since our
acquisitions, product capability has been developed to address
higher value and more technically advanced markets such as can
sheet.
We hold a 58% equity interest in the Aluminium Company of
Malaysia Berhad, a publicly traded company that wholly owns and
controls the Bukit Raja, Selangor light gauge rolling facility.
Unlike our production sharing joint ventures at Norf, Germany
and Logan, Kentucky, our Korean partners are financial partners
and we market 100% of the plants output.
Asia also operates a recycling furnace in Ulsan, Korea for the
conversion of customer and third party recycled aluminum,
including used beverage cans. Metal from recycled aluminum
purchases represented 4.2% of Asias total shipments in
fiscal 2008.
39
South
America
|
|
|
|
|
Location
|
|
Plant Processes
|
|
Major End-Use Markets/Applications
|
|
Pindamonhangaba, Brazil
|
|
Hot rolling, cold rolling, recycling
|
|
Construction/industrial, can stock, foilstock, recycled ingot,
foundry ingot, forge stock
|
Utinga, Brazil
|
|
Finishing
|
|
Foil
|
Ouro Preto, Brazil
|
|
Alumina refining, smelting
|
|
Primary aluminum (sheet ingot and billets)
|
Aratu, Brazil
|
|
Smelting
|
|
Primary aluminum (sheet ingot and billets)
|
Our Pindamonhangaba (Pinda) rolling and recycling facility in
Brazil has an integrated process that includes recycling, sheet
ingot casting, hot mill and cold mill operations. A leased
coating line produces painted products, including can end stock.
Pinda supplies foilstock to our Utinga foil plant, which
produces converter, household and container foil.
Pinda is the largest aluminum rolling and recycling facility in
South America in terms of shipments and the only facility in
South America capable of producing can body and end stock. Pinda
recycles primarily used beverage cans, and is engaged in tolling
recycled metal for our customers.
Total production capacity at our primary metal facilities in
Ouro Preto and Aratu, Brazil was 102kt in fiscal 2008.
We conduct bauxite mining, alumina refining, primary aluminum
smelting and hydro-electric power generation operations at our
Ouro Preto, Brazil facility. Our owned power generation supplies
approximately 25% of our smelter needs. In the Ouro Preto
region, we own the mining rights to approximately 6 million
tonnes of bauxite reserves. There are additional reserves in the
Cataguases and Carangola regions sufficient to meet our
requirements in the foreseeable future.
We also conduct primary aluminum smelting operations at our
Aratu facility in Candeias, Brazil.
|
|
Item 3.
|
Legal
Proceedings
|
In connection with our spin-off from Alcan, we assumed a number
of liabilities, commitments and contingencies mainly related to
our historical rolled products operations, including liabilities
in respect of legal claims and environmental matters. As a
result, we may be required to indemnify Alcan for claims
successfully brought against Alcan or for the defense of, or
defend, legal actions that arise from time to time in the normal
course of our rolled products business including commercial and
contract disputes, employee-related claims and tax disputes
(including several disputes with Brazils Ministry of
Treasury regarding various forms of manufacturing taxes and
social security contributions). In addition to these assumed
liabilities and contingencies, we may, in the future, be
involved in, or subject to, other disputes, claims and
proceedings that arise in the ordinary course of our business,
including some that we assert against others, such as
environmental, health and safety, product liability, employee,
tax, personal injury and other matters. Where appropriate, we
have established reserves in respect of these matters (or, if
required, we have posted cash guarantees). While the ultimate
resolution of, and liability and costs related to, these matters
cannot be determined with certainty due to the considerable
uncertainties that exist, we do not believe that any of these
pending actions, individually or in the aggregate, will
materially impair our operations or materially affect our
financial condition or liquidity. The following describes
certain environmental matters relating to our business,
including those for which we assumed liability as a result of
our spin-off from Alcan. None of the environmental matters
include government sanctions of $100,000 or more.
Environmental
Matters
We are involved in proceedings under the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act, also
known as CERCLA or Superfund, or analogous state provisions
regarding liability arising from the usage, storage, treatment
or disposal of hazardous substances and wastes at a number of
sites
40
in the United States, as well as similar proceedings under the
laws and regulations of the other jurisdictions in which we have
operations, including Brazil and certain countries in the
European Union. Many of these jurisdictions have laws that
impose joint and several liability, without regard to fault or
the legality of the original conduct, for the costs of
environmental remediation, natural resource damages, third party
claims, and other expenses, on those persons who contributed to
the release of a hazardous substance into the environment. In
addition, we are, from time to time, subject to environmental
reviews and investigations by relevant governmental authorities.
As described further in the following paragraph, we have
established procedures for regularly evaluating environmental
loss contingencies, including those arising from such
environmental reviews and investigations and any other
environmental remediation or compliance matters. We believe we
have a reasonable basis for evaluating these environmental loss
contingencies, and we believe we have made reasonable estimates
of the costs that are likely to be borne by us for these
environmental loss contingencies. Accordingly, we have
established reserves based on our reasonable estimates for the
currently anticipated costs associated with these environmental
matters. We estimate that the undiscounted remaining
clean-up
costs related to all of our known environmental matters as of
March 31, 2008 will be approximately $50 million. Of
this amount, $34 million is included in Other long-term
liabilities, with the remaining $16 million included in
Accrued expenses and other current liabilities in our
consolidated balance sheet as of March 31, 2008. Management
has reviewed the environmental matters that we have previously
reported for which we assumed liability as a result of our
spin-off from Alcan. As a result of this review, management has
determined that the currently anticipated costs associated with
these environmental matters will not, individually or in the
aggregate, materially impair our operations or materially
adversely affect our financial condition, results of operations
or liquidity.
With respect to environmental loss contingencies, we record a
loss contingency on a non-discounted basis whenever such
contingency is probable and reasonably estimable. The evaluation
model includes all asserted and unasserted claims that can be
reasonably identified. Under this evaluation model, the
liability and the related costs are quantified based upon the
best available evidence regarding actual liability loss and cost
estimates. Except for those loss contingencies where no estimate
can reasonably be made, the evaluation model is fact-driven and
attempts to estimate the full costs of each claim. Management
reviews the status of, and estimated liability related to,
pending claims and civil actions on a quarterly basis. The
estimated costs in respect of such reported liabilities are not
offset by amounts related to cost-sharing between parties,
insurance, indemnification arrangements or contribution from
other potentially responsible parties unless otherwise noted.
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. In
the quarter ended December 31, 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 extent
of coverage of the costs included in the settlement. On
October 8, 2007, we received a letter from these insurers
stating that they have completed their review and they are
requesting a refund of the $39 million plus interest. We
reviewed the
41
insurers position, and on January 7, 2008, we sent a
letter to the insurers rejecting their position that Novelis is
not entitled to insurance coverage for the judgment against
Novelis.
Since our fiscal 2005 Annual Report on
Form 10-K
was not filed until August 25, 2006, we recognized a
liability for the full settlement amount of $71 million on
December 31, 2005, included in Accrued expenses and other
current liabilities on our consolidated balance sheet, 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. This resulted in a net
charge of $40 million during the quarter ended
December 31, 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
quarter ended December 31, 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 the parties as described above. The
$39 million liability is included in Accrued expenses and
other current liabilities in our consolidated balance sheets as
of March 31, 2008 and 2007.
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.
Coca-Cola
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.
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 filed its answer and the parties are proceeding with
discovery.
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 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 nations provision of the CCE supply
agreement. Novelis Corporation moved to dismiss the complaint
and on March 26, 2008, the U.S. District Court for the
Northern District of Georgia issued an order granting Novelis
Corporations motion to dismiss CCEs claim. On
April 24, 2008, CCE filed a notice of appeal of the
courts order with the United Stated Circuit Court of
Appeal for the 11th Circuit. If CCE were to ultimately
prevail in this appeal and litigation, the amount of damages
would likely be material. We have not recorded any reserves for
these matters.
42
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 alleged that Anheuser-Busch, Inc. breached
the existing multi-year aluminum can stock supply agreement
between the parties, and sought monetary damages and declaratory
relief. Among other claims, we asserted that since entering into
the supply agreement, Anheuser-Busch, Inc. has breached its
confidentiality obligations and 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. 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.
On January 18, 2008, Anheuser-Busch, Inc. filed a motion
for summary judgment. On May 22, 2008, the court granted
Anheuser-Busch, Inc.s motion for summary judgment. Novelis
Corporation has 30 days to file a notice of appeal with the
court and is currently reviewing the courts order to
understand the reasoning behind the decision and evaluate its
grounds for appeal. Novelis Corporation has continued to perform
under the supply agreement during the litigation.
ARCO Aluminum Complaint. On May 24, 2007,
Arco Aluminum Inc. (ARCO) filed a complaint against Novelis
Corporation and Novelis Inc. in the United States District Court
for the Western District of Kentucky. ARCO and Novelis are
partners in a joint venture rolling mill located in Logan,
Kentucky. In the complaint, ARCO seeks to resolve a perceived
dispute over management and control of the joint venture
following Hindalcos acquisition of Novelis.
ARCO alleges that its consent was required in connection with
Hindalcos acquisition of Novelis. Failure to obtain
consent, ARCO alleges, has put us in default of the joint
venture agreements, thereby triggering certain provisions in
those agreements. The provisions include a reversion of the
production management at the joint venture to Logan Aluminum
from Novelis, and a reduction of the board of directors of the
entity that manages the joint venture from seven members (four
appointed by Novelis and three appointed by ARCO) to six members
(three appointed by each of Novelis and ARCO).
ARCO seeks a court declaration that (1) Novelis and its
affiliates are prohibited from exercising any managerial
authority or control over the joint venture,
(2) Novelis interest in the joint venture is limited
to an economic interest only and (3) ARCO has authority to
act on behalf of the joint venture. Alternatively, ARCO is
seeking a reversion of the production management function to
Logan Aluminum, and a change in the composition of the board of
directors of the entity that manages the joint venture. Novelis
filed its answer to the complaint on July 16, 2007.
On July 3, 2007, ARCO filed a motion for partial summary
judgment with respect to one of the counts of its complaint
relating to the claim that Novelis breached the joint venture
agreement by not seeking ARCOs consent. On July 30,
2007, Novelis filed a motion to hold ARCOs motion for
summary judgment in abeyance (pending further discovery), along
with a demand for a jury. On February 14, 2008, the judge
issued an order granting our motion to hold ARCOs summary
judgment motion in abeyance. Pursuant to this ruling, the joint
venture continues to conduct management and board activities as
normal.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
43
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
On May 15, 2007, all of our common shares were acquired by
Hindalco through its indirect wholly-owned subsidiary AV Metals
Inc. (Acquisition Sub) pursuant to a plan of arrangement (the
Arrangement). Immediately following the Arrangement, Acquisition
Sub transferred our common shares to its wholly-owned subsidiary
AV Aluminum Inc. (AV Aluminum). As of the date of filing, AV
Aluminum is the sole shareholder of record of our shares.
Subsequent to completion of the Arrangement on May 15,
2007, all of our common shares were indirectly held by Hindalco.
We are a domestic issuer for purposes of the Securities Exchange
Act of 1934, as amended, because our 7.25% senior unsecured
debt securities are publicly traded.
We currently do not pay dividends and do not intend to do so in
the foreseeable future. No dividends have been declared since
October 26, 2006. Future dividends are at the discretion of
the board of directors and will depend on, among other things,
our financial resources, cash flows generated by our business,
our cash requirements, restrictions under the instruments
governing our indebtedness, being in compliance with the
appropriate indentures and covenants under the instruments that
govern our indebtedness that would allow us to legally pay
dividends and other relevant factors.
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected financial data in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our consolidated and combined financial
statements included in this Annual Report on
Form 10-K.
Background
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary AV Metals Inc.
(Acquisition Sub) pursuant to a plan of arrangement
(Arrangement) entered into on February 10, 2007 and
approved by the Ontario Superior Court of Justice on
May 14, 2007 (see Note 2 Acquisition of
Novelis Common Stock in the accompanying consolidated and
combined financial statements). As a result of the Arrangement,
Acquisition Sub acquired all of the Companys outstanding
common shares at a price of $44.93 per share, and all
outstanding stock options and other equity incentives were
terminated in exchange for cash payments. The aggregate purchase
price for the Companys common shares was $3.4 billion
and immediately following the Arrangement, the common shares of
the Company were transferred from Acquisition Sub to its
wholly-owned subsidiary AV Aluminum Inc. (AV Aluminum). Hindalco
also assumed $2.8 billion of Novelis debt for a total
transaction value of $6.2 billion.
On June 22, 2007, we issued 2,044,122 additional common
shares to AV Aluminum for $44.93 per share resulting in an
additional equity contribution of approximately
$92 million. This contribution was equal in amount to
certain payments made by Novelis related to change in control
compensation to certain employees and directors, lender fees and
other transaction costs incurred by the Company. As this
transaction was approved by the Company and executed subsequent
to the Arrangement, the $92 million cash payment is not
included in the determination of total purchase price.
As discussed in Note 1 Business and Summary of
Significant Accounting Policies in the accompanying consolidated
and combined financial statements, the Arrangement was recorded
in accordance with Staff Accounting Bulletin No. 103,
Push Down Basis of Accounting Required in Certain Limited
Circumstances (SAB No. 103). Accordingly, in the
accompanying March 31, 2008 consolidated balance sheet, the
consideration and related costs paid by Hindalco in connection
with the acquisition have been pushed down to us and
have been allocated to the assets acquired and liabilities
assumed in accordance with FASB Statement No. 141,
Business Combinations. Due to the impact of push down
accounting, the Companys consolidated financial statements
and certain note presentations for our fiscal year ended
March 31, 2008 are
44
presented in two distinct periods to indicate the application of
two different bases of accounting between the periods presented:
(1) the period up to, and including, the acquisition date
(April 1, 2007 through May 15, 2007, labeled
Predecessor) and (2) the period after that date
(May 16, 2007 through March 31, 2008, labeled
Successor). All periods including and prior to the
three months ended March 31, 2007 are also labeled
Predecessor. The accompanying consolidated and
combined financial statements shown below include a black line
division which indicates that the Predecessor and Successor
reporting entities shown are not comparable.
Change
in Fiscal Year End
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. Accordingly, the accompanying consolidated and
combined financial statements present our financial position as
of March 31, 2008 and 2007, and the results of our
operations, cash flows and changes in
shareholders/invested equity for the periods from
May 16, 2007 through March 31, 2008 (Successor) and
from April 1, 2007 through May 15, 2007 (Predecessor)
(on a combined basis, our fiscal year ended March 31,
2008), the three months ended March 31, 2007 and the years
ended December 31, 2006 and 2005.
Basis
of Presentation
The data presented below is derived from the following audited
financial statements of the Company which are included elsewhere
in this Annual Report on
Form 10-K:
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our consolidated statements of operations for:
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the periods from May 16, 2007 through March 31, 2008
and from April 1, 2007 through May 15, 2007;
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the three months ended March 31, 2007; and
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the year ended December 31, 2006;
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our consolidated and combined statement of operations for the
year ended December 31, 2005 and
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our consolidated balance sheets as of March 31, 2008 and
2007.
|
The data presented below is also derived from the following
audited financial statements of the Company which are not
included in this Annual Report on
Form 10-K:
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our combined statements of operations for the years ended
December 31, 2004 and 2003;
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our consolidated balance sheets as of December 31, 2006 and
2005; and
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our combined balance sheets as of December 31, 2004 and
2003.
|
The consolidated and combined financial statements for the year
ended December 31, 2005 include the results for the period
from January 1 to January 5, 2005 prior to our spin-off
from Alcan, in addition to the results for the period from
January 6 to December 31, 2005. The combined financial
results for the period from January 1 to January 5, 2005
present our operations on a carve-out accounting basis. The
consolidated balance sheet as of December 31, 2005 (and
subsequent periods) and the consolidated results for the period
from January 6 (the date of the spin-off from Alcan) to
December 31, 2005 (and subsequent periods) present our
financial position, results of operations and cash flows as a
stand-alone entity.
All income earned and cash flows generated by us as well as the
risks and rewards of these businesses from January 1 to
January 5, 2005 were primarily attributed to us and are
included in our consolidated and combined results for the year
ended December 31, 2005, with the exception of losses of
$43 million ($29 million net of tax) arising from the
change in fair market value of derivative contracts, primarily
with Alcan. These mark-to-market losses for the period from
January 1 to January 5, 2005 were recorded in the
45
consolidated and combined statement of operations for the year
ended December 31, 2005 and were recognized as a decrease
in Owners net investment.
Our historical combined financial statements for the years ended
December 31, 2004 and 2003 have been derived from the
accounting records of Alcan using the historical results of
operations and historical basis of assets and liabilities of the
businesses subsequently transferred to us. Management believes
the assumptions underlying the historical combined financial
statements are reasonable. However, the historical combined
financial statements included herein may not necessarily reflect
what our results of operations, financial position and cash
flows would have been had we been a stand-alone company during
the periods presented. Alcans investment in the Novelis
businesses, presented as Owners net investment in the
historical combined financial statements, includes the
accumulated earnings of the businesses as well as cash transfers
related to cash management functions performed by Alcan.
As of May 15, 2007, all of our common shares were
indirectly held by Hindalco; thus, no earnings per share data is
reported (in millions, except per share amounts).
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May 16,
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April 1,
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Three
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|
|
|
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|
|
|
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2007
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2007
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Months
|
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|
|
|
|
|
|
|
|
|
|
|
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|
Through
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|
Through
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Ended
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|
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|
|
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March 31,
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May 15,
|
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March 31,
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Year Ended December 31,
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|
|
2008
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Successor
|
|
|
|
Predecessor
|
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|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Net sales
|
|
$
|
9,965
|
|
|
|
$
|
1,281
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|
|
$
|
2,630
|
|
|
$
|
9,849
|
|
|
$
|
8,363
|
|
|
$
|
7,755
|
|
|
$
|
6,221
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|
Net income (loss)
|
|
$
|
28
|
|
|
|
$
|
(97
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)
|
|
$
|
(64
|
)
|
|
$
|
(275
|
)
|
|
$
|
90
|
|
|
$
|
55
|
|
|
$
|
157
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|
Dividends per common share
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.20
|
|
|
$
|
0.36
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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As of
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|
|
As of
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|
|
|
|
|
|
|
|
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|
|
March 31,
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|
March 31,
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|
As of December 31,
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|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
Total assets
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|
$
|
10,946
|
|
|
|
$
|
5,970
|
|
|
$
|
5,792
|
|
|
$
|
5,476
|
|
|
$
|
5,954
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|
|
$
|
6,316
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|
Long-term debt (including current portion)
|
|
$
|
2,575
|
|
|
|
$
|
2,300
|
|
|
$
|
2,302
|
|
|
$
|
2,603
|
|
|
$
|
2,737
|
|
|
$
|
1,659
|
|
Short-term borrowings
|
|
$
|
115
|
|
|
|
$
|
245
|
|
|
$
|
133
|
|
|
$
|
27
|
|
|
$
|
541
|
|
|
$
|
964
|
|
Cash and cash equivalents
|
|
$
|
326
|
|
|
|
$
|
128
|
|
|
$
|
73
|
|
|
$
|
100
|
|
|
$
|
31
|
|
|
$
|
27
|
|
Shareholders/invested equity
|
|
$
|
3,538
|
|
|
|
$
|
175
|
|
|
$
|
195
|
|
|
$
|
433
|
|
|
$
|
555
|
|
|
$
|
1,974
|
|
As described more fully in Note 2 Acquisition
of Novelis Common Stock in the accompanying consolidated and
combined financial statements, the consideration paid by
Hindalco to acquire Novelis has been pushed down to us and
allocated to the assets acquired and liabilities assumed based
on our estimates of fair value, using methodologies and
assumptions that we believe are reasonable. This allocation of
fair value results in additional charges or income to our
post-acquisition consolidated statements of operations.
In accordance with FASB Statement No. 141, during our
quarter ended June 30, 2007, we substantially allocated
total consideration ($3.405 billion) to the assets acquired
and liabilities assumed based on our initial estimates of fair
value using methodologies and assumptions that we believed were
reasonable. During the three months ended March 31, 2008,
we finalized the allocation of the total consideration to
identifiable assets and liabilities. This is primarily due to
the finalization of our assessment of the valuation of the
acquired tangible and intangible assets, the allocation of fair
value to our reporting units, remeasurement of postretirement
benefits and the income tax implications of the new basis of
accounting triggered by the Arrangement.
The final purchase price allocation includes a total of
$685 million for the fair value of liabilities associated
with unfavorable sales contracts ($371 million included in
Other long-term liabilities and $314 million included in
Accrued expenses and other current liabilities). Of this amount,
$655 million relates to unfavorable sales contracts in
North America. These contracts include a ceiling over which
metal prices cannot contractually be passed through to certain
customers, unless adjusted. Subsequent to the Arrangement, the
fair values of these liabilities are credited to Net sales over
the remaining lives of the underlying contracts.
46
The reduction of these liabilities does not affect our cash
flows. For the fiscal year ended March 31, 2008 (during the
period from May 16, 2007 through March 31, 2008 only),
we recorded accretion of $270 million.
Intangible assets include (1) $124 million for a
favorable energy supply contract in North America, recorded at
its estimated fair value, (2) $15 million for other
favorable supply contracts in Europe and
(3) $9 million for the estimated value of acquired
in-process research and development projects that had not yet
reached technological feasibility. In accordance with FASB
Statement No. 141, the $9 million of acquired
in-process research and development was expensed upon
acquisition and charged to Research and development expenses in
the period from May 16, 2007 through March 31, 2008.
We incurred a total of $64 million of fees and expenses
related to the Arrangement, of which $32 million was
incurred in each of the periods from April 1, 2007 through
May 15, 2007, and for the three months ended March 31,
2007. These fees and expenses are included in Sale transaction
fees in our condensed consolidated and combined statements of
operations.
We implemented restructuring programs that included certain
businesses we acquired from Alcan in the spin-off transaction.
Restructuring charges related to those programs, to other
actions initiated after the spin-off and impairment charges on
long-lived assets, included in our results of operations for the
periods presented are as follows (in millions).
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|
|
|
|
|
|
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|
May 16,
|
|
|
April 1,
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
Through
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
May 15,
|
|
March 31,
|
|
Year Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Successor
|
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
Restructuring charges net
|
|
$
|
6
|
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
19
|
|
|
$
|
10
|
|
|
$
|
20
|
|
|
$
|
8
|
|
Impairment charges on long-lived assets
|
|
|
1
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
7
|
|
|
|
75
|
|
|
|
4
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) is
provided as a supplement to, and should be read in conjunction
with, our consolidated and combined financial statements and the
accompanying notes included in this Annual Report on
Form 10-K
for a more complete understanding of our financial condition and
results of operations. The MD&A includes the following
sections:
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|
|
Acquisition of Novelis Common Stock and Predecessor and
Successor Reporting; and
|
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|
Change in Fiscal Year End
|
|
|
|
|
|
Note Regarding Combined Results of Operations and Selected
Financial and Operating Information Due to our Acquisition by
Hindalco;
|
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Highlights;
|
|
|
|
Our Business:
|
|
|
|
|
|
Business Model and Key Concepts;
|
|
|
|
Challenges;
|
|
|
|
Key Trends and Business Outlook; and
|
|
|
|
Spin-off from Alcan, Inc. (Alcan) (in October 2007, the Rio
Tinto Group purchased all of the outstanding shares of Alcan,
our former parent, and was renamed Rio Tinto Alcan).
|
47
|
|
|
|
|
Operations and Segment Review an analysis of our
consolidated and combined results of operations, on both a
consolidated and combined and on a segment basis;
|
|
|
|
Liquidity and Capital Resources an analysis of the
effect of our operating, financing and investing activities on
our liquidity and capital resources;
|
|
|
|
Off-Balance Sheet Arrangements a discussion of such
commitments and arrangements;
|
|
|
|
Contractual Obligations a summary of our aggregate
contractual obligations;
|
|
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|
Dividends our dividend history;
|
|
|
|
Environment, Health and Safety our mission and
commitment to environment, health and safety management;
|
|
|
|
Critical Accounting Policies and Estimates a
discussion of accounting policies that require significant
judgments and estimates; and
|
|
|
|
Recently Issued Accounting Standards a summary and
discussion of our plans for the adoption of new accounting
standards relevant to us.
|
The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to,
those discussed below and elsewhere in this Annual Report on
Form 10-K,
particularly in Special Note Regarding Forward-Looking
Statements and Market Data and Risk
Factors.
References herein to Novelis, the
Company, we, our, or
us refer to Novelis Inc. and its subsidiaries unless
the context specifically indicates otherwise. References herein
to Hindalco refer to Hindalco Industries Limited. In
October 2007, the Rio Tinto Group purchased all the outstanding
shares of Alcan, Inc. References herein to Alcan
refer to Rio Tinto Alcan Inc.
GENERAL
Novelis is the worlds leading aluminum rolled products
producer based on shipment volume. We produce aluminum sheet and
light gauge products for the beverage and food can,
transportation, construction and industrial, and foil products
markets. As of March 31, 2008, we had operations on four
continents: North America; South America; Asia; and Europe,
through 33 operating plants and one research facility and
several market-focused innovation centers in 11 countries. In
addition to aluminum rolled products plants, our South American
businesses include bauxite mining, 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.
Acquisition
of Novelis Common Stock and Predecessor and Successor
Reporting
On May 15, 2007, the Company was acquired by Hindalco
through its indirect wholly-owned subsidiary AV Metals Inc.
(Acquisition Sub) pursuant to a plan of arrangement
(Arrangement) entered into on February 10, 2007 and
approved by the Ontario Superior Court of Justice on
May 14, 2007 (see Note 2 Acquisition of
Novelis Common Stock in the accompanying consolidated and
combined financial statements). As a result of the Arrangement,
Acquisition Sub acquired all of the Companys outstanding
common shares at a price of $44.93 per share, and all
outstanding stock options and other equity incentives were
terminated in exchange for cash payments. The aggregate purchase
price for the Companys common shares was $3.4 billion
and immediately following the Arrangement, the common shares of
the Company were transferred from Acquisition Sub to its
wholly-owned subsidiary AV Aluminum Inc. (AV Aluminum). Hindalco
also assumed $2.8 billion of Novelis debt for a total
transaction value of $6.2 billion.
On June 22, 2007, we issued 2,044,122 additional common
shares to AV Aluminum for $44.93 per share resulting in an
additional equity contribution of approximately
$92 million. This contribution was equal in
48
amount to certain payments made by Novelis related to change in
control compensation to certain employees and directors, lender
fees and other transaction costs incurred by the Company. As
this transaction was approved by the Company and executed
subsequent to the Arrangement, the $92 million cash payment
is not included in the determination of total purchase price.
As discussed in Note 1 Business and Summary of
Significant Accounting Policies in the accompanying consolidated
and combined financial statements, the Arrangement was recorded
in accordance with Staff Accounting Bulletin No. 103,
Push Down Basis of Accounting Required in Certain Limited
Circumstances (SAB No. 103). Accordingly, in the
accompanying March 31, 2008 consolidated balance sheet, the
consideration and related costs paid by Hindalco in connection
with the acquisition have been pushed down to us and
have been allocated to the assets acquired and liabilities
assumed in accordance with Financial Accounting Standards Board
(FASB) Statement No. 141, Business Combinations. Due
to the impact of push down accounting, the Companys
consolidated financial statements and certain note presentations
for our fiscal year ended March 31, 2008 are presented in
two distinct periods to indicate the application of two
different bases of accounting between the periods presented:
(1) the period up to, and including, the acquisition date
(April 1, 2007 through May 15, 2007, labeled
Predecessor) and (2) the period after that date
(May 16, 2007 through March 31, 2008, labeled
Successor). All periods including and prior to the
three months ended March 31, 2007 are also labeled
Predecessor. The accompanying consolidated and
combined financial statements include a black line division
which indicates that the Predecessor and Successor reporting
entities shown are not comparable.
Change
in Fiscal Year End
On June 26, 2007, our board of directors approved the
change of our fiscal year end to March 31 from December 31.
On June 28, 2007, we filed a Transition Report on
Form 10-Q
for the three month period ended March 31, 2007 with the
United States Securities and Exchange Commission (SEC) pursuant
to
Rule 13a-10
under the Securities Exchange Act of 1934 for transition period
reporting. Accordingly, the accompanying consolidated and
combined financial statements present our financial position as
of March 31, 2008 and 2007; and the results of our
operations, cash flows and changes in
shareholders/invested equity for the following periods:
May 16, 2007 through March 31, 2008 (Successor);
April 1, 2007 through May 15, 2007 (Predecessor) (on a
combined basis, our fiscal year ended March 31, 2008); the
three months ended March 31, 2007; and the years ended
December 31, 2006 and 2005.
Throughout MD&A, data for all periods except as of and for
the year ended March 31, 2007, are derived from our audited
consolidated and combined financial statements included in this
Annual Report on
Form 10-K.
All data as of and for the year ended March 31, 2007 are
derived from our unaudited condensed consolidated financial
statements included in our transition period ended
March 31, 2007 and our Quarterly Report on
Form 10-Q
for the period ended December 31, 2007.
NOTE REGARDING
COMBINED RESULTS OF OPERATIONS AND SELECTED FINANCIAL AND
OPERATING INFORMATION DUE TO OUR ACQUISITION BY
HINDALCO
As discussed above, the Arrangement created a new basis of
accounting. Under accounting principles generally accepted in
the United States of America (GAAP), the consolidated financial
statements for our fiscal year ended March 31, 2008 are
presented in two distinct periods, as Predecessor and Successor
entities, and are not comparable in all material respects.
However, within MD&A, in order to facilitate a discussion
of our results of operations, segment information and liquidity
and capital resources for the year ended March 31, 2008 on
a combined basis, in comparison with a similar period, we
prepared and are presenting financial information for the twelve
months ended March 31, 2007, which includes the three month
transition period ended March 31, 2007 and the nine months
ended December 31, 2006, on a combined basis. Wherever
practicable, the discussion below compares the consolidated
financial statements for the fiscal year ended March 31,
2008 with the combined financial statements for the year ended
March 31, 2007. For purposes of MD&A, we believe that
this comparison provides a more meaningful analysis.
49
In addition, our Predecessor and Successor operating results,
segment information and cash flows for the period from
April 1, 2007 through May 15, 2007, and for the period
from May 16, 2007 through March 31, 2008, are
presented herein on a combined basis.
The combined operating results, segment information and cash
flows are non-GAAP financial measures, do not include any pro
forma assumptions or adjustments and should not be used in
isolation or substitution of the Predecessor and Successor
operating results, segment information or cash flows.
Shown below are combining schedules of (1) shipments and
(2) our results of operations for periods attributable to
the Successor and Predecessor, and the combined presentation for
the year ended March 31, 2008 that we use throughout
MD&A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Combined Shipments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipments (kt)(A):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products(B)
|
|
|
2,640
|
|
|
|
|
348
|
|
|
|
2,988
|
|
Ingot products(C)
|
|
|
147
|
|
|
|
|
15
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
2,787
|
|
|
|
|
363
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
One kilotonne (kt) is 1,000 metric tonnes. One metric tonne is
equivalent to 2,204.6 pounds. |
|
(B) |
|
Rolled products include tolling (the conversion of
customer-owned metal). |
|
(C) |
|
Ingot products include primary ingot in Brazil, foundry products
in Korea and Europe, secondary ingot in Europe and other
miscellaneous recyclable aluminum. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Combined Results of Operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,965
|
|
|
|
$
|
1,281
|
|
|
$
|
11,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
9,042
|
|
|
|
|
1,205
|
|
|
|
10,247
|
|
Selling, general and administrative expenses
|
|
|
319
|
|
|
|
|
95
|
|
|
|
414
|
|
Depreciation and amortization
|
|
|
367
|
|
|
|
|
28
|
|
|
|
395
|
|
Research and development expenses
|
|
|
46
|
|
|
|
|
6
|
|
|
|
52
|
|
Interest expense and amortization of debt issuance
costs net
|
|
|
173
|
|
|
|
|
26
|
|
|
|
199
|
|
(Gain) loss on change in fair value of derivative
instruments net
|
|
|
(22
|
)
|
|
|
|
(20
|
)
|
|
|
(42
|
)
|
Equity in net (income) loss of non-consolidated affiliates
|
|
|
4
|
|
|
|
|
(1
|
)
|
|
|
3
|
|
Sale transaction fees
|
|
|
|
|
|
|
|
32
|
|
|
|
32
|
|
Other (income) expenses net
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,929
|
|
|
|
|
1,375
|
|
|
|
11,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for taxes on income
(loss) and minority interests share
|
|
|
36
|
|
|
|
|
(94
|
)
|
|
|
(58
|
)
|
Provision (benefit) for taxes on income (loss)
|
|
|
3
|
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests share
|
|
|
33
|
|
|
|
|
(98
|
)
|
|
|
(65
|
)
|
Minority interests share
|
|
|
(5
|
)
|
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28
|
|
|
|
$
|
(97
|
)
|
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
HIGHLIGHTS
Significant highlights, events and factors impacting our
business during the years ended March 31, 2008 and 2007;
and December 31, 2006 and 2005 are presented briefly below.
Each is discussed in further detail throughout MD&A.
|
|
|
|
|
Shipments and selected financial information are as follows (in
millions, except shipments, which are in kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
2,988
|
|
|
|
2,951
|
|
|
|
2,960
|
|
|
|
2,873
|
|
Ingot products
|
|
|
162
|
|
|
|
162
|
|
|
|
163
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
3,150
|
|
|
|
3,113
|
|
|
|
3,123
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,246
|
|
|
$
|
10,160
|
|
|
$
|
9,849
|
|
|
$
|
8,363
|
|
Net income (loss)
|
|
$
|
(69
|
)
|
|
$
|
(265
|
)
|
|
$
|
(275
|
)
|
|
$
|
90
|
|
Net increase (decrease) in total debt(A)
|
|
$
|
82
|
|
|
$
|
18
|
|
|
$
|
(195
|
)
|
|
$
|
(321
|
)
|
|
|
|
(A) |
|
Net increase (decrease) in total debt is measured comparing the
period-end amounts of our total outstanding debt (including
short-term borrowings) as shown in our consolidated balance
sheets. For the year ended March 31, 2008, the net increase
in total debt excludes unamortized fair value adjustments
recorded as part of the Arrangement. For the year ended
December 31, 2005, the net decrease in total debt is
measured as the reduction from our total debt of
$2.951 billion as of January 6, 2005, the date of our
spin-off from Alcan. |
|
|
|
|
|
Rolled products shipments increased in fiscal 2008 primarily due
to increased shipments in the can market in Europe, South
America and Asia. The increase in demand for can products was
partially offset by decreased shipments in the industrial and
automotive markets in North America and Europe.
|
|
|
|
London Metal Exchange (LME) pricing for aluminum (metal) was an
average of 1.5% lower during the year ended March 31, 2008
than the comparable prior year period. Cash prices have trended
up at the end of this fiscal year. As of March 31, 2008 and
2007; December 31, 2007 and 2006, cash prices per metric
tonne were $2,935 and $2,792; $2,850 and $2,285, respectively.
This trend positively impacted our fiscal 2008 fourth quarter
results as described more fully under Metal Price Lag below.
|
|
|
|
Net sales for the year ended March 31, 2008 increased from
the prior year primarily due to (1) increased conversion
premium, (2) strengthening of the euro against the U.S.
dollar, (3) accretion of fair value reserves associated
with the sales contracts subject to metal price ceilings,
(4) metal price lag, (5) increased volume and
(6) a reduction of sales subject to metal price ceilings.
These metal price ceilings prevent us from passing metal price
increases above a specified level through to certain customers.
During the years ended March 31, 2008 and 2007, we were
unable to pass through approximately $230 million and
$460 million, respectively, of metal price increases
associated with sales under these contracts for a net favorable
impact of approximately $230 million.
|
Net sales for the year ended December 31, 2006 increased
from the prior year primarily due to the increase in the LME.
However, the benefit of higher LME prices was limited by metal
price ceilings in sales contracts representing approximately 20%
of our shipments in the year ended December 31, 2006.
During the years ended December 31, 2006 and 2005, we were
unable to pass through approximately $475 million and
$75 million, respectively, of metal price increases
associated with sales under these contracts for a net
unfavorable comparable impact of approximately $400 million.
|
|
|
|
|
During the years ended March 31, 2008 and 2007;
December 31, 2006 and 2005, we recognized pre-tax gains of
$42 million and $39 million; $63 million and
$269 million, respectively, related to the change in fair
value of derivative instruments. For segment reporting purposes,
Segment Income
|
51
|
|
|
|
|
(defined in Operating Segment Review below) includes
approximately $32 million and $228 million;
$249 million and $83 million of cash-settled
derivative gains for the years ended March 31, 2008 and
2007; December 31, 2006 and 2005, respectively.
|
|
|
|
|
|
Compared to the year ended March 31, 2007, our net loss for
the year ended March 31, 2008 was impacted by
$43 million of incremental stock compensation expense
associated with the Arrangement and $21 million of
incremental income associated with push-down accounting and the
allocation of purchase price.
|
|
|
|
As of March 31, 2008, our total debt increased by
$82 million from the prior year (excluding unamortized fair
value adjustments recorded as part of the acquisition by
Hindalco). The increase in debt was driven primarily by costs
associated with or triggered by the Arrangement that were in
excess of the additional $92 million of equity contributed
by Hindalco as well as increased cash and cash equivalents as
compared to the prior year by $198 million.
|
|
|
|
As described more fully in Note 2 Acquisition
of Novelis Common Stock in the accompanying consolidated and
combined financial statements, the consideration paid by
Hindalco to acquire Novelis has been pushed down to us and
allocated to the assets acquired and liabilities assumed based
on our estimates of fair value, using methodologies and
assumptions that we believe are reasonable. This allocation of
fair value results in additional charges or income to our
post-acquisition consolidated statements of operations. A
summary of the impacts of these items on our pre-tax income and
Segment Income for our fiscal year ended March 31, 2008 is
shown below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) to:
|
|
|
|
Pre-Tax
|
|
|
Segment
|
|
|
|
Income
|
|
|
Income(A)
|
|
|
Depreciation and amortization
|
|
$
|
(162
|
)
|
|
$
|
|
|
Can ceiling contracts
|
|
|
270
|
|
|
|
270
|
|
Other favorable/unfavorable contracts
|
|
|
(8
|
)
|
|
|
(8
|
)
|
In-process research and development
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Inventory
|
|
|
(35
|
)
|
|
|
(35
|
)
|
Equity investments
|
|
|
(38
|
)
|
|
|
|
|
Fair value of debt
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact
|
|
$
|
21
|
|
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
We use Segment Income to measure the profitability and financial
performance of our operating segments, as discussed below in
OPERATING SEGMENT REVIEW FOR THE YEAR ENDED MARCH 31, 2008
(TWELVE MONTHS COMBINED NON-GAAP) COMPARED TO THE YEAR ENDED
MARCH 31, 2007 (TWELVE MONTHS COMBINED NON-GAAP) and
FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2005.
|
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 aluminum to our customers. Nearly all of our products
have a price structure with two components: (i) a
pass-through aluminum price based on the LME plus local market
premiums and (ii) a conversion premium price on
the conversion cost to produce the rolled product and the
competitive market conditions for that product.
Metal
Price Ceilings
Sales contracts representing approximately 10% of our fiscal
2008 shipments provide for a ceiling over which metal prices
could not contractually be passed through to certain customers,
unless adjusted. This
52
negatively impacts our margins when the price we pay for metal
is above the ceiling price contained in these contracts. During
the years ended March 31, 2008 and 2007; December 31,
2006 and 2005, we were unable to pass through approximately
$230 million and $460 million; $475 million and
$75 million, respectively, of metal purchase costs
associated with sales under theses 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, and offset partially by
reduced income taxes.
Our exposure to metal price ceilings approximates 8% of
estimated shipments for the fiscal year 2009. Based on a
March 31, 2008 aluminum price of $2,935 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 $286 $312 million in fiscal 2009
and $215 $233 million in the aggregate
thereafter.
In connection with the allocation of purchase price (i.e., total
consideration) paid by Hindalco, we established reserves
totaling $655 million as of May 15, 2007 to record
these contracts at fair value. Fair value effectively represents
the discounted cash flows of the forecasted metal purchase costs
in excess of the metal price ceilings contained in these
contracts. These reserves are being accreted into Net sales over
the remaining lives of the underlying contracts, and this
accretion will not impact future cash flows. For the year ended
March 31, 2008 (during the period from May 16, 2007
through March 31, 2008 only), we recorded accretion of
$270 million.
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.
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 derivative
instruments on projected aluminum volume requirements above our
assumed internal hedge position. We currently purchase forward
derivative instruments to hedge our exposure to further metal
price increases.
Metal
Price Lag
On certain sales contracts we experience timing differences on
the pass through of changing aluminum prices based on the
difference between 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 refer to this timing difference as metal price
lag. During the year ended March 31, 2008, metal
price lag negatively impacted our results by $20 million
and favorably impacted the comparable prior years ended
March 31, 2007, December 31, 2006 and 2005 by
approximately $80 million, $46 million and
$27 million, respectively. These amounts are reported
herein without regard to the effects of any derivative
instruments we purchased to offset this risk as described below.
For general metal price lag exposure we sell short-term LME
forward contracts to help mitigate the exposure, although exact
offset hedging is not achieved.
Certain of our sales contracts, most notably in Europe, 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, compared to current prices, as metal
prices increase (decrease) because the prices are fixed at
historical levels. The positive or negative impact on sales
under these contracts has not been included in the metal price
lag effect quantified above, as we enter into forward metal
purchases simultaneous with the sales contracts thereby
mitigating the exposure to changing metal prices on sales under
these contracts.
The impacts of the above mentioned items on Net sales and
Segment Income are described more fully in the Operations and
Segment Review where appropriate.
53
For accounting purposes, we do not treat all derivative
instruments as hedges under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities.
For example, we do not treat the derivative instruments
purchased to mitigate the risks discussed above under metal
price ceilings and metal price lag as hedges under FASB
No. 133. 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 consolidated and combined
statements of operations, changes in fair value of derivative
instruments not accounted for as hedges under FASB Statement
No. 133 are recognized in (Gain) loss on change in fair
value of derivative instruments net. These
gains or losses may or may not result from cash settlement. For
Segment Income purposes we only include the impact of the
derivative gains or losses to the extent they are settled in
cash during that period.
Challenges
We face many challenges in our business and industry, but we
believe that the following are the most significant.
External
Economic Factors
First, we have not fully covered our exposure relative to the
metal price ceilings with the three hedging strategies described
above. This is primarily a result of (i) not being able to
purchase derivative instruments with strike prices that directly
coincide with the metal price ceilings, and (ii) our
recycling operations providing less internal hedge benefit than
we previously expected, as the spread between UBC prices and LME
prices has compressed.
Second, we are concerned about further strengthening of the
Brazilian real, which strengthened 15% and 10% against the
U.S. dollar in fiscal 2008 and 2006, respectively. In
Brazil, where we have predominantly U.S. dollar selling
prices and local currency operating costs, we benefit as the
Brazilian real weakens, but are adversely affected as it
strengthens. In 2006, we began hedging this risk with derivative
instruments in the short-term, but we are still exposed to
long-term fluctuations in the Brazilian real.
Third, energy prices have increased substantially in the recent
past and rising energy costs worldwide expose us to reduced
operating profits as changes cannot immediately be recovered
under existing contracts and sales agreements, and may only be
mitigated in future periods under future pricing arrangements.
Energy prices are impacted by several factors, including the
volatility of supply and geopolitical events, both of which have
created uncertainty in the oil, natural gas and electricity
markets, which drive the majority of our manufacturing and
transportation energy costs. The majority of energy usage occurs
at our casting centers, at our smelters in South America and
during the hot rolling of aluminum. Our cold rolling facilities
require relatively less energy.
A portion of our electricity requirements is purchased pursuant
to long-term contracts in the local regions in which we operate,
and a number of our facilities are located in regions with
regulated prices, which affords relatively stable costs. In
South America, we own and operate hydroelectric facilities that
meet approximately 25% of that regions total electricity
requirements, and in North America we have an existing long-term
contract for certain electricity costs at fixed rates. As of
March 31, 2008, we have a nominal amount of forward
purchases outstanding relating to natural gas. While these
arrangements help to minimize the impact of near-term energy
price increases, we have not fully mitigated our exposure to
rising energy prices on a global basis.
Fourth, prices for alloys that we utilized in our manufacturing
process such as magnesium and manganese have increased
substantially in the fiscal year. To offset the increase in
these prices we instated an alloy
up-charge in
the fourth quarter of fiscal year 2008 where contractually
feasible.
Hindalco
Integration
Following the acquisition by Hindalco, we continued to mange our
business as a stand-alone company during fiscal 2008 in much the
same manner as when our common equity was publicly held. More
recently,
54
we have begun to define the scope of our management authority in
the context of our being owned by an integrated primary producer
of aluminum. Specifically, we are working with Hindalco to
define the appropriate level of our management autonomy; align
our corporate cultures, management philosophies, strategic
plans, and policies; integrate our information technology and
financial control systems; and hire and retain key personnel.
While we expect to be successful in this undertaking, we
recognize that the integration process with Hindalco will
require substantial management time and energy.
Key
Trends and Business Outlook
The use of aluminum continues to increase in the markets we
serve. The principal drivers of this increase include, among
others, improving per capita gross domestic product in the
regions where we operate, increases in disposable income, and
increases in the use of aluminum due, in part, to a focus on
lightweight products for better fuel economy, compliance with
regulatory requirements and cost-effective benefits of
recycling. In addition, global demand has been further fueled by
growth in China and emerging markets.
We have observed a structural shift in aluminum prices, which
have risen to unprecedented, sustained levels and reacted
suddenly upward and downward based on market events. Before this
recent rise in prices, the long-term historical average price
for aluminum was approximately $1,500 per tonne. We do not try
to predict aluminum prices, but market consensus indicates that
it is unlikely that they will return to this level in the
short-term. In the long-term, we use the LME forward curve model
as a reasonable approximation of what aluminum prices may be in
the future; however, the LME is a marketplace and there can be
considerable deviation of actual prices from forward prices. As
we migrate away from the metal price ceilings contracts and
toward a pure conversion model, the price of aluminum should not
influence performance in the long-run, other than its effect on
ultimate customer demand and working capital.
As described above in Metal Price Ceilings, we have reduced our
exposure to metal price ceilings to approximately 8% of
estimated shipments in fiscal 2009. However, to the extent that
metal prices stay at current levels we expect that operating
margins and cash flows from operations will be negatively
impacted by the amount of metal purchase price that we are
unable to pass through to our customers. Based on a
March 31, 2008 aluminum price of $2,935 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 $286 $310 million in fiscal 2009
and $215 $233 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. For fiscal 2009, we have mitigated this
impact by purchasing derivative instruments priced at $3,025 per
tonne. While we have not entered into any derivative contracts
beyond December 2009, we are partially protected against
further increases in metal prices due to our smelting operations
in South America and our global recycling operations.
As of April 30, 2008, the current LME price is $2,895 per
tonne and the forward curve continues to be relatively flat,
indicating long term prices above $3,000 per tonne. If aluminum
prices continue to be above this level, our free cash flow will
be negatively impacted in the near term due to the metal price
ceilings discussed above, as well as additional working capital
requirements as a result of the increased price. We expect that
this will reduce our available liquidity in the short term
beginning in fiscal year 2009. The impact of sustained aluminum
prices on liquidity is further discussed in the Liquidity and
Capital Resources section of MD&A.
For the year ended March 31, 2008, we incurred a net loss
of $69 million due primarily to the impact of the metal
price ceilings, increased depreciation and amortization as a
result of our acquisition by Hindalco and sale transaction fees,
the last of which caused us to incur higher than normal
corporate costs. We believe that our operating results will
improve in fiscal 2009 primarily because (1) strong demand
in South America and Asia, (2) additional conversion
premium improvements and favorable mix, and (3) reduced
general and administrative costs as compared to the fiscal year
2008 as a result of the transaction.
55
Spin-off
from Alcan, Inc.
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 our opening balance sheet and issues
relating to the transfer of U.S. pension assets and
liabilities from Alcan to Novelis.
For the year ended March 31, 2008, the following occurred
relating to existing Alcan pension plans covering our employees:
a) In October 2007, we completed the transfer of U.K. plan
assets and liabilities from Alcan to Novelis. Plan liabilities
assumed exceeded plan assets received by $4 million. We
made an additional contribution of approximately $2 million
to the plan in February 2008.
b) In April 2008, Alcan transferred $49 million to the
Novelis Pension Plan (Canada) for the first payment. We expect
to receive a second payment of $1 million by the end of
fiscal year 2009. Plan liabilities assumed is expected to equal
plan assets to be received.
OPERATIONS
AND SEGMENT REVIEW
The following discussion and analysis is based on our
consolidated and combined statements of operations, which
reflect our results of operations for the fiscal year ended
March 31, 2008 (as prepared on a combined non-GAAP basis),
and the years ended March 31, 2007 (as prepared on a
combined non-GAAP basis), December 31, 2006 and 2005.
The following tables present our shipments, our results of
operations, prices for aluminum, oil and natural gas and key
currency exchange rates for the periods referred to above, and
the changes from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2006
|
|
|
|
Year Ended
|
|
|
versus
|
|
|
versus
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products, including tolling (the conversion of
customer-owned metal)
|
|
|
2,988
|
|
|
|
2,951
|
|
|
|
2,960
|
|
|
|
2,873
|
|
|
|
1.3
|
%
|
|
|
3.0
|
%
|
Ingot products, including primary and secondary ingot and
recyclable aluminum
|
|
|
162
|
|
|
|
162
|
|
|
|
163
|
|
|
|
214
|
|
|
|
|
%
|
|
|
(23.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
3,150
|
|
|
|
3,113
|
|
|
|
3,123
|
|
|
|
3,087
|
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2006
|
|
|
|
Year Ended
|
|
|
versus
|
|
|
versus
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Results of Operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,246
|
|
|
$
|
10,160
|
|
|
$
|
9,849
|
|
|
$
|
8,363
|
|
|
|
10.7
|
%
|
|
|
17.8
|
%
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
10,247
|
|
|
|
9,629
|
|
|
|
9,317
|
|
|
|
7,570
|
|
|
|
6.4
|
%
|
|
|
23.1
|
%
|
Selling, general and administrative expenses
|
|
|
414
|
|
|
|
417
|
|
|
|
410
|
|
|
|
352
|
|
|
|
(0.7
|
)%
|
|
|
16.5
|
%
|
Depreciation and amortization
|
|
|
395
|
|
|
|
233
|
|
|
|
233
|
|
|
|
230
|
|
|
|
69.5
|
%
|
|
|
1.3
|
%
|
Research and development expenses
|
|
|
52
|
|
|
|
39
|
|
|
|
40
|
|
|
|
41
|
|
|
|
33.3
|
%
|
|
|
(2.4
|
)%
|
Interest expense and amortization of debt issuance
costs net
|
|
|
199
|
|
|
|
208
|
|
|
|
206
|
|
|
|
194
|
|
|
|
(4.3
|
)%
|
|
|
6.2
|
%
|
Gain (loss) on change in fair value of derivative
instruments net
|
|
|
(42
|
)
|
|
|
(39
|
)
|
|
|
(63
|
)
|
|
|
(269
|
)
|
|
|
7.7
|
%
|
|
|
(76.6
|
)%
|
Equity in net (income) loss of non-consolidated affiliates
|
|
|
3
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
(6
|
)
|
|
|
(118.8
|
)%
|
|
|
166.7
|
%
|
Sale transaction fees
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Litigation settlement net of insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
%
|
|
|
n.m.
|
|
Other (income) expenses net
|
|
|
4
|
|
|
|
18
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(77.8
|
)%
|
|
|
n.m.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,304
|
|
|
|
10,521
|
|
|
|
10,127
|
|
|
|
8,139
|
|
|
|
7.4
|
%
|
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for taxes on income
(loss), minority interests share and cumulative effect of
accounting change
|
|
|
(58
|
)
|
|
|
(361
|
)
|
|
|
(278
|
)
|
|
|
224
|
|
|
|
(83.9
|
)%
|
|
|
(224.1
|
)%
|
Provision (benefit) for taxes on income (loss)
|
|
|
7
|
|
|
|
(99
|
)
|
|
|
(4
|
)
|
|
|
107
|
|
|
|
(107.1
|
)%
|
|
|
(103.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests share and
cumulative effect of accounting change
|
|
|
(65
|
)
|
|
|
(262
|
)
|
|
|
(274
|
)
|
|
|
117
|
|
|
|
(75.2
|
)%
|
|
|
(334.2
|
)%
|
Minority interests share
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(21
|
)
|
|
|
33.3
|
%
|
|
|
(95.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of accounting change
|
|
|
(69
|
)
|
|
|
(265
|
)
|
|
|
(275
|
)
|
|
|
96
|
|
|
|
(74.0
|
)%
|
|
|
(386.5
|
)%
|
Cumulative effect of accounting change net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
%
|
|
|
n.m.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(69
|
)
|
|
$
|
(265
|
)
|
|
$
|
(275
|
)
|
|
$
|
90
|
|
|
|
(74.0
|
)%
|
|
|
(405.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n.m. not meaningful
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2006
|
|
|
|
Year Ended
|
|
|
versus
|
|
|
versus
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
London Metal Exchange Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum (per metric tonne, and presented in U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing cash price as of end of period
|
|
$
|
2,935
|
|
|
$
|
2,792
|
|
|
$
|
2,850
|
|
|
$
|
2,285
|
|
|
|
5.1
|
%
|
|
|
24.7
|
%
|
Average cash price during period
|
|
$
|
2,624
|
|
|
$
|
2,665
|
|
|
$
|
2,567
|
|
|
$
|
1,897
|
|
|
|
(1.5
|
)%
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strengthen/(Weaken)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2006
|
|
|
|
Year Ended
|
|
|
versus
|
|
|
versus
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Federal Reserve Bank of New York Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average of the month end rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar per euro
|
|
|
1.432
|
|
|
|
1.294
|
|
|
|
1.266
|
|
|
|
1.240
|
|
|
|
(10.7
|
)%
|
|
|
(2.1
|
)%
|
Brazilian real per U.S. dollar
|
|
|
1.837
|
|
|
|
2.148
|
|
|
|
2.164
|
|
|
|
2.407
|
|
|
|
(14.5
|
)%
|
|
|
(10.1
|
)%
|
South Korean won per U.S. dollar
|
|
|
932
|
|
|
|
944
|
|
|
|
950
|
|
|
|
1,023
|
|
|
|
(1.3
|
)%
|
|
|
(7.1
|
)%
|
Canadian dollar per U.S. dollar
|
|
|
1.025
|
|
|
|
1.135
|
|
|
|
1.131
|
|
|
|
1.209
|
|
|
|
(9.7
|
)%
|
|
|
(6.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2006
|
|
|
|
Year Ended
|
|
|
versus
|
|
|
versus
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
New York Mercantile Exchange Energy Price
Quotations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Sweet Crude Average settlement price (per
barrel)
|
|
$
|
78.80
|
|
|
$
|
64.02
|
|
|
$
|
65.28
|
|
|
$
|
50.03
|
|
|
|
23.1
|
%
|
|
|
30.5
|
%
|
Natural Gas Average Henry Hub contract settlement
price (per MMBTU)(A)
|
|
$
|
7.18
|
|
|
$
|
6.67
|
|
|
$
|
7.23
|
|
|
$
|
8.62
|
|
|
|
7.6
|
%
|
|
|
(16.1
|
)%
|
|
|
|
(A) |
|
One MMBTU is the equivalent of one decatherm, or one million
British Thermal Units (BTUs). |
RESULTS
OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2008 (TWELVE MONTHS
COMBINED NON-GAAP) COMPARED TO THE YEAR ENDED MARCH 31, 2007
(TWELVE MONTHS COMBINED NON-GAAP)
Shipments
Rolled products shipments increased in fiscal 2008 primarily due
to increased shipments in the can market in Europe, South
America and Asia. The increase in demand for can products was
partially offset by decreased shipments in the industrial and
automotive markets in North America and Europe.
58
Net
sales
Net sales for the year ended March 31, 2008 increased from
the prior year due to (1) increased conversion premium of
$250 million, (2) accretion of fair value reserves
associated with the can ceiling contracts of $270 million,
(3) strengthening of the euro against the U.S. dollar
of $150 million, (4) metal price lag of
$100 million, (5) increased volume of $54 million
and (6) reduction of net sales under metal price ceiling
contracts of $230 million. These metal price ceilings
prevent us from passing metal price increases above a specified
level through to certain customers.
Net sales for 2008 were adversely impacted in North America due
to price ceilings on certain sales contracts, which limited our
ability to pass through approximately $230 million of metal
purchase costs. In comparison, we were unable to pass through
approximately $460 million of metal purchase costs in the
comparable prior year period, for a net favorable impact of
approximately $230 million.
Costs
and expenses
The following table presents our costs and expenses for the
years ended March 31, 2008 and 2007, in dollars and
expressed as percentages of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$ in
|
|
|
% of
|
|
|
$ in
|
|
|
% of
|
|
|
|
millions
|
|
|
net sales
|
|
|
millions
|
|
|
net sales
|
|
|
|
Combined
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
$
|
10,247
|
|
|
|
91.1
|
%
|
|
$
|
9,629
|
|
|
|
94.8
|
%
|
Selling, general and administrative expenses
|
|
|
414
|
|
|
|
3.7
|
%
|
|
|
417
|
|
|
|
4.1
|
%
|
Depreciation and amortization
|
|
|
395
|
|
|
|
3.5
|
%
|
|
|
233
|
|
|
|
2.3
|
%
|
Research and development expenses
|
|
|
52
|
|
|
|
0.5
|
%
|
|
|
39
|
|
|
|
0.4
|
%
|
Interest expense and amortization of debt issuance
costs net
|
|
|
199
|
|
|
|
1.8
|
%
|
|
|
208
|
|
|
|
2.0
|
%
|
Gain (loss) on change in fair value of derivative
instruments net
|
|
|
(42
|
)
|
|
|
(0.4
|
)%
|
|
|
(39
|
)
|
|
|
(0.4
|
)%
|
Equity in net (income) loss of non-consolidated affiliates
|
|
|
3
|
|
|
|
|
%
|
|
|
(16
|
)
|
|
|
(0.2
|
)%
|
Sale transaction fees
|
|
|
32
|
|
|
|
0.3
|
%
|
|
|
32
|
|
|
|
0.3
|
%
|
Other (income) expenses net
|
|
|
4
|
|
|
|
|
%
|
|
|
18
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,304
|
|
|
|
100.5
|
%
|
|
$
|
10,521
|
|
|
|
103.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold. Metal represents
approximately 70% 80% of our input costs, and as a
percentage of net sales, cost of goods sold was adversely
impacted in both periods due to price ceilings on certain sales
contracts, as discussed above; however, the current year
benefited from less volume sold under these contracts, as well
as the accretion of the contract fair value reserves. As a
percentage of net sales, cost of goods sold also improved as a
result of pricing improvements across all regions, partially
offset by certain operational cost increases.
Selling, general and administrative expenses
(SG&A). SG&A decreased slightly as a
result of corporate costs which were approximately
$21 million lower, offset by increased stock compensation
costs associated with our acquisition by Hindalco. Corporate
cost reductions were driven primarily by reduced spending on
third party consultants at our corporate headquarters and lower
long-term incentive compensation.
Depreciation and amortization. Depreciation
and amortization increased due to our acquisition by Hindalco.
As a result of the acquisition, the consideration paid by
Hindalco has been pushed down to us and allocated to the assets
acquired and liabilities assumed based on their estimated fair
value. As a result, property, plant and equipment and intangible
assets increased approximately $2.3 billion. The increase
in asset
59
values, all of which is non-cash, is charged to depreciation and
amortization expense in future periods based on the estimated
useful lives of the individual assets.
Research and development expenses. Research
and development expenses increased compared to the prior year
due to the accounting associated with our acquisition by
Hindalco. For the year ended March 31, 2008, we recorded a
charge of $9 million for the estimated value of acquired
in-process research and development projects that had not yet
reached technological feasibility.
Interest expense and amortization of debt issuance
costs net. Interest expense declined
primarily due to the elimination of penalty interest incurred in
the prior year as a result of our delayed filings and lower
interest rates on our variable rate debt in the current year.
Sale transaction fees. We incurred
$32 million of fees and expenses related to the Arrangement
during each of the years ended March 31, 2008 and 2007.
Other (income) expenses net. The
reconciliation of the difference between the years is shown
below (in millions):
|
|
|
|
|
|
|
Other (Income)
|
|
|
|
Expenses Net
|
|
|
Other (income) expenses net for the year ended
March 31, 2007
|
|
$
|
18
|
|
Restructuring charges net of $7 million in 2008
compared to $27 million in 2007
|
|
|
(20
|
)
|
Exchange losses of $2 million in 2008 compared to
$3 million in 2007
|
|
|
(1
|
)
|
Impairment charges on long-lived assets of $1 million in
2008 compared to $8 million in 2007
|
|
|
(7
|
)
|
Gain on sale of equity interest in non-consolidated affiliate in
2007 only
|
|
|
15
|
|
Gain on sale of rights to develop and operate hydroelectric
power plants in 2007 only
|
|
|
11
|
|
Losses on disposals of property, plant and equipment
net in 2007 only
|
|
|
(6
|
)
|
Other net
|
|
|
(6
|
)
|
|
|
|
|
|
Other (income) expenses net for the year ended
March 31, 2008
|
|
$
|
4
|
|
|
|
|
|
|
Provision
(benefit) for taxes on income (loss)
For the year ended March 31, 2008, we recorded a
$7 million provision for taxes on our pre-tax loss of
$55 million, before our equity in net (income) loss of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of (13)%. Our effective
tax rate is greater than the benefit at the Canadian statutory
rate due primarily to (1) a $78 million benefit from
the effects of enacted tax rate changes on cumulative taxable
temporary differences, partially offset by (2) a
$30 million of exchange remeasurement of deferred income
taxes, (3) a $62 million for (a) pre-tax foreign
currency gains or losses with no tax effect and (b) the tax
effect of U.S. dollar denominated currency gains or losses
with no pre-tax effect and (4) a $7 million decrease
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
(5) $17 million increase in uncertain tax positions
recorded under the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes.
For the year ended March 31, 2007, we recorded a
$99 million benefit for taxes on our pre-tax loss of
$377 million, before our equity in net (income) loss of
non-consolidated affiliates and minority interests share,
which represented an effective tax rate of 26%. Our effective
tax rate is less than the benefit at the Canadian statutory rate
due primarily to a $65 million benefit from differences
between the Canadian statutory and foreign effective tax rates
applied to entities in different jurisdictions, more than offset
by (1) a $61 million increase in valuation allowances
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) an $11 million expense from expense/
60
income items with no tax effect net and (3) a
$11 million for (a) pre-tax foreign currency gains or
losses with no tax effect and (b) the tax effect of
U.S. dollar denominated currency gains or losses with no
pre-tax effect.
Net
income (loss)
We reported a net loss of $69 million for the year ended
March 31, 2008, compared to a net loss of $265 million
for the year ended March 31, 2007. The reduction in net
loss was primarily driven by the decrease in net sales under
metal price ceiling contracts as discussed above.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2005
Shipments
Rolled products shipments increased in 2006 primarily due to
increased shipments in the can market in North America, South
America and Europe, as well as increased shipments of hot and
cold rolled intermediate products in Europe. Ingot product
shipments declined in fiscal 2006 due to the closure of our
Borgofranco, Italy facility and lower re-melt shipments in
Europe.
Net
sales
Higher net sales for the year ended December 31, 2006
compared to 2005 resulted primarily from the increase in LME
metal conversion premiums, which was 35% higher on average
during 2006 than 2005. Metal represents approximately
60% 70% of the sales value of our products. Net
sales for 2006 was adversely impacted in North America due to
price ceilings on certain can contracts, which limited our
ability to pass through approximately $475 million of metal
price increases. During 2005, we were unable to pass through
approximately $75 million of metal price increases, for a
net unfavorable comparable impact of approximately
$400 million.
Costs
and expenses
The following table presents our costs and expenses for the
years ended December 31, 2006 and 2005, in dollars and
expressed as percentages of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
$ in
|
|
|
% of
|
|
|
$ in
|
|
|
% of
|
|
|
|
millions
|
|
|
net sales
|
|
|
millions
|
|
|
net sales
|
|
|
|
Predecessor
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
$
|
9,317
|
|
|
|
94.6
|
%
|
|
$
|
7,570
|
|
|
|
90.5
|
%
|
Selling, general and administrative expenses
|
|
|
410
|
|
|
|
4.1
|
%
|
|
|
352
|
|
|
|
4.2
|
%
|
Depreciation and amortization
|
|
|
233
|
|
|
|
2.4
|
%
|
|
|
230
|
|
|
|
2.8
|
%
|
Research and development expenses
|
|
|
40
|
|
|
|
0.4
|
%
|
|
|
41
|
|
|
|
0.5
|
%
|
Interest expense and amortization of debt issuance
costs net
|
|
|
206
|
|
|
|
2.1
|
%
|
|
|
194
|
|
|
|
2.3
|
%
|
Gain (loss) on change in fair value of derivative
instruments net
|
|
|
(63
|
)
|
|
|
(0.6
|
)%
|
|
|
(269
|
)
|
|
|
(3.2
|
)%
|
Equity in net (income) loss of non-consolidated affiliates
|
|
|
(16
|
)
|
|
|
(0.2
|
)%
|
|
|
(6
|
)
|
|
|
(0.1
|
)%
|
Litigation settlement net of insurance recoveries
|
|
|
|
|
|
|
|
%
|
|
|
40
|
|
|
|
0.5
|
%
|
Other (income) expenses net
|
|
|
|
|
|
|
|
%
|
|
|
(13
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,127
|
|
|
|
102.8
|
%
|
|
$
|
8,139
|
|
|
|
97.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Cost of goods sold. Metal represents
approximately 70% 80% of our input costs, and the
increase in cost of goods sold in dollar terms is primarily due
to the impact of higher LME prices. As a percentage of net
sales, cost of goods sold for 2006 was adversely impacted due to
metal price ceilings on certain can contracts, which limited our
ability to pass through approximately $475 million of metal
price increases as described above. During 2005, we were unable
to pass through approximately $75 million of metal price
increases. Further, we experienced adverse impacts from higher
energy and transportation costs in all regions and unfavorable
exchange rate impacts, most notably in South America.
Selling, general and administrative
expenses. SG&A increased in 2006 primarily
because corporate costs increased from $72 million in 2005
to $127 million in 2006. Higher corporate costs were driven
by (1) an incremental $23 million of consulting,
legal, audit and other professional fees incurred in connection
with the restatement and review process, delayed filings and as
a result of our continued reliance on third party consultants to
support our financial reporting requirements,
(2) approximately $10 million of severance associated
with certain corporate executives, (3) $11 million of
incremental stock compensation expense primarily associated with
changes in fair values of previously issued share-based awards
that are settled in cash and the option plan amendment approved
during the fourth quarter, as described in
Note 13 Share-Based Compensation to our
consolidated and combined financial statements and
(4) generally higher employee costs as a result of
additional permanent hires made since our inception.
Interest expense and amortization of debt issuance
costs net. In 2005, we expensed
$11 million in debt issuance fees on undrawn credit
facilities during our first quarter used to back up the Alcan
notes we received in January 2005 as part of the spin-off.
Excluding the debt issuance fees, interest expense increased in
2006 over 2005 primarily as a result of (1) penalty
interest we incurred during 2006 due to the late filing of our
financial statements and (2) higher interest rates on our
remaining variable rate debt, which were partially offset by
lower interest expense as a result of reduced debt levels.
Gain (loss) on change in fair value of derivative
instruments net. The decreased loss
on change in fair value of derivative instruments primarily
reflects the impact of higher LME forward prices.
Litigation settlement net of insurance
recoveries. We recorded a $40 million
pre-tax charge in 2005 in connection with the Reynolds Boat Case
as described in Note 19 Commitments and
Contingencies to our consolidated and combined financial
statements.
Other (income) expenses net. The
reconciliation of the difference between the years is shown
below (in millions).
|
|
|
|
|
|
|
Other (Income)
|
|
|
|
Expenses Net
|
|
|
Other (income) expenses net for the year ended
December 31, 2005
|
|
$
|
(13
|
)
|
Restructuring charges net of $19 million in
2006 compared to $10 million in 2005
|
|
|
9
|
|
Exchange gains of $8 million in 2006 compared to
$6 million in 2005
|
|
|
(2
|
)
|
Impairment charges on long lived assets in 2005 only
|
|
|
(7
|
)
|
Loss on disposal of business in 2006 only
|
|
|
15
|
|
Gain on sale of equity interest in non-consolidated affiliate in
2006 only
|
|
|
(15
|
)
|
Gain on sale of rights to develop and operate hydroelectric
power plants in 2006 only
|
|
|
(11
|
)
|
Losses on disposals of property, plant and equipment
net of $5 million 2006 compared to gains of
$17 million in 2005
|
|
|
22
|
|
Other net
|
|
|
2
|
|
|
|
|
|
|
Other (income) expenses net for the year ended
December 31, 2006
|
|
$
|
|
|
|
|
|
|
|
During 2006, we announced several restructuring programs related
to our central management and administration offices in Zurich,
Switzerland; our Neuhausen research and development center in
Switzerland; our Goettingen facility in Germany; and the
reorganization of our plants in Ohle and Ludenscheid, Germany,
62
including the closing of two non-core business lines located
within those facilities. Additionally, during 2006, we continued
to incur costs relating to the shutdown of our Borgofranco
facility in Italy. We incurred aggregate restructuring charges
of approximately $16 million in 2006 in connection with
these programs. Restructuring charges in 2005 were substantially
attributable to provisions we made in the fourth quarter after
announcing our intent to close our Borgofranco foundry alloys
business. See Note 3 Restructuring Programs to
our accompanying consolidated and combined financial statements.
During 2005 we incurred a $5 million impairment charge on
the value of the property, plant and equipment at the
Borgofranco foundry alloys business. See Note 6
Property, Plant and Equipment to our consolidated and combined
financial statements.
During both 2006 and 2005, we disposed of certain businesses,
equity interests not considered core to our ongoing business,
rights, and fixed assets. See Note 17 Other
(income) expenses net to our consolidated and
combined financial statements.
Provision
(benefit) for taxes on income (loss)
For the year ended December 31, 2006, our income tax
benefit includes $71 million of increases 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
$15 million of expense due to pre-tax foreign currency
gains or losses with no tax effect and the tax effect of
U.S. dollar denominated currency gains or losses with no
pre-tax effect, collectively referred to as exchange translation
items.
For the year ended December 31, 2005, our provision for
income taxes includes expense of $23 million related to
exchange translation items and a benefit of $10 million
associated with out-of-period adjustments. From an effective tax
rate perspective, these are the primary explanations why our
effective tax provision or benefit differs from that at the
Canadian statutory tax rate of 33%.
Net
income (loss)
We reported a net loss of $275 million for the year ended
December 31, 2006 compared to net income of
$90 million for the year ended December 31, 2005. Net
income for 2005 included our consolidated net income of
$119 million for the period from January 6, 2005 (the
effective date of the spin-off) to December 31, 2005 and a
combined net loss of $29 million on the mark-to-market of
derivative instruments, primarily with Alcan, for the period
from January 1 to January 5, 2005, prior to the spin-off,
as described in Note 1 Business and Summary of
Significant Accounting Policies Basis of
Presentation, Consolidation and Combination: Year Ended
December 31, 2005 to our consolidated and combined
financial statements.
OPERATING
SEGMENT REVIEW FOR THE YEAR ENDED MARCH 31, 2008 (TWELVE MONTHS
COMBINED NON-GAAP) COMPARED TO THE YEAR ENDED MARCH 31, 2007
(TWELVE MONTHS COMBINED NON-GAAP) AND FOR THE YEAR ENDED
DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31,
2005
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.
As a result of the acquisition by Hindalco, and based on the way
our President and Chief Operating Officer (our chief operating
decision-maker) reviews the results of segment operations, we
changed our segment performance measure to Segment Income, as
defined below. As a result, certain prior period amounts have
been reclassified to conform to the new segment performance
measure.
We measure the profitability and financial performance of our
operating segments, based on Segment Income, in accordance with
FASB Statement No. 131, Disclosure About the Segments of
an Enterprise and Related Information. Segment Income
provides a measure of our underlying segment results that is in
line with our portfolio approach to risk management. We define
Segment Income as earnings before (a) interest expense and
amortization of debt issuance costs net;
(b) unrealized gains (losses) on change in fair value of
63
derivative instruments net; (c) realized gains
(losses) on corporate derivative instruments net;
(d) depreciation and amortization; (e) impairment
charges on long-lived assets; (f) minority interests
share; (g) adjustments to reconcile our proportional share
of Segment Income from non-consolidated affiliates to income as
determined on the equity method of accounting;
(h) restructuring charges net; (i) gains
or losses on disposals of property, plant and equipment and
businesses net; (j) corporate selling, general
and administrative expenses; (k) other costs
net; (l) litigation settlement net of insurance
recoveries; (m) sale transaction fees; (n) provision
or benefit for taxes on income (loss) and (o) 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 in the
accompanying consolidated and combined financial statements
included in this Annual Report on
Form 10-K.
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 consolidated and
combined statements of operations, changes in fair value of
derivative instruments not accounted for as hedges under FASB
Statement No. 133 are recognized in (Gain) loss on change
in fair value of derivative instruments net. These
gains or losses may or may not result from cash settlement. For
Segment Income purposes we only include the impact of the
derivative gains or losses to the extent they are settled in
cash (i.e., realized) during that period.
As discussed above, the Arrangement created a new basis of
accounting. Under GAAP, the consolidated financial statements
for our fiscal year ended March 31, 2008 are presented in
two distinct periods, as Predecessor and Successor entities are
not comparable in all material respects. However, in order to
facilitate a discussion of our segment information for the year
ended March 31, 2008 in comparison with the year ended
March 31, 2007, our Predecessor and Successor segment
information is presented herein on a combined basis. The
combined segment information are non-GAAP financial measures and
should not be used in isolation or substitution of the
Predecessor and Successor segment information.
Net
sales
Shown below is the schedule of Net sales by operating segment
for periods attributable to the Successor, Predecessor and the
combined presentation for the year ended March 31, 2008
that we use throughout MD&A (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Combined Net sales by Operating Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,655
|
|
|
|
$
|
446
|
|
|
$
|
4,101
|
|
Europe
|
|
|
3,828
|
|
|
|
|
510
|
|
|
|
4,338
|
|
Asia
|
|
|
1,602
|
|
|
|
|
216
|
|
|
|
1,818
|
|
South America
|
|
|
885
|
|
|
|
|
109
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Combined Net sales(A)
|
|
$
|
9,970
|
|
|
|
$
|
1,281
|
|
|
$
|
11,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Combined Net sales do not include the elimination of results
from our non-consolidated affiliates on a proportionately
consolidated basis. The Net sales attributable to our
non-consolidated affiliates were $5 million for the period
from May 16, 2007 through March 31, 2008 and less than
$1 million for the period from April 1, 2007 through
May 15, 2007. |
64
Segment
Income
Shown below is the schedule of our reconciliation from Total
Segment Income (Loss) to Net income (loss) by operating segment
for periods attributable to the Successor, Predecessor and the
combined presentation for the year ended March 31, 2008
that we use throughout MD&A (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Combined Results by Operating Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
266
|
|
|
|
$
|
(24
|
)
|
|
$
|
242
|
|
Europe
|
|
|
241
|
|
|
|
|
32
|
|
|
|
273
|
|
Asia
|
|
|
46
|
|
|
|
|
6
|
|
|
|
52
|
|
South America
|
|
|
143
|
|
|
|
|
18
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Income (Loss)
|
|
|
696
|
|
|
|
|
32
|
|
|
|
728
|
|
Interest expense and amortization of debt issuance
costs net
|
|
|
(173
|
)
|
|
|
|
(26
|
)
|
|
|
(199
|
)
|
Unrealized gains (losses) on change in fair value of derivative
instruments net(A)
|
|
|
(8
|
)
|
|
|
|
5
|
|
|
|
(3
|
)
|
Realized gains (losses) on corporate derivative
instruments net
|
|
|
16
|
|
|
|
|
(3
|
)
|
|
|
13
|
|
Depreciation and amortization
|
|
|
(367
|
)
|
|
|
|
(28
|
)
|
|
|
(395
|
)
|
Impairment charges on long-lived assets
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
(1
|
)
|
Minority interests share
|
|
|
(5
|
)
|
|
|
|
1
|
|
|
|
(4
|
)
|
Adjustment to eliminate proportional consolidation(B)
|
|
|
(65
|
)
|
|
|
|
(7
|
)
|
|
|
(72
|
)
|
Restructuring charges net
|
|
|
(6
|
)
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
Corporate selling, general and administrative expenses
|
|
|
(55
|
)
|
|
|
|
(35
|
)
|
|
|
(90
|
)
|
Other costs net
|
|
|
(1
|
)
|
|
|
|
1
|
|
|
|
|
|
Sale transaction fees
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Benefit (provision) for taxes on income (loss)
|
|
|
(3
|
)
|
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28
|
|
|
|
$
|
(97
|
)
|
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Unrealized gains (losses) on change in fair value of derivative
instruments net represents the portion of gains
(losses) that were not settled in cash during the period. |
|
|
|
(B) |
|
Our financial information for our segments (including Segment
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 Segment Income to Net income (loss), the
proportional Segment Income of these non-consolidated affiliates
is removed from Total Segment Income, net of our share of their
net after-tax results, which is reported as Equity in net
(income) loss of non-consolidated affiliates on our consolidated
and combined statements of operations. See
Note 8 Investment in and Advances to
Non-Consolidated Affiliates and Related Party Transactions in
the accompanying consolidated and combined financial statements
for further information about these non-consolidated affiliates. |
65
Reconciliation
The following table presents Segment Income (Loss) by operating
segment and reconciles Total Segment Income to Net income (loss)
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Segment Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
242
|
|
|
$
|
(54
|
)
|
|
$
|
20
|
|
|
$
|
193
|
|
Europe
|
|
|
273
|
|
|
|
276
|
|
|
|
245
|
|
|
|
195
|
|
Asia
|
|
|
52
|
|
|
|
72
|
|
|
|
82
|
|
|
|
106
|
|
South America
|
|
|
161
|
|
|
|
182
|
|
|
|
165
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Income (Loss)
|
|
|
728
|
|
|
|
476
|
|
|
|
512
|
|
|
|
606
|
|
Interest expense and amortization of debt issuance
costs net
|
|
|
(199
|
)
|
|
|
(208
|
)
|
|
|
(206
|
)
|
|
|
(194
|
)
|
Unrealized gains (losses) on change in fair value of derivative
instruments net
|
|
|
(3
|
)
|
|
|
(152
|
)
|
|
|
(151
|
)
|
|
|
141
|
|
Realized gains (losses) on corporate derivative
instruments net
|
|
|
13
|
|
|
|
(37
|
)
|
|
|
(35
|
)
|
|
|
45
|
|
Depreciation and amortization
|
|
|
(395
|
)
|
|
|
(233
|
)
|
|
|
(233
|
)
|
|
|
(230
|
)
|
Impairment charges on long-lived assets
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(7
|
)
|
Minority interests share
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(21
|
)
|
Adjustment to eliminate proportional consolidation
|
|
|
(72
|
)
|
|
|
(36
|
)
|
|
|
(35
|
)
|
|
|
(36
|
)
|
Restructuring charges net
|
|
|
(7
|
)
|
|
|
(27
|
)
|
|
|
(19
|
)
|
|
|
(10
|
)
|
Gain (loss) on disposals of property, plant and equipment and
businesses net
|
|
|
|
|
|
|
(6
|
)
|
|
|
(20
|
)
|
|
|
17
|
|
Corporate selling, general and administrative expenses
|
|
|
(90
|
)
|
|
|
(127
|
)
|
|
|
(128
|
)
|
|
|
(78
|
)
|
Other costs net
|
|
|
|
|
|
|
29
|
|
|
|
37
|
|
|
|
10
|
|
Litigation settlement net of insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
Sale transaction fees
|
|
|
(32
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
Benefit (provision) for taxes on income (loss)
|
|
|
(7
|
)
|
|
|
99
|
|
|
|
4
|
|
|
|
(107
|
)
|
Cumulative effect of accounting change net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(69
|
)
|
|
$
|
(265
|
)
|
|
$
|
(275
|
)
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Segment Results
North
America
As of March 31, 2008, 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.
66
The following table presents key financial and operating
information for North America (in millions, except for
shipments, which are in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2006
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,102
|
|
|
|
1,135
|
|
|
|
1,156
|
|
|
|
1,119
|
|
|
|
(2.9
|
)%
|
|
|
3.3
|
%
|
Ingot products
|
|
|
64
|
|
|
|
74
|
|
|
|
73
|
|
|
|
75
|
|
|
|
(13.5
|
)%
|
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,166
|
|
|
|
1,209
|
|
|
|
1,229
|
|
|
|
1,194
|
|
|
|
(3.6
|
)%
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,101
|
|
|
$
|
3,721
|
|
|
$
|
3,691
|
|
|
$
|
3,265
|
|
|
|
10.2
|
%
|
|
|
13.0
|
%
|
Segment Income (Loss)
|
|
$
|
242
|
|
|
$
|
(54
|
)
|
|
$
|
20
|
|
|
$
|
193
|
|
|
|
548.1
|
%
|
|
|
(89.6
|
)%
|
Total assets
|
|
$
|
3,892
|
|
|
$
|
1,566
|
|
|
$
|
1,476
|
|
|
$
|
1,547
|
|
|
|
148.5
|
%
|
|
|
(4.6
|
)%
|
2008
versus 2007
Shipments
Rolled products shipments declined due to reduced industrial
products, light gauge and lower can volumes. Industrial products
and light gauge demand has declined primarily due to a slowdown
in the housing and transportation markets. Ingot product
shipments declined during the year ended March 31, 2008 due
to lower scrap sales and improved internal use of primary ingot,
excess amounts of which were sold to third parties in the year
ended March 31, 2007.
Net
sales
Net sales increased primarily as a result of reduced exposure to
contracts with price ceilings and contract fair value accretion
as discussed above in Metal Price Ceilings. During the fiscal
year ended March 31, 2008, we were unable to pass through
approximately $230 million of metal purchase costs. During
the comparable prior year period, we were unable to pass through
approximately $460 million of metal purchase costs, for a
net favorable comparable impact of approximately
$230 million. Sales during the fiscal year 2008 were also
favorably impacted by (1) increase in conversion premium of
$59 million, (2) contracts priced in prior periods of
$59 million and (3) $270 million related to the
accretion of the contract fair value reserves, as discussed in
Metal Price Ceilings. These factors were partially offset by
unfavorable volume of $165 million and lower average LME of
approximately $90 million.
Segment
Income
As compared to the year ended March 31, 2007, Segment
Income for the year ended March 31, 2008 was favorably
impacted by $500 million as a result of the impact of the
price ceilings (including the accretion of the contract fair
value reserves), described above. Segment Income was also
positively impacted by approximately $53 million due to
higher selling prices. These positive factors were partially
offset by (1) the negative impact of metal price lag which
unfavorably impacted Segment Income by $30 million as
compared to 2007, (2) lower realized gains related to the
cash settlement of derivatives of approximately
$115 million, (3) lower volume which negatively
impacted Segment Income by approximately $29 million,
(4) higher operating expense of approximately
$41 million, (5) incremental stock compensation
expense of $11 million as a result of the Arrangement and
(6) $29 million of additional expenses associated with
other fair value adjustments recorded as a result of the
Arrangement.
Total
assets
The consideration and related costs paid by Hindalco in
connection with the Arrangement have been pushed down to us and,
in turn, to each of our reporting units, and have been allocated
to the assets acquired
67
and liabilities assumed based on their relative fair values.
This increased North America assets by approximately
$2.5 billion as fair value exceeded historical cost. See
Note 2 Acquisition of Novelis Common Stock in
the accompanying consolidated and combined financial statements.
2006
versus 2005
Shipments
Rolled products shipments increased due to a 35kt increase in
orders in the can market. Small increases in foil shipments due
to increased market share and shipments in the OEM/distributor
market were offset by lower shipments into the light gauge
automotive finstock and automotive sheet markets.
Net
sales
Net sales increases in the year ended December 31, 2006
compared to 2005 were driven primarily by metal prices, which
were 35% higher on average in 2006 compared to 2005. Increases
in metal prices are largely passed through to customers.
However, the pass through of metal price increases to our
customers was limited in cases where metal price ceilings were
exceeded. This factor unfavorably impacted North America net
sales in the year ended December 31, 2006 by approximately
$475 million. During 2005, we were unable to pass through
approximately $75 million of metal price increases, for a
net unfavorable comparable impact of approximately
$400 million.
Segment
Income
As described above, the net unfavorable impact of metal price
ceilings was approximately $400 million, which reduced
Segment Income in 2006 as compared to 2005. This was partially
offset by $128 million of gains from the cash settlement of
derivative instruments and $72 million from the benefit of
metal price lag in 2006. Price increases added approximately
$37 million to Segment Income in 2006, partially offset by
$7 million related to the unfavorable impact of changes in
mix. Additionally, increased volume and higher UBC spreads
favorably impacted Segment Income in 2006 by $21 million
and $19 million, respectively, as compared to 2005. These
benefits were partially offset by higher operating costs of
$43 million, $23 million of which was higher energy
and transportation costs.
Europe
As of March 31, 2008, Europe 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.
The following table presents key financial and operating data
for Europe (in millions, except for shipments, which are in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2006
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
1,055
|
|
|
|
1,009
|
|
|
|
|
%
|
|
|
4.6
|
%
|
Ingot products
|
|
|
35
|
|
|
|
15
|
|
|
|
18
|
|
|
|
72
|
|
|
|
133.3
|
%
|
|
|
(75.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
1,106
|
|
|
|
1,086
|
|
|
|
1,073
|
|
|
|
1,081
|
|
|
|
1.8
|
%
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,338
|
|
|
$
|
3,851
|
|
|
$
|
3,620
|
|
|
$
|
3,093
|
|
|
|
12.6
|
%
|
|
|
17.0
|
%
|
Segment Income
|
|
$
|
273
|
|
|
$
|
276
|
|
|
$
|
245
|
|
|
$
|
195
|
|
|
|
(1.1
|
)%
|
|
|
25.6
|
%
|
Total assets
|
|
$
|
4,430
|
|
|
$
|
2,543
|
|
|
$
|
2,474
|
|
|
$
|
2,139
|
|
|
|
74.2
|
%
|
|
|
15.7
|
%
|
68
2008
versus 2007
Shipments
Rolled products shipments were flat year over year driven by
increased can volume that was offset by lower volumes in painted
and general purpose products. Demand decreased due to lower
construction activity in the European market. Ingot product
shipments have increased as a result of higher scrap sales.
Net
sales
Net sales increased primarily as a result of
(1) incremental volume of ingot products, (2) a
strengthening euro against the U.S. dollar and
(3) higher conversion premiums. These factors contributed
approximately (1) $59 million,
(2) $150 million and (3) $115 million,
respectively. While average LME was lower year over year, net
sales increased from contracts priced in prior periods. This
contributed approximately $100 million to net sales as
compared to the prior year; however it did not deliver any
Segment Income increase as the metal costs were hedged at prior
period prices (which were comparably higher).
Segment
Income
Segment Income was favorably impacted in 2008 primarily by
higher conversion premiums, increased ingot sales volume and
currency benefits. These factors improved Segment Income during
the year ended March 31, 2008 by approximately
$53 million, $5 million and $16 million,
respectively, versus the comparable prior year period. However,
these positive factors were offset by unfavorable metal price
lag, share-based compensation expense and expenses associated
with fair value adjustments recorded as a result of the
Arrangement. These factors reduced Segment Income during the
year ended March 31, 2008 by approximately
$60 million, $6 million and $8 million,
respectively, on a comparable basis.
Total
assets
The consideration and related costs paid by Hindalco in
connection with the Arrangement have been pushed down to us and,
in turn, to each of our reporting units, and have been allocated
to the assets acquired and liabilities assumed based on their
relative fair values. This increased Europe assets by
approximately $1.8 billion as fair value exceeded
historical cost. See Note 2 Acquisition of
Novelis Common Stock in the accompanying consolidated and
combined financial statements.
2006
versus 2005
Shipments
Rolled products shipments increased primarily due to a 38kt
increase in hot rolled and cold rolled coil shipments (an
intermediate product) and an 18kt increase in can shipments.
Other market increases include 7kt in automotive and 6kt in each
of the painted and plain markets, driven by strong market
demand. These increases were partially offset by the sale of our
Annecy operation in March 2006, which reduced shipments in 2006
by 21kt. Ingot products shipments declined due to lower re-melt
shipments of 23kt and lower casting alloys shipments of 31kt due
to the closing of our Borgofranco, Italy facility.
Net
sales
Net sales increased primarily as a result of the 35% increase in
average LME metal prices, improved mix of rolled products
shipments versus ingot products, offset partially by unfavorable
metal price lag.
Segment
Income
Compared to 2005, Segment Income was impacted in 2006 by a
number of factors. Higher volume in 2006 favorably impacted
Segment Income by $41 million. Segment Income was
unfavorably impacted by $44 million due to sales to certain
customers at previously fixed forward prices. This negative
impact was directly offset by $44 million of cash-settled
derivative gains related to forward LME purchases entered into
69
back-to-back with the customer contracts. Metal price lag
related to inventory processing time favorably impacted 2006 by
approximately $4 million. Price, mix and other operational
improvements added $23 million to Segment Income in 2006
over 2005. The strengthening of the euro added $10 million
due to the translation of euro profits into U.S. dollars
and the effect of exchange gains and losses. Europe incurred
approximately $5 million of Novelis
start-up
costs in 2005 that did not recur in 2006. Finally, these
benefits were partially offset by a $33 million increase in
energy costs in 2006.
Total
assets
Total assets increased primarily due to the increase in metal
prices, which impacted both inventories and accounts receivable.
Asia
As of March 31, 2008, Asia operated three manufacturing
facilities, with production focused on foil, construction and
industrial, and beverage and food can end-use applications.
The following table presents key financial and operating data
for Asia (in millions, except for shipments, which are in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2006
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
491
|
|
|
|
460
|
|
|
|
471
|
|
|
|
483
|
|
|
|
6.7
|
%
|
|
|
(2.5
|
)%
|
Ingot products
|
|
|
39
|
|
|
|
45
|
|
|
|
45
|
|
|
|
41
|
|
|
|
(13.3
|
)%
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
530
|
|
|
|
505
|
|
|
|
516
|
|
|
|
524
|
|
|
|
5.0
|
%
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,818
|
|
|
$
|
1,711
|
|
|
$
|
1,692
|
|
|
$
|
1,391
|
|
|
|
6.3
|
%
|
|
|
21.6
|
%
|
Segment Income
|
|
$
|
52
|
|
|
$
|
72
|
|
|
$
|
82
|
|
|
$
|
106
|
|
|
|
(27.8
|
)%
|
|
|
(22.6
|
)%
|
Total assets
|
|
$
|
1,082
|
|
|
$
|
1,110
|
|
|
$
|
1,078
|
|
|
$
|
1,002
|
|
|
|
(2.5
|
)%
|
|
|
7.6
|
%
|
2008
versus 2007
Shipments
Rolled products shipments increased 31kt, primarily due to
increased demand in the can market. This increase was partially
offset by a decline of shipments in the industrial and foil
stock markets as a result of continued price pressure from
Chinese exports, driven by the difference in aluminum metal
prices on the Shanghai Futures Exchange and the LME.
Net
sales
Net sales increased approximately $132 million as a result
of higher conversion premiums and increased volume, and
contracts priced in prior periods. The contracts priced in prior
periods did not deliver any net sales increase as the metal
costs were hedged at prior period prices (which were comparably
higher). This was partially offset by lower average LME during
the fiscal year, which reduced net sales by $25 million.
Segment
Income
Segment Income was unfavorably impacted by (1) operational
cost increases of approximately $16 million primarily
related to energy and freight, (2) loss on realized
derivative instruments of $14 million, (3) incremental
stock compensation expense of $4 million as a result of the
Arrangement and (4) $6 million of additional expenses
associated with other fair value adjustments recorded as a
result of the Arrangement. However, these factors were partially
offset by a benefit of approximately $24 million from
increased volume and price.
70
Total
assets
The consideration and related costs paid by Hindalco in
connection with the Arrangement have been pushed down to us and,
in turn, to each of our reporting units, and have been allocated
to the assets acquired and liabilities assumed based on their
relative fair values. This increased Asia assets by
approximately $21 million as fair value exceeded historical
cost. See Note 2 Acquisition of Novelis Common
Stock in the accompanying consolidated and combined financial
statements.
2006
versus 2005
Shipments
Rolled products shipments for the year ended December 31,
2006 declined compared to 2005 due to reduced demand for certain
of our industrial and light gauge products resulting from the
higher LME prices and increasing price competition. Ingot
products shipments were higher due to increased regional
automotive demand.
Net
sales
Net sales increased primarily as a result of the 35% increase in
average LME metal prices, which was largely passed through to
customers, offset partially by lower shipments.
Segment
Income
Segment Income declined by approximately $15 million due to
higher operating and energy costs and by approximately
$9 million due to lower volume and an unfavorable mix.
South
America
As of March 31, 2008, South America operated two rolling
plants in Brazil along with two smelters, an alumina refinery,
bauxite mines and power generation facilities. South America
manufactures various aluminum rolled products, including can
stock, automotive and industrial sheet and light gauge for the
beverage and food can, construction and industrial and
transportation end-use markets.
The following table presents key financial and operating data
for South America (in millions, except for shipments, which are
in kt).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2006
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Shipments (kt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rolled products
|
|
|
324
|
|
|
|
285
|
|
|
|
278
|
|
|
|
261
|
|
|
|
13.7
|
%
|
|
|
6.5
|
%
|
Ingot products
|
|
|
24
|
|
|
|
28
|
|
|
|
27
|
|
|
|
27
|
|
|
|
(14.3
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipments
|
|
|
348
|
|
|
|
313
|
|
|
|
305
|
|
|
|
288
|
|
|
|
11.2
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
994
|
|
|
$
|
889
|
|
|
$
|
863
|
|
|
$
|
630
|
|
|
|
11.8
|
%
|
|
|
37.0
|
%
|
Segment Income
|
|
$
|
161
|
|
|
$
|
182
|
|
|
$
|
165
|
|
|
$
|
112
|
|
|
|
(11.5
|
)%
|
|
|
47.3
|
%
|
Total assets
|
|
$
|
1,478
|
|
|
$
|
821
|
|
|
$
|
821
|
|
|
$
|
790
|
|
|
|
80.0
|
%
|
|
|
3.9
|
%
|
2008
versus 2007
Shipments
Rolled products shipments increased during the year ended
March 31, 2008 over the comparable prior year period
primarily due to an increase in can shipments driven by strong
market demand. This was slightly offset by reductions in
shipments in the industrial products markets.
71
Net
sales
Net sales increased primarily as a result of increased price and
volume of approximately $120 million offset by an
unfavorable change in mix of approximately $25 million.
Segment
Income
Segment Income during the year ended March 31, 2008 was
favorably impacted primarily by (1) higher selling prices,
(2) higher realized gains on the cash settlement of
derivatives primarily related to currency hedging, and
(3) favorable social tax reserve adjustments. These factors
improved Segment Income for the year ended March 31, 2008
by approximately (1) $60 million,
(2) $33 million and (3) $6 million,
respectively. These positive factors were more than offset by
(1) metal price lag, (2) the strengthening of the
Brazilian real, (3) lower average LME during the fiscal
year, (4) higher operating costs and (5) incremental
expenses associated with fair value adjustments recorded as a
result of the Arrangement. These factors reduced Segment Income
by (1) $17 million, (2) $68 million,
(3) $13 million, (4) $13 million and
(5) $9 million, respectively, as compared to the prior
year.
Total
assets
The consideration and related costs paid by Hindalco in
connection with the Arrangement have been pushed down to us and,
in turn, to each of our reporting units, and have been allocated
to the assets acquired and liabilities assumed based on their
relative fair values. This increased South America assets by
approximately $584 million as fair value exceeded
historical cost. See Note 2 Acquisition of
Novelis Common Stock in the accompanying consolidated and
combined financial statements.
2006
versus 2005
Shipments
The increase in shipments in 2006 is explained by a 28kt
increase in can shipments driven by local market growth. This
was slightly offset by reductions in shipments in the foil and
industrial products markets.
Net
sales
The main drivers for the rise in net sales for 2006 over 2005
were the increase in LME prices, which added approximately
$115 million, while increased volume and reduced tolling
sales added approximately $125 million of additional net
sales.
Segment
Income
For the year ended December 31, 2006, we benefited from
rising LME metal prices in two ways. First, the output from our
smelters, representing approximately 85% of our raw material
input cost, has little or no correlation with LME metal price
movements. Second, we experienced favorable metal price lag
resulting from price increases. These two factors favorably
impacted Segment Income by approximately $41 million.
Segment Income for 2006 also benefited from a number of other
items as compared to 2005. These include approximately
$6 million of expenses incurred in 2005 associated with
certain labor claims which did not recur in 2006,
$10 million of gains from the cash settlement of derivative
instruments and other net cost reductions of approximately
$27 million. These benefits were partially offset by the
impact of a stronger Brazilian real, which was on average 10%
higher in 2006 as compared to 2005. This unfavorably impacted
Segment Income by $28 million as the majority of sales are
in U.S. dollars while local manufacturing costs are
incurred in Brazilian real.
LIQUIDITY
AND CAPITAL RESOURCES
As discussed above, the Arrangement created a new basis of
accounting. Under GAAP, the consolidated financial statements
for our fiscal year ended March 31, 2008 are presented in
two distinct periods, as Predecessor and Successor entities are
not comparable in all material respects. However, in order to
facilitate a
72
discussion of our liquidity and capital resources for the year
ended March 31, 2008 in comparison with the year ended
March 31, 2007, our Predecessor and Successor cash flows
are presented herein on a combined basis. The combined cash
flows are non-GAAP financial measures and should not be used in
isolation or substitution of the Predecessor and Successor cash
flows.
Cash
Flows
Shown below is a condensed combining schedule of cash flows for
periods attributable to the Successor, Predecessor and the
combined presentation for the year ended March 31, 2008
that we use throughout our discussion of liquidity and capital
resources (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2007
|
|
|
|
April 1, 2007
|
|
|
|
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
May 15, 2007
|
|
|
March 31, 2008
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
405
|
|
|
|
$
|
(230
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(185
|
)
|
|
|
|
(17
|
)
|
|
|
(202
|
)
|
Proceeds from sales of assets
|
|
|
8
|
|
|
|
|
|
|
|
|
8
|
|
Changes to investment in and advances to non-consolidated
affiliates
|
|
|
24
|
|
|
|
|
1
|
|
|
|
25
|
|
Proceeds from loans receivable net
related parties
|
|
|
18
|
|
|
|
|
|
|
|
|
18
|
|
Net proceeds from settlement of derivative instruments
|
|
|
37
|
|
|
|
|
18
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(98
|
)
|
|
|
|
2
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
92
|
|
|
|
|
|
|
|
|
92
|
|
Proceeds from issuance of debt
|
|
|
1,100
|
|
|
|
|
150
|
|
|
|
1,250
|
|
Principal repayments
|
|
|
(1,009
|
)
|
|
|
|
(1
|
)
|
|
|
(1,010
|
)
|
Short-term borrowings net
|
|
|
(241
|
)
|
|
|
|
60
|
|
|
|
(181
|
)
|
Dividends minority interests
|
|
|
(1
|
)
|
|
|
|
(7
|
)
|
|
|
(8
|
)
|
Debt issuance costs
|
|
|
(37
|
)
|
|
|
|
(2
|
)
|
|
|
(39
|
)
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(96
|
)
|
|
|
|
201
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
211
|
|
|
|
|
(27
|
)
|
|
|
184
|
|
Effect of exchange rate changes on cash balances held in
foreign currencies
|
|
|
13
|
|
|
|
|
1
|
|
|
|
14
|
|
Cash and cash equivalents beginning of period
|
|
|
102
|
|
|
|
|
128
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
326
|
|
|
|
$
|
102
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Free cash flow (which is a non-GAAP measure) consists of:
(a) Net cash provided by (used in) operating activities;
(b) less dividends and capital expenditures and
(c) plus net proceeds from settlement of derivative
instruments (which is net of premiums paid to purchase
derivative instruments). Dividends include those paid
73
by our less than wholly-owned subsidiaries to their minority
shareholders and dividends paid by us to our common shareholder.
Management believes that Free cash flow is relevant to investors
as it provides a measure of the cash generated internally that
is available for debt service and other value creation
opportunities. However, Free cash flow does not necessarily
represent cash available for discretionary activities, as
certain debt service obligations must be funded out of Free cash
flow. We believe the line on our consolidated and combined
statements of cash flows entitled Net cash provided by
(used in) operating activities is the most directly
comparable measure to Free cash flow. Our method of calculating
Free cash flow may not be consistent with that of other
companies.
In our discussion of Metal Price Ceilings, we have disclosed
that certain customer contracts contain a fixed aluminum (metal)
price ceiling beyond which the cost of aluminum cannot be passed
through to the customer, unless adjusted. During the years ended
March 31, 2008 and 2007; December 31, 2006 and 2005,
we were unable to pass through approximately $230 million
and $460 million; $475 million and $75 million,
respectively, of metal purchase costs associated with sales
under theses contracts. Net cash provided by operating
activities is negatively impacted by the same amounts, adjusted
for any timing difference between customer receipts and vendor
payments and offset partially by reduced income taxes. Based on
a March 31, 2008 aluminum price of $2,935 per tonne, and
our estimate of a range of shipment volumes, we estimate that we
will be unable to pass through aluminum purchase costs of
approximately $286 $312 million during fiscal
2009 and $215 $233 million in the aggregate
thereafter.
As a result of our acquisition by Hindalco, we established
reserves totaling $655 million as of May 15, 2007 to
record these contracts at fair value. Fair value effectively
represents the discounted cash flows of the forecasted metal
purchases in excess of the metal price ceilings contained in
these contracts. These reserves are being accreted into revenue
over the remaining lives of the underlying contracts, and this
accretion will not impact future cash flows.
The following table shows the reconciliation from Net cash
provided by (used in) operating activities to Free cash flow,
the ending balances of cash and cash equivalents and the change
between periods (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change Year
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2006
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
versus
|
|
|
versus
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2005
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
175
|
|
|
$
|
(166
|
)
|
|
$
|
16
|
|
|
$
|
449
|
|
|
$
|
341
|
|
|
$
|
(433
|
)
|
Dividends
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
(30
|
)
|
|
|
(34
|
)
|
|
|
2
|
|
|
|
4
|
|
Capital expenditures
|
|
|
(202
|
)
|
|
|
(119
|
)
|
|
|
(116
|
)
|
|
|
(178
|
)
|
|
|
(83
|
)
|
|
|
62
|
|
Net proceeds from settlement of derivative instruments
|
|
|
55
|
|
|
|
191
|
|
|
|
238
|
|
|
|
91
|
|
|
|
(136
|
)
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
20
|
|
|
$
|
(104
|
)
|
|
$
|
108
|
|
|
$
|
328
|
|
|
$
|
124
|
|
|
$
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
326
|
|
|
$
|
128
|
|
|
$
|
73
|
|
|
$
|
100
|
|
|
$
|
198
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
versus 2007
In 2008, net cash provided by operating activities increased as
a result of our reduced exposure to metal price ceiling
contracts as discussed above. For the year ended March 31,
2008 our exposure to metal price ceilings decreased by
approximately $230 million providing additional operating
cash flow as compared to the prior year.
In 2008, capital expenditures were higher due, in part, to the
construction of
Fusiontm ingot
casting lines in our European and Asian Segments as well as
additional planned maintenance activities, improvements to our
Yeongju hot mill and other ancillary upgrades. Net proceeds from
the settlement of derivative instruments contributed
$55 million to Free cash flow in 2008 as compared to
$191 million in 2007. Much of the proceeds received in 2007
related to aluminum call options purchased in the prior year to
hedge against the risk of rising aluminum prices.
74
In 2008, Free cash flow was used primarily to increase our
overall liquidity and pay for costs associated with the Hindalco
transaction. Although our total debt increased from
March 31, 2007 by $82 million, this was more than
offset by an increase in our cash and cash equivalents of
$198 million.
2006
versus 2005
In 2006, net cash provided by operating activities was
influenced primarily by two offsetting factors. First, we
incurred a net loss of $275 million, driven by the impact
of the metal price ceilings and higher corporate costs as a
result of the restatement and review process and continued
reliance on third party consultants. Second, these amounts were
offset by reductions in working capital primarily associated
with improvements in accounts payable management.
In 2006, capital expenditures were lower as a result of our
focus on reducing debt in 2006. Net proceeds from the settlement
of derivative instruments contributed $242 million to Free
cash flow in 2006 as compared to $148 million in 2005. Much
of the proceeds received in 2006 related to aluminum call
options purchased in 2005 to hedge against the risk of rising
aluminum prices in 2006.
In 2006, Free cash flow was used primarily to reduce debt, and
we were able to reduce total debt by an amount that exceeded
Free cash flow by reducing cash and cash equivalents on the
balance sheet by $27 million, as well as utilizing the
proceeds from certain asset sales and the collection of a loan
receivable.
In 2005, net cash provided by operating activities resulted
primarily from improvements in working capital evidenced by
inventory reductions and improved payables management. The
proceeds from the settlement of derivative instruments also
added significantly to Free cash flow although this was offset
slightly by the purchase of the aluminum call options described
above. In 2005, Free cash flow was also used primarily to reduce
debt.
Financing
Activities
Overview
As a result of our acquisition by Hindalco, we were required to
refinance our existing credit facility during the current year.
The details of the new credit facility are discussed below.
Additionally, we refinanced debt in Asia due to its scheduled
maturity, and we continue to maintain forfaiting and factoring
arrangements in Asia and South America that provide additional
liquidity in those segments. See Note 10 Debt
to our consolidated and combined financial statements for
additional information regarding our financing activities.
Senior
Secured Credit Facilities
In connection with our spin-off from Alcan, we entered into
senior secured credit facilities (Old Credit Facilities)
providing for aggregate borrowings of up to $1.8 billion.
The Old Credit Facilities consisted 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% (which was 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.
On April 27, 2007, our lenders consented to the sixth
amendment of our Old Credit Facilities. The amendment included
increasing the Term Loan B facility by $150 million. We
utilized the additional funds available under the Term Loan B
facility to reduce the outstanding balance of our
$500 million revolving credit facility. The additional
borrowing capacity under the revolving credit facility was used
to fund working capital requirements and certain costs
associated with the Arrangement, including the cash settlement
of share-based compensation arrangements and lender fees.
Additionally, the amendment included a limited waiver of the
change of control Event of Default (as defined) which
effectively extended the requirement to repay the Old Credit
Facilities to July 11, 2007.
On May 25, 2007, we entered into a Bank and Bridge
Facilities Commitment with affiliates of UBS and ABN AMRO, to
provide backstop assurance for the refinancing of our existing
indebtedness following the
75
Arrangement. The commitments from UBS and ABN AMRO, provided by
the banks on a 50%-50% basis, consisted of the following:
(1) a senior secured term loan of up to $1.06 billion;
(2) a senior secured asset-based revolving credit facility
of up to $900 million and (3) a commitment to issue up
to $1.2 billion of unsecured senior notes, if necessary.
The commitment contained terms and conditions customary for
facilities of this nature.
On July 6, 2007, we entered into new senior secured credit
facilities with a syndicate of lenders led by affiliates of UBS
and ABN AMRO (New Credit Facilities) providing for aggregate
borrowings of up to $1.76 billion. The New Credit
Facilities consist of (1) a $960 million seven-year
Term Loan facility (Term Loan facility) and (2) an
$800 million five year multi-currency asset-based revolving
credit line and letter of credit facility (ABL facility).
The proceeds from the Term Loan facility of $960 million,
drawn in full at the time of closing, and an initial draw of
$324 million under the ABL facility were used to pay off
our old credit facility, pay for debt issuance costs of the New
Credit Facilities and provide for additional working capital.
Mandatory minimum principal amortization payments under the Term
Loan facility are $2.4 million per calendar quarter. The
first minimum principal amortization payment was made on
September 30, 2007. Additional mandatory prepayments are
required to be made for certain collateral liquidations, asset
sales, debt and preferred stock issuances, equity issuances,
casualty events and excess cash flow (as defined in the New
Credit Facilities). Any unpaid principal is due in full on
July 6, 2014.
Under the Term Loan facility, loans characterized as alternate
base rate (ABR) borrowings bear interest annually at a rate
equal to the alternate base rate (which is the greater of
(a) the base rate in effect on a given day and (b) the
federal funds effective rate in effect on a given day, plus
0.50%) plus the applicable margin. Loans characterized as
Eurocurrency borrowings bear interest at an annual rate equal to
the adjusted LIBOR rate for the interest period in effect, plus
the applicable margin. Generally, for both the Term Loan
facility and ABL facility, interest rates reset every three
months and interest is payable on a monthly, quarterly, or other
periodic basis depending on the type of loan.
Borrowings under the ABL facility are generally based on 85% of
eligible accounts receivable and 75% to 85% of eligible
inventories. Commitment fees ranging from 0.25% to 0.375% are
based on average daily amounts outstanding under the ABL
facility during a fiscal quarter and are payable quarterly.
The New Credit Facilities include customary affirmative and
negative covenants. Under the ABL facility, if our excess
availability, as defined under the borrowing, is less than 10%
of the borrowing base, we are required to maintain a minimum
fixed charge coverage ratio of 1 to 1. Substantially all of our
assets are pledged as collateral under the New Credit Facilities.
We incurred debt issuance costs on our New Credit Facilities
totaling $32 million, including $8 million in fees
previously paid in conjunction with Bank and Bridge Facilities
Commitment. The unamortized amount of these costs was
$27 million as of March 31, 2008.
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.
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.
Pursuant to the terms of the indenture governing our Senior
Notes, we were obligated, within 30 days of 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 were purchased.
Consequently, we commenced a tender offer on May 16, 2007
to repurchase all of the outstanding Senior Notes at the
76
prescribed price. This offer expired on July 3, 2007 with
holders of approximately $1 million of principal presenting
their Senior Notes pursuant to the tender offer.
Korean
Bank Loans
In August 2007, we refinanced our Korean won (KRW)
40 billion ($40 million) floating rate long-term loan
due November 2007 with a floating rate short-term borrowing in
the amount of $40 million due by August 2008. We recognized
a loss on extinguishment of debt of less than $1 million in
connection with this refinancing. Additionally, we immediately
entered into an interest rate swap and cross currency swap for
the new loan through a 3.94% fixed rate KRW 38 billion
($38 million) loan.
On October 25, 2007, we entered into a $100 million
floating rate loan due October 2010 and immediately repaid our
$70 million floating rate loan. In December 2007, we repaid
our KRW 25 billion ($25 million) loan from the balance
of the proceeds of the $100 million floating rate loan.
Additionally, we immediately entered into an interest rate swap
and cross currency swap for the $100 million floating rate
loan through a 5.44% fixed rate KRW 92 billion
($92 million) loan.
Interest
Rate Swaps
During the quarter ended December 31, 2007, we entered into
interest rate swaps to fix the variable LIBOR interest rate for
up to $600 million of our floating rate Term Loan facility
at effective weighted average interest rates and amounts
expiring as follows: (i) 4.1% on $600 million through
September 30, 2008, (ii) 4.0% on $500 million
through March 31, 2009 and (iii) 4.0% on
$400 million through March 31, 2010. We are still
obligated to pay any applicable margin, as defined in our New
Credit Facilities, in addition to these interest rates.