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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
Form 10-K/A
Amendment No. 1
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended March 31, 2008
    Or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          .
 
Commission file number 001-32312
 
Novelis Inc.
(Exact name of registrant as specified in its charter)
 
     
Canada   98-0442987
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
3399 Peachtree Road NE, Suite 1500,
Atlanta, GA
(Address of principal executive offices)
  30326
(Zip Code)
 
(404) 814-4200
(Registrant’s 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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.  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):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of July 31, 2008, the registrant had 77,459,658 common shares outstanding. All of the Registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the Registrant’s parent company.
 
DOCUMENTS INCORPORATED BY REFERENCE
None
 


 

 
TABLE OF CONTENTS
 
                 
      EXPLANATORY NOTE
    2  
 
      Business     5  
      Risk Factors     26  
      Unresolved Staff Comments     37  
      Properties     37  
      Legal Proceedings     41  
      Submission of Matters to a Vote of Security Holders     44  
 
      Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     45  
      Selected Financial Data     45  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     48  
      Quantitative and Qualitative Disclosures About Market Risk     95  
      Financial Statements and Supplementary Data     99  
      Changes In and Disagreements With Accountants On Accounting and Financial Disclosure     209  
      Controls and Procedures     209  
      Other Information     212  
 
      Directors and Executive Officers of the Registrant     213  
      Executive Compensation     216  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     243  
      Certain Relationships and Related Transactions and Director Independence     243  
      Principal Accountant Fees and Services     243  
 
      Exhibits and Financial Statement Schedules     244  
 EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE PFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE PEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE PFO


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EXPLANATORY NOTE
 
As previously disclosed in our Current Report on Form 8-K dated August 1, 2008, our management and the audit committee of our Board of Directors have determined that our consolidated financial statements for periods subsequent to our acquisition by Hindalco, Ltd. on May 15, 2007, including the period from May 16, 2007 through March 31, 2008, the period from May 16, 2007 through June 30, 2007, the three months ended September 30, 2007 and the period from May 16, 2007 through September 30, 2007, and the three months ended December 31, 2007 and the period May 16, 2007 through December 31, 2007 (collectively the “Successor Periods”) should no longer be relied upon.
 
This Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ending March 31, 2008 (the “2008 Form 10-K”) restates the financial information in Item 8 of the 2008 Form 10-K (including corrections to the unaudited quarterly financial data for fiscal year 2008 in Note 22 — Quarterly Results) to reflect non-cash accounting adjustments to correct errors in our application of purchase accounting for an equity method investment which led to a misstatement of our provision for income taxes. The Company has also included in the appropriate periods in its restated consolidated financial statements other miscellaneous adjustments that were deemed to be not material by management, either individually or in the aggregate, and therefore were corrected in the period in which they were identified.
 
All applicable amounts relating to this restatement have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated and combined financial statements in this amended Form 10-K/A. For discussion of the individual restatement adjustments, see Item 8. Financial Statements and Supplementary Data — Note 2 — Restatement of Financial Statements. Additionally, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
For the convenience of the reader, this Form 10-K/A sets forth the 2008 Form 10-K in its entirety. However, this Form 10-K/A only amends and restates certain information in Items 1 and 1A of Part I, Items 6, 7, 8, and 9A of Part II and Item 15 of Part IV of the 2008 Form 10-K, and no other items in the 2008 Form 10-K are amended hereby. Except for the amended and restated information described above, the foregoing items have not been updated to reflect events occurring after the filing date of the 2008 Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with our filings made with the Securities and Exchange Commission (SEC) on and after the filing of the 2008 Form 10-K. Pursuant to the rules of the SEC, Item 15 of Part IV of the 2008 Form 10-K has been amended to contain currently-dated certifications from our chief executive officer and chief financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
 
Except as expressly stated or where the context requires otherwise, the information in this Amendment generally speaks as of June 19, 2008, the date on which the 2008 Form 10-K was filed with the SEC.
 
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. Management’s 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/A 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,


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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:
 
  •  the level of our indebtedness and our ability to generate cash;
 
  •  changes in the prices and availability of aluminum (or premiums associated with such prices) or other materials and raw materials we use;
 
  •  the effect of metal price ceilings in certain of our sales contracts;
 
  •  the effectiveness of our metal hedging activities, including our internal used beverage can (UBC) and smelter hedges;
 
  •  relationships with, and financial and operating conditions of, our customers, suppliers and other stakeholders;
 
  •  integration with Hindalco Industries Limited;
 
  •  fluctuations in the supply of, and prices for, energy in the areas in which we maintain production facilities;
 
  •  our ability to access financing for future capital requirements;
 
  •  continuing obligations and other relationships resulting from our spin-off from Alcan, Inc.;
 
  •  changes in the relative values of various currencies and the effectiveness of our currency hedging activities;
 
  •  factors affecting our operations, such as litigation, environmental remediation and clean-up costs, labor relations and negotiations, breakdown of equipment and other events;
 
  •  economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs;
 
  •  competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials;
 
  •  changes in general economic conditions;
 
  •  our ability to maintain effective internal control over financial reporting and disclosure controls and procedures in the future;
 
  •  changes in the fair value of derivative instruments;
 
  •  cyclical demand and pricing within the principal markets for our products as well as seasonality in certain of our customers’ industries;
 
  •  changes in government regulations, particularly those affecting taxes, environmental, health or safety compliance;
 
  •  changes in interest rates that have the effect of increasing the amounts we pay under our principal credit agreement and other financing agreements; and
 
  •  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. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
In this Annual Report on Form 10-K/A, 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.
 
                                 
Period
  At Period End     Average Rate(1)     High     Low  
 
Year Ended December 31, 2003
    1.2923       1.3916       1.5750       1.2923  
Year Ended December 31, 2004
    1.2034       1.2984       1.3970       1.1775  
Year Ended December 31, 2005
    1.1656       1.2083       1.2703       1.1507  
Year Ended December 31, 2006
    1.1652       1.1310       1.1726       1.0955  
Three Months Ended March 31, 2007(2)
    1.1530       1.1674       1.1852       1.1530  
April 1, 2007 Through May 15, 2007(2)
    1.0976       1.1022       1.1583       1.0976  
May 16, 2007 Through March 31, 2008(2)
    1.0275       1.0180       1.1028       0.9168  
 
 
(1) The average of the noon buying rates on the last day of each month during the period.
 
(2) 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
 
Item 1.   Business
 
Overview
 
We are the world’s 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 shareholder’s/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.
 
Restatement
 
The Company has restated its consolidated financial statements as of March 31, 2008 and for the period from May 16, 2007 through March 31, 2008 to reflect non-cash accounting adjustments to correct errors in our application of purchase accounting for an equity method investment which led to a misstatement of our provision for income taxes. The Company has also included in the appropriate periods in its restated consolidated financial statements other miscellaneous adjustments that were previously identified but deemed not to be material by management, either individually or in the aggregate, and therefore were corrected in the period in which they were identified. See Note 2 — Restatement of Financial Statements in the accompanying consolidated and combined financial statements for further information.
 
Organization and Description of Business
 
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s 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 Alcan’s 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.


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The spin-off occurred on January 6, 2005, following approval by Alcan’s 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.
 
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 3 — 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 Company’s 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:
 
  •  hot mills — that require sheet ingot, a rectangular slab of aluminum, as starter material; and
 
  •  continuous casting mills — that can convert molten metal directly into semi-finished sheet.
 
Both processes require subsequent rolling, which we call cold rolling, and finishing steps such as annealing, coating, leveling or slitting to achieve the desired thicknesses 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.


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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. 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.
 
Aluminum’s 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),


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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.
 
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.


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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 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:
 
     
North America
 
Asia
 
Alcoa, Inc. (Alcoa)
  Furukawa-Sky Aluminum Corp.
Aleris International, Inc. (Aleris)
  Sumitomo Light Metal Company, Ltd.
Arco Aluminium, (a subsidiary of BP plc)
  Southwest Aluminum Co. Ltd.
Norandal Aluminum
  Kobe Steel Ltd.
Wise Metal Group LLC
  Alcoa
Alcan
   
 
     
Europe
 
South America
 
Hydro A.S.A. 
  Companhia Brasileira de Alumínio
Alcan
  Alcoa
Alcoa
   
Aleris
   
 
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.


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Key Factors Affecting Supply and Demand
 
The following factors have historically affected the supply of aluminum rolled products:
 
Production Capacity.  As in most manufacturing industries with high fixed costs, production capacity has the largest impact on supply in the aluminum rolled products industry. In the aluminum rolled products industry, the addition of production capacity requires large capital investments and significant plant construction or expansion, and typically requires long lead-time equipment orders.
 
Alternative Technology.  Advances in technological capabilities allow aluminum rolled products producers to better align product portfolio and supply with industry demand. As an example, continuous casting offers the ability to increase capacity in smaller increments than is possible with hot mill additions. This enables production capacity to better adjust to small year-over-year increases in demand. However, the continuous casting process results in the production of a more limited range of products.
 
Trade.  Some trade flows do occur between regions despite shipping costs, import duties and the need for localized customer support. Higher value-added, specialty products such as lithographic sheet and some foils are more likely to be traded internationally, especially if demand in certain markets exceeds local supply. With respect to less technically demanding applications, emerging markets with low cost inputs may export commodity aluminum rolled products to larger, more mature markets. Accordingly, regional changes in supply, such as plant expansions, may have some effect on the worldwide supply of commodity aluminum rolled products.
 
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.


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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 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 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and in Note 21 — 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 and combined 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


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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.
 
  •  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 9 — 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K/A and Note 21 — 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  
 


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                  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  
 
                                           
                  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) (Restated)
  $ 3,888     $ 4,171     $ 1,081     $ 1,478     $ (199 )   $ 263     $ 10,682  
 
 
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  

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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 21 — 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 America’s 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 America’s can sheet production plants (at Logan, Kentucky and Oswego, New York).
 
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.


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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 America’s 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.
 
Primary Aluminum Production.  We produced approximately 102kt of our own primary aluminum requirements in fiscal 2008 through our smelter and related facilities in Brazil.


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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., Alcan’s 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.
 
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


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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.


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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 3 — 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.
 
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 Alcan’s Rolled Products Americas and Asia business group in August


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2002. Ms. Brooks led three of Alcan’s 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 roles 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 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, Europe’s largest manufacturer of private label hygienic disposables. Prior to joining Ontex in 2004, Mr. de Weert was President, Europe,


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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 organization’s 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 organization’s 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 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 Europe’s Can, Litho and Recycling business unit from October 2004. Prior to that he was Vice President of Metal Management and Procurement for Alcan’s 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


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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 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


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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:
 
  •  the contributed businesses, liabilities or contracts;
 
  •  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
 
  •  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.
 
Alcan has agreed to indemnify us and our subsidiaries and each of our respective directors, officers and employees against liabilities relating to:
 
  •  liabilities of Alcan other than those of an entity forming part of our group or otherwise assumed by us pursuant to the separation agreement;
 
  •  any liability of Alcan or its subsidiaries, other than us, retained by Alcan under the separation agreement; and
 
  •  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.
 
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


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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. (Acquisition Sub), AV Aluminum Inc. 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.
 
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.


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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 Company’s 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 Alcan’s packaging facility located in Rorschach, Switzerland as well as from our facilities located in Utinga, Brazil to Alcan’s packaging facility located in Maua, Brazil. These agreements are for five-year terms during the course of which we will supply specified percentages of Alcan’s requirements for its facilities described above (in the case of Alcan’s Rorschach facility, 94% in 2006, 93% in 2007, 92% in 2008 and 90% in 2009, and in the case of Alcan’s Maua facility, 70%). In addition, we will continue to supply certain of Alcan’s 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:
 
  •  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;
 
  •  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;
 
  •  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;
 
  •  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
 
  •  Alcan retains access to all of the total plate production capacity of the Sierre facility, which represents a portion of Sierre’s 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.
 
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.
 
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


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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.
 
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 SEC’s 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/A.
 
Item 1A.   Risk Factors
 
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, Asia’s 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


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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 Hindalco’s 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; and
 
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.
 
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.


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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:
 
  •  increases in costs of natural gas;
 
  •  significant increases in costs of supplied electricity or fuel oil related to transportation;
 
  •  interruptions in energy supply due to equipment failure or other causes; and
 
  •  the inability to extend energy supply contracts upon expiration on economical terms.
 
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


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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:
 
  •  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;
 
  •  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;
 
  •  increasing our vulnerability to general adverse economic and industry conditions;
 
  •  placing us at a competitive disadvantage as compared to our competitors that have less leverage;
 
  •  limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation;
 
  •  limiting our ability or increasing the costs to refinance indebtedness; and
 
  •  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.
 
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:
 
  •  incur additional debt and provide additional guarantees;
 
  •  pay dividends beyond certain amounts and make other restricted payments;
 
  •  create or permit certain liens;
 
  •  make certain asset sales;
 
  •  use the proceeds from the sales of assets and subsidiary stock;
 
  •  create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
 
  •  engage in certain transactions with affiliates;
 
  •  enter into sale and leaseback transactions;
 
  •  designate subsidiaries as unrestricted subsidiaries; and
 
  •  consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.
 
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


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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 management’s 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.
 
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


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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.
 
If we fail to establish and maintain effective internal control over financial reporting, we may have material misstatements in our financial statements and we may not be able to report our financial results in a timely manner (Restated).
 
In conjunction with this amended Annual Report on Form 10-K/A for the year ended March 31, 2008 and under the authorization and direction of our Audit Committee, management has reassessed the effectiveness of the Company’s internal control over financial reporting and determined that (a) the material weakness relating to our accounting for income taxes remains remediated and (b) a new material weakness relating to the application of purchase accounting for an equity method investee including related income tax accounts has been identified.
 
This new material weakness in our internal control over financial reporting led to the restatement of our consolidated financial statements as of March 31, 2008 and for the period May 16, 2007 through March 31, 2008. We cannot be certain that any remedial measures we take will ensure that we implement and maintain effective internal control over financial reporting in the future. Any failure to implement new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In particular, if the material weakness described above is not remediated, it could result in a misstatement of our accounts and disclosures that could result in a material misstatement to our annual or interim consolidated financial statements in future periods that would not be prevented or detected. For further discussion of our disclosure controls and procedures and internal control over financial reporting, see “Item 9A. Controls and Procedures.”
 
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 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.


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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 Hindalco’s 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.


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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 Alcan’s 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, Alcan’s 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-arm’s 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 of our spin-off from Alcan or (8) Alcan sells to a


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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 Alcan’s 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 Alcan’s 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 Alcan’s 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 Alcan’s 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.
 
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


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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 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.


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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 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


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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 management’s 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.
 
Item 2.   Properties
 
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.”
 
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 Logan’s total production capacity.
 
(ii) The Louisville, Kentucky plant is scheduled to be closed by June 30, 2008.


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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 Logan’s 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 America’s Warren, Ohio facility, in addition to Logan’s 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.
 
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 world’s 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.


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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 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 facility’s 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


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Nachterstedt in Germany, are Europe’s 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 Asia’s total shipments in fiscal 2008.
 
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.


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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 Brazil’s 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 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


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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 September 30, 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 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 September 30, 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


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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 Bottler’s 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 court’s 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 Corporation’s 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 Corporation’s motion to dismiss CCE’s claim. On April 24, 2008, CCE filed a notice of appeal of the court’s 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.
 
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


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notice of appeal with the court and is currently reviewing the court’s 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 Hindalco’s acquisition of Novelis.
 
ARCO alleges that its consent was required in connection with Hindalco’s 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 ARCO’s consent. On July 30, 2007, Novelis filed a motion to hold ARCO’s 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 ARCO’s 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.


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PART II
 
Item 5.   Market for Registrant’s 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. Management’s 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/A.
 
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 3 — 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 Company’s 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 Company’s 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 Company’s consolidated financial statements and certain note presentations for our fiscal year ended March 31, 2008 are presented in two distinct


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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 shareholder’s/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.
 
RESTATEMENT
 
The Company has restated its consolidated financial statements as of March 31, 2008 and for the period from May 16, 2007 through March 31, 2008 to reflect non-cash accounting adjustments to correct errors in our application of purchase accounting for an equity method investment which led to a misstatement of our provision for income taxes. The Company has also included in the appropriate periods in its restated consolidated financial statements other miscellaneous adjustments that were previously identified but deemed not to be material by management, either individually or in the aggregate, and therefore were corrected in the period in which they were identified. See Note 2 — Restatement of Financial Statements in the accompanying consolidated and combined financial statements for further information.
 
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/A:
 
  •  our consolidated statements of operations for:
 
  •  the periods from May 16, 2007 through March 31, 2008 (as restated) and from April 1, 2007 through May 15, 2007;
 
  •  the three months ended March 31, 2007; and
 
  •  the year ended December 31, 2006;
 
  •  our consolidated and combined statement of operations for the year ended December 31, 2005 and
 
  •  our consolidated balance sheets as of March 31, 2008 (as restated) 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/A:
 
  •  our combined statements of operations for the years ended December 31, 2004 and 2003;
 
  •  our consolidated balance sheets as of December 31, 2006 and 2005; and
 
  •  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


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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 consolidated and combined statement of operations for the year ended December 31, 2005 and were recognized as a decrease in Owner’s 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. Alcan’s investment in the Novelis businesses, presented as Owner’s 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).
 
                                                           
    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  
    (Restated)
                                       
    Successor       Predecessor     Predecessor     Predecessor     Predecessor     Predecessor     Predecessor  
Net sales
  $ 9,965       $ 1,281     $ 2,630     $ 9,849     $ 8,363     $ 7,755     $ 6,221  
Net income (loss)
  $ (20 )     $ (97 )   $ (64 )   $ (275 )   $ 90     $ 55     $ 157  
Dividends per common share
  $ —       $ —     $ —     $ 0.20     $ 0.36     $ —     $ —   
 
                                                   
    As of
      As of
                         
    March 31,
      March 31,
    As of December 31,  
    2008       2007     2006     2005     2004     2003  
    (Restated)
                                 
    Successor       Predecessor     Predecessor     Predecessor     Predecessor     Predecessor  
Total assets
  $ 10,682       $ 5,970     $ 5,792     $ 5,476     $ 5,954     $ 6,316  
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
  $ 3,523       $ 175     $ 195     $ 433     $ 555     $ 1,974  
 
As described more fully in Note 3 — 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


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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. 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).
 
                                                           
    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.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
OVERVIEW
 
The following Management’s 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/A for a more complete understanding of our financial condition and results of operations. The MD&A includes the following sections:
 
  •  Restatement;
 
  •  General;
 
  •  Acquisition of Novelis Common Stock and Predecessor and Successor Reporting; and
 
  •  Change in Fiscal Year End


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  •  Note Regarding Combined Results of Operations and Selected Financial and Operating Information Due to our Acquisition by Hindalco;
 
  •  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).
 
  •  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;
 
  •  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/A, 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.
 
RESTATEMENT
 
The Company has restated its consolidated financial statements as of March 31, 2008 and for the period from May 16, 2007 through March 31, 2008 to reflect non-cash accounting adjustments to correct errors in our application of purchase accounting for an equity method investment which led to a misstatement of our provision for income taxes. The Company has also included in the appropriate periods in its restated consolidated financial statements other miscellaneous adjustments that were previously identified but deemed not to be material by management, either individually or in the aggregate, and therefore were corrected in the period in which they were identified. See Note 2 — Restatement of Financial Statements in the accompanying consolidated and combined financial statements for further information.


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GENERAL
 
Novelis is the world’s 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 3 — 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 Company’s 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 Company’s 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 Financial Accounting Standards Board (FASB) Statement No. 141, Business Combinations. Due to the impact of push down accounting, the Company’s 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;


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and the results of our operations, cash flows and changes in shareholder’s/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/A. 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.
 
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.
 


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    May 16, 2007
      April 1, 2007
       
    Through
      Through
    Year Ended
 
    March 31, 2008       May 15, 2007     March 31, 2008  
    (Restated)
            (Restated)
 
    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
    375         28       403  
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
    (25 )       (1 )     (26 )
Sale transaction fees
    —         32       32  
Other (income) expenses — net
    —         4       4  
                           
      9,908         1,375       11,283  
                           
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    57         (94 )     (37 )
Provision (benefit) for taxes on income (loss)
    73         4       77  
                           
Income (loss) before minority interests’ share
    (16 )       (98 )     (114 )
Minority interests’ share
    (4 )       1       (3 )
                           
Net income (loss)
  $ (20 )     $ (97 )   $ (117 )
                           
 
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  
    (Restated)
             
    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)
  $ (117 )   $ (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

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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 (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 3 — 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


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  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 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.


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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.
 
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


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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 region’s 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 manage 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, 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


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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 $117 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.
 
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 Alcan’s 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.


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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 %
                                                 
 


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                            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  
    (Restated)                       (Restated)        
    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
    403       233       233       230       73.0 %     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
    (26 )     (16 )     (16 )     (6 )     62.5 %     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.  
                                                 
      11,283       10,521       10,127       8,139       7.2 %     24.4 %
                                                 
Income (loss) before provision (benefit) for taxes on income (loss), minority interests’ share and cumulative effect of accounting change
    (37 )     (361 )     (278 )     224       (89.8 )%     (224.1 )%
Provision (benefit) for taxes on income (loss)
    77       (99 )     (4 )     107       (177.8 )%     (103.7 )%
                                                 
Income (loss) before minority interests’ share and cumulative effect of accounting change
    (114 )     (262 )     (274 )     117       (56.5 )%     (334.2 )%
Minority interests’ share
    (3 )     (3 )     (1 )     (21 )     — %     (95.2 )%
                                                 
Net income (loss) before cumulative effect of accounting change
    (117 )     (265 )     (275 )     96       (55.8 )%     (386.5 )%
Cumulative effect of accounting change — net of tax
    —       —       —       (6 )     — %     n.m.  
                                                 
Net income (loss)
  $ (117 )   $ (265 )   $ (275 )   $ 90       (55.8 )%     (405.6 )%
                                                 
 
 
n.m. — not meaningful
 
                                                 
                            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 %

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                            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.
 
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.


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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  
    (Restated)     (Restated)              
    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
    403       3.6 %     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
    (26 )     (0.2 )%     (16 )     (0.2 )%
Sale transaction fees
    32       0.3 %     32       0.3 %
Other (income) expenses — net
    4       — %     18       0.2 %
                                 
    $ 11,283       100.3 %   $ 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 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.


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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 $77 million provision for taxes on our pre-tax loss of $63 million, before our equity in net (income) loss of non-consolidated affiliates and minority interests’ share, which represented an effective tax rate of (122)%. Our effective tax rate differs from the benefit at the Canadian statutory rate due primarily to (1) a $62 million provision 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, (2) $30 million of exchange remeasurement of deferred income taxes, (3) a $17 million benefit from the effects of enacted tax rate changes on cumulative taxable temporary differences, partially offset by (4) a $7 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses and (5) a $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/ 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 $117 million (as restated) 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.


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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 %
                                 
 
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


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(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 14 — 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 20 — 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, 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 4 — 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 7 — Property, Plant and Equipment to our consolidated and combined financial statements.


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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 18 — 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 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.


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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/A.
 
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.


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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  
    (Restated)             (Restated)  
    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)
    (7 )       5       (2 )
Realized gains (losses) on corporate derivative instrument — net
    16         (3 )     13  
Depreciation and amortization
    (375 )       (28 )     (403 )
Impairment charges on long-lived assets
    (1 )       —       (1 )
Minority interests’ share
    (4 )       1       (3 )
Adjustment to eliminate proportional consolidation(B)
    (36 )       (7 )     (43 )
Restructuring charges — net
    (6 )       (1 )     (7 )
Corporate selling, general and administrative expenses
    (55 )       (35 )     (90 )
Other costs — net
    (2 )       1       (1 )
Sale transaction fees
    —         (32 )     (32 )
Benefit (provision) for taxes on income (loss)
    (73 )       (4 )     (77 )
                           
Net income (loss)
  $ (20 )     $ (97 )   $ (117 )
                           
 
 
(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 9 — 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.


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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  
    (Restated)                    
    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
    (2 )     (152 )     (151 )     141  
Realized gains (losses) on corporate derivative instruments — net
    13       (37 )     (35 )     45  
Depreciation and amortization
    (403 )     (233 )     (233 )     (230 )
Impairment charges on long-lived assets
    (1 )     (8 )     —       (7 )
Minority interests’ share
    (3 )     (3 )     (1 )     (21 )
Adjustment to eliminate proportional consolidation
    (43 )     (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
    (1 )     29       37       10  
Litigation settlement — net of insurance recoveries
    —       —       —       (40 )
Sale transaction fees
    (32 )     (32 )     —       —  
Benefit (provision) for taxes on income (loss)
    (77 )     99       4       (107 )
Cumulative effect of accounting change — net of tax
    —       —       —       (6 )
                                 
Net income (loss)
  $ (117 )   $ (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.


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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  
    (Restated)                       (Restated)        
    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
  $ 3,888     $ 1,566     $ 1,476     $ 1,547       148.3 %     (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


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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 3 — 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  
    (Restated)                       (Restated)        
    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
  $ 4,171     $ 2,543     $ 2,474     $ 2,139       64.0 %     15.7 %


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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 $1.5 billion (as restated) as fair value exceeded historical cost. See Note 3 — 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


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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  
    (Restated)                       (Restated)        
    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
  $ 1,081     $ 1,110     $ 1,078     $ 1,002       (2.6 )%     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.


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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 3 — 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  
    (Restated)                       (Restated)        
    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.


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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 3 — 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


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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


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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.


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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 11 — 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