Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 10, 2008

Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 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
(State or other jurisdiction of
incorporation or organization)
  98-0442987
(I.R.S. employer
identification number)
     
3399 Peachtree Road NE, Suite 1500
Atlanta, Georgia
(Address of principal executive offices)
  30326
(Zip Code)
 
Telephone: (404) 814-4200
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):
 
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
    (Do not check if a smaller reporting company)       
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of October 31, 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.
 


 

 
TABLE OF CONTENTS
 
                 
      FINANCIAL INFORMATION        
      Financial Statements        
        Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) Three Months Ended September 30, 2008; Three Months Ended September 30, 2007 (Restated); Six Months Ended September 30, 2008; May 16, 2007 Through September 30, 2007 (Restated); and April 1, 2007 Through May 15, 2007     2  
        Condensed Consolidated Balance Sheets (unaudited) As of September 30, 2008 and March 31, 2008 (Restated)     3  
        Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended September 30, 2008; May 16, 2007 Through September 30, 2007 (Restated); and April 1, 2007 Through May 15, 2007     4  
        Condensed Consolidated Statement of Shareholder’s Equity (unaudited) Six Months Ended September 30, 2008 (Restated as to opening balance)     6  
        Notes to the Condensed Consolidated Financial Statements (unaudited)     7  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     51  
      Quantitative and Qualitative Disclosures About Market Risk     90  
      Controls and Procedures     94  
             
      OTHER INFORMATION        
      Legal Proceedings     96  
      Exhibits     98  
 EX-10.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


1


Table of Contents

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (unaudited)
(in millions)
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended     Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
          (Restated)
          (Restated)
         
    Successor     Successor     Successor     Successor       Predecessor  
Net sales
  $ 2,959     $ 2,821     $ 6,062     $ 4,368       $ 1,281  
                                           
Cost of goods sold (exclusive of depreciation and amortization shown below)
    2,791       2,555       5,622       3,991         1,205  
Selling, general and administrative expenses
    89       88       173       130         95  
Depreciation and amortization
    107       103       223       156         28  
Research and development expenses
    10       10       22       23         6  
Interest expense and amortization of debt issuance costs — net
    41       56       81       81         26  
(Gain) loss on change in fair value of derivative instruments — net
    185       30       119       16         (20 )
Equity in net (income) loss of non-consolidated affiliates
    (2 )     (20 )     —       (19 )       (1 )
Sale transaction fees
    —       —       —       —         32  
Other (income) expenses — net
    10       (2 )     32       9         4  
                                           
      3,231       2,820       6,272       4,387         1,375  
                                           
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (272 )     1       (210 )     (19 )       (94 )
Provision (benefit) for taxes on income (loss)
    (169 )     20       (134 )     47         4  
                                           
Income (loss) before minority interests’ share
    (103 )     (19 )     (76 )     (66 )       (98 )
Minority interests’ share
    —       —       (2 )     2         1  
                                           
Net income (loss)
    (103 )     (19 )     (78 )     (64 )       (97 )
                                           
Other comprehensive income (loss):
                                         
Currency translation adjustment
    (73 )     27       (63 )     14         31  
Change in fair value of effective portion of hedges
    (16 )     2       3       4         (1 )
Postretirement benefit plans:
                                         
Amortization of net actuarial loss
    —       —       —       —         (1 )
Change in pension and other benefits
    2       —       2       —         —  
                                           
Other comprehensive income (loss) before income tax effect
    (87 )     29       (58 )     18         29  
Income tax (expense) benefit related to items of other comprehensive income (loss)
    6       2       (2 )     12         4  
                                           
Other comprehensive income (loss) — net of tax
    (81 )     31       (60 )     30         33  
                                           
Comprehensive income (loss)
  $ (184 )   $ 12     $ (138 )   $ (34 )     $ (64 )
                                           
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2


Table of Contents

Novelis Inc.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
 
                 
    As of  
    September 30,
    March 31,
 
    2008     2008  
          (Restated)
 
    Successor     Successor  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 219     $ 326  
Accounts receivable (net of allowances of $1 as of September 30, 2008 and March 31, 2008)
               
— third parties
    1,347       1,248  
— related parties
    24       31  
Inventories
    1,413       1,455  
Prepaid expenses and other current assets
    75       58  
Current portion of fair value of derivative instruments
    237       203  
Deferred income tax assets
    186       125  
                 
Total current assets
    3,501       3,446  
Property, plant and equipment — net
    3,032       3,357  
Goodwill
    1,864       1,869  
Intangible assets — net
    827       888  
Investment in and advances to non-consolidated affiliates
    924       946  
Fair value of derivative instruments — net of current portion
    46       21  
Deferred income tax assets
    10       12  
Other long-term assets
               
— third parties
    91       102  
— related parties
    29       41  
                 
Total assets
  $ 10,324     $ 10,682  
                 
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
               
Current portion of long-term debt
  $ 14     $ 15  
Short-term borrowings
    351       115  
Accounts payable
               
— third parties
    1,418       1,582  
— related parties
    57       55  
Accrued expenses and other current liabilities
    965       850  
Deferred income tax liabilities
    34       39  
                 
Total current liabilities
    2,839       2,656  
Long-term debt — net of current portion
    2,544       2,560  
Deferred income tax liabilities
    557       701  
Accrued postretirement benefits
    420       421  
Other long-term liabilities
    457       672  
                 
      6,817       7,010  
                 
Commitments and contingencies
               
                 
Minority interests in equity of consolidated affiliates
    122       149  
                 
Shareholder’s equity
               
Common stock, no par value; unlimited number of shares authorized; 77,459,658 shares issued and outstanding as of September 30, 2008 and March 31, 2008
    —       —  
Additional paid-in capital
    3,497       3,497  
Retained earnings (Accumulated deficit)
    (98 )     (20 )
Accumulated other comprehensive income (loss)
    (14 )     46  
                 
Total shareholder’s equity
    3,385       3,523  
                 
Total liabilities and shareholder’s equity
  $ 10,324     $ 10,682  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


Table of Contents

Novelis Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
                           
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Through
      Through
 
    September 30,
    September,
      May 15,
 
    2008     2007       2007  
          (Restated)
         
    Successor     Successor       Predecessor  
OPERATING ACTIVITIES
                         
Net income (loss)
  $ (78 )   $ (64 )     $ (97 )
Adjustments to determine net cash provided by (used in) operating activities:
                         
Depreciation and amortization
    223       156         28  
(Gain) loss on change in fair value of derivative instruments — net
    119       16         (20 )
Deferred income taxes
    (183 )     —         (18 )
Amortization of debt issuance costs
    3       7         1  
Write-off and amortization of fair value adjustments — net
    (124 )     (82 )       —  
Foreign exchange remeasurement on non-working capital items — net
    17       (2 )       —  
Gain on reversal of accrued legal claim
    (26 )     —         —  
Provision for uncollectible accounts receivable
    —       1         —  
Equity in net (income) loss of non-consolidated affiliates
    —       (19 )       (1 )
Dividends from non-consolidated affiliates
    —       —         4  
Minority interests’ share
    2       (2 )       (1 )
Impairment charges on long-lived assets
    1       —         —  
(Gain) loss on sales of property, plant and equipment and business — net
    (2 )     —         —  
Changes in assets and liabilities:
                         
Accounts receivable
                         
— third parties
    (183 )     54         (21 )
Inventories
    (71 )     105         (76 )
Prepaid expenses and other current assets
    (25 )     (2 )       (7 )
Other long-term assets
    9       (2 )       (1 )
Accounts payable
                         
— third parties
    (33 )     (124 )       (62 )
— related parties
    9       3         —  
Accrued expenses and other current liabilities
    (74 )     (57 )       42  
Accrued postretirement benefits
    22       8         1  
Other long-term liabilities
    4       7         (2 )
                           
Net cash provided by (used in) operating activities
    (390 )     3         (230 )
                           
INVESTING ACTIVITIES
                         
Capital expenditures
    (70 )     (57 )       (17 )
Proceeds from sales of property, plant and equipment
    2       1         —  
Changes to investment in and advances to non-consolidated affiliates
    13       3         1  
Proceeds from loans receivable — net — related parties
    13       10         —  
Net proceeds from settlement of derivative instruments
    94       72         18  
                           
Net cash provided by (used in) investing activities
    52       29         2  
                           
 
(Continued)


4


Table of Contents

Novelis Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions) — (Continued)
 
                           
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Through
      Through
 
    September 30,
    September 30,
      May 15,
 
    2008     2007       2007  
          (Restated)
         
    Successor     Successor       Predecessor  
FINANCING ACTIVITIES
                         
Proceeds from issuance of common stock
    —       92         —  
Proceeds from issuance of debt
    —       960         150  
Principal repayments
    (7 )     (905 )       (1 )
Short-term borrowings — net
    263       (65 )       60  
Dividends — minority interests
    (5 )     (1 )       (7 )
Debt issuance costs
    —       (35 )       (2 )
Proceeds from the exercise of stock options
    —       —         1  
                           
Net cash provided by (used in) financing activities
    251       46         201  
                           
Net increase (decrease) in cash and cash equivalents
    (87 )     78         (27 )
Effect of exchange rate changes on cash balances held in foreign currencies
    (20 )     1         1  
Cash and cash equivalents — beginning of period
    326       102         128  
                           
Cash and cash equivalents — end of period
  $ 219     $ 181       $ 102  
                           
Supplemental disclosures of cash flow information:
                         
Interest paid
  $ 82     $ 102       $ 13  
Income taxes paid
  $ 67     $ 31       $ 9  
Supplemental schedule of non-cash investing and financing activities related to the Acquisition of Novelis Common Stock (See Note 1):
                         
Property, plant and equipment
          $ (1,244 )          
Goodwill
          $ (1,866 )          
Intangible assets
          $ (859 )          
Investment in and advances to non-consolidated affiliates
          $ (610 )          
Debt
          $ 66            
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Table of Contents

Novelis Inc.
 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(in millions, except number of shares)
 
                                                 
                      Retained
    Accumulated
       
                Additional
    Earnings
    Other
       
    Common Stock     Paid-in
    (Accumulated
    Comprehensive
       
    Shares     Amount     Capital     Deficit)     Income (Loss)     Total  
 
Successor
                                               
Balance as of March 31, 2008 (Restated)
    77,459,658     $ —     $ 3,497     $ (20 )   $ 46     $ 3,523  
Net income (loss)
    —       —       —       (78 )     —       (78 )
Currency translation adjustment — net
    —       —       —       —       (65 )     (65 )
Change in fair value of effective portion of hedges — net
    —       —       —       —       2       2  
Postretirement benefit plans:
                                               
Change in pension and other benefits — net
    —       —       —       —       3       3  
                                                 
Balance as of September 30, 2008
    77,459,658     $ —     $ 3,497     $ (98 )   $ (14 )   $ 3,385  
                                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


Table of Contents

Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited)
 
1.   Business and Summary of Significant Accounting Policies
 
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.
 
Description of Business and Basis of Presentation
 
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 September 30, 2008, we had operations on four continents: North America; Europe; Asia and South America, through 32 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.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K/A for the year ended March 31, 2008 filed with the United States Securities and Exchange Commission (SEC) on August 11, 2008. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to SEC Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.
 
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 pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The aggregate purchase price for all of the Company’s common shares was $3.4 billion and Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion. Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.
 
Our acquisition by Hindalco was recorded in accordance with Staff Accounting Bulletin No. 103, Push Down Basis of Accounting Required in Certain Limited Circumstances. In the accompanying condensed consolidated balance sheets, 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 condensed consolidated financial statements and certain note presentations for the six months ended September 30, 2007 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 September 30, 2007, labeled “Successor”). The accompanying condensed consolidated financial statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are not comparable.


7


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Interim Reporting
 
The unaudited results of operations for the interim periods shown in these condensed consolidated financial statements, including the periods shown as Predecessor and Successor, are not necessarily indicative of operating results for the entire fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our consolidated financial position as of September 30, 2008 and March 31, 2008 (as restated); the consolidated results of our operations for (1) the three months ended September 30, 2008, (2) the six months ended September 30, 2008, (3) the three months ended September 30, 2007 (as restated), and (4) the periods from May 16, 2007 through September 30, 2007 (as restated) and (5) from April 1, 2007 through May 15, 2007; our consolidated cash flows for (1) the six months ended September 30, 2008, and (2) the periods from May 16, 2007 through September 30, 2007 (as restated) and from April 1, 2007 through May 15, 2007; and changes in our consolidated shareholder’s equity for the six months ended September 30, 2008 (restated as to opening balance).
 
Reclassifications
 
Certain reclassifications of the prior period amounts and presentation have been made to conform to the presentation adopted for the current periods. The following reclassifications and presentation changes were made to the prior periods’ condensed consolidated statements of cash flows to conform to the current period presentation: (a) certain amounts previously presented in Accounts payable — third parties were reclassified to Foreign exchange remeasurement on non-working capital items — net. These reclassifications have no effect on total assets, total shareholder’s equity, net income (loss) or total cash flows as previously presented.
 
Dividends
 
Our board of directors has declared no dividends 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.
 
Recently Adopted Accounting Standards
 
The following accounting standards have been adopted by us during the six months ended September 30, 2008.
 
On April 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (FASB Statement No. 159). FASB Statement No. 159 permits entities to choose to measure financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “fair value option”) with changes in fair value reported in earnings each reporting period. The fair value option enables some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently without applying the complex hedge accounting requirements under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (FASB Statement No. 133), to achieve similar results. We already record our derivative contracts and hedging activities at fair value in accordance with FASB Statement No. 133. We did not elect the fair value option for any other financial instruments or certain other financial assets and liabilities that were not previously required to be measured at fair value.
 
On April 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements (FASB Statement No. 157), as it relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB


8


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed our required adoption date of FASB Statement No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until April 1, 2009. Also in February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which states that FASB Statement No. 13, Accounting for Leases, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB Statement No. 13 are excluded from the provisions of FASB Statement No. 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141 or FASB Statement No. 141 (Revised), Business Combinations. See Note 13 — Fair Value Measurements regarding our adoption of this standard.
 
On April 1, 2008, we adopted FASB Staff Position (FSP) No. FIN 39-1, Amendment of FASB Interpretation No. 39, (FSP FIN 39-1). FSP FIN 39-1 amends FASB Statement No. 39, Offsetting of Amounts Related to Certain Contracts, by permitting entities that enter into master netting arrangements as part of their derivative transactions to offset in their financial statements net derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. Our adoption of this standard did not have a material impact on our consolidated financial position, results of operations and cash flows.
 
Recently Issued Accounting Standards
 
The following new accounting standards have been issued, but have not yet been adopted by us as of September 30, 2008, as adoption is not required until future reporting periods.
 
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (FASB Statement No. 162). FASB Statement No. 162 defines the order in which accounting principles that are generally accepted should be followed. FASB Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 162 on our consolidated financial position, results of operations and cash flows.
 
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of Useful Life of Intangible Assets, (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. We have not yet commenced evaluating the potential impact, if any, of the adoption of FSP FAS 142-3 on our consolidated financial position, results of operations and cash flows.
 
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (FASB Statement No. 161), an amendment of FASB Statement No. 133. FASB Statement No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. FASB Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted.


9


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
FASB Statement No. 161 permits, but does not require, comparative disclosures for earlier periods upon initial adoption. As FASB Statement No. 161 only requires enhanced disclosures, this standard will have no impact on our consolidated financial position, results of operations and cash flows.
 
In December 2007, the FASB issued Statement No. 141 (Revised), Business Combinations, (FASB Statement No. 141(R)) which establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FASB Statement No. 141(R) also requires acquirers to estimate the acquisition-date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. We will be required to apply this new standard prospectively to business combinations for which the acquisition date is on or after the beginning of the annual reporting period beginning on or after December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FASB Statement No. 141(R) amends certain provisions of FASB Statement No. 109, Accounting for Income Taxes, such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FASB Statement No. 141(R) would also apply the provisions of FASB Statement No. 141(R). Early adoption is prohibited. We are currently evaluating the effects that FASB Statement No. 141(R) may have on our consolidated financial position, results of operations and cash flows.
 
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (FASB Statement No. 160), which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. FASB Statement No. 160 applies to fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 160 on our consolidated financial position, results of operations and cash flows.
 
We have determined that all other recently issued accounting standards will not have a material impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.
 
2.   Restatement of Financial Statements
 
We have restated our consolidated financial statements as of March 31, 2008 and for the period from May 16, 2007 through March 31, 2008. This restatement corrects non-cash errors relating to our application of purchase accounting associated with an equity method investment which led to a misstatement of our provision for income taxes during the period we were finalizing our purchase accounting. We also corrected other miscellaneous adjustments that were deemed to be not material by management, either individually or in the aggregate. These adjustments do not have an impact on our compliance with the financial covenants under our 7.25% Senior Notes or under our New Senior Secured Credit Facilities (see Note 8 — Debt). See our Annual Report on Form 10-K/A filed with the SEC on August 11, 2008 for details of these corrections, including the effects of the restatement on our March 31, 2008 balance sheet. Items in the accompanying condensed consolidated financial statements and related notes that have been restated are marked accordingly.


10


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following tables highlight the financial statement effects related to the above corrections for the period from May 16, 2007 through September 30, 2007.
 
Our condensed consolidated statement of operations and comprehensive income (loss) for the three months ended September 30, 2007 is restated as follows (in millions).
 
                         
    Three Months
 
    Ended
 
    September 30, 2007  
    As Previously
          As
 
    Reported     Restatements     Restated  
    Successor           Successor  
 
Net sales
  $ 2,821     $ —     $ 2,821  
                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    2,555       —       2,555  
Selling, general and administrative expenses
    88       —       88  
Depreciation and amortization
    102       1       103  
Research and development expenses
    10       —       10  
Interest expense and amortization of debt issuance costs — net
    56       —       56  
(Gain) loss on change in fair value of derivative instruments — net
    36       (6 )     30  
Equity in net (income) loss of non-consolidated affiliates
    4       (24 )     (20 )
Other (income) expenses — net
    (7 )     5       (2 )
                         
      2,844       (24 )     2,820  
                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (23 )     24       1  
Provision (benefit) for taxes on income (loss)
    (36 )     56       20  
                         
Income (loss) before minority interests’ share
    13       (32 )     (19 )
Minority interests’ share
    —       —       —  
                         
Net income (loss)
    13       (32 )     (19 )
                         
Other comprehensive income (loss):
                       
Currency translation adjustment
    27       —       27  
Change in fair value of effective portion of hedges — net
    2       —       2  
                         
Other comprehensive income (loss) before income tax effect
    29       —       29  
Income tax (expense) benefit related to items of other comprehensive income (loss)
    2       —       2  
                         
Other comprehensive income (loss) — net of tax
    31       —       31  
                         
Comprehensive income (loss)
  $ 44     $ (32 )   $ 12  
                         


11


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Our condensed consolidated statement of operations and comprehensive income (loss) for the period from May 16, 2007 through September 30, 2007 is restated as follows (in millions).
 
                         
    May 16, 2007
 
    Through
 
    September 30, 2007  
    As Previously
          As
 
    Reported     Restatements     Restated  
    Successor           Successor  
 
Net sales
  $ 4,368     $ —     $ 4,368  
                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    3,991       —       3,991  
Selling, general and administrative expenses
    130       —       130  
Depreciation and amortization
    155       1       156  
Research and development expenses
    23       —       23  
Interest expense and amortization of debt issuance costs — net
    81       —       81  
(Gain) loss on change in fair value of derivative instruments — net
    22       (6 )     16  
Equity in net (income) loss of non-consolidated affiliates
    5       (24 )     (19 )
Other (income) expenses — net
    4       5       9  
                         
      4,411       (24 )     4,387  
                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (43 )     24       (19 )
Provision (benefit) for taxes on income (loss)
    —       47       47  
                         
Income (loss) before minority interests’ share
    (43 )     (23 )     (66 )
Minority interests’ share
    2       —       2  
                         
Net income (loss)
    (41 )     (23 )     (64 )
                         
Other comprehensive income (loss):
                       
Currency translation adjustment
    14       —       14  
Change in fair value of effective portion of hedges — net
    4       —       4  
                         
Other comprehensive income (loss) before income tax effect
    18       —       18  
Income tax (expense) benefit related to items of other comprehensive income (loss)
    12       —       12  
                         
Other comprehensive income (loss) — net of tax
    30       —       30  
                         
Comprehensive income (loss)
  $ (11 )   $ (23 )   $ (34 )
                         


12


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Our condensed consolidated statement of cash flows for the period from May 16, 2007 through September 30, 2007 is restated as follows (in millions).
 
                         
    May 16, 2007
 
    Through
 
    September 30, 2007  
    As Previously
          As
 
    Reported     Restatements     Restated  
    Successor           Successor  
 
OPERATING ACTIVITIES
                       
Net income (loss)
  $ (41 )   $ (23 )   $ (64 )
Adjustments to determine net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    155       1       156  
(Gain) loss on change in fair value of derivative instruments — net
    22       (6 )     16  
Deferred income taxes
    (46 )     46       —  
Amortization of debt issuance costs
    7       —       7  
Write-off and amortization of fair value adjustments — net
    (82 )     —       (82 )
Foreign exchange remeasurement on non-working capital items — net
    (2 )     —       (2 )
Provision for uncollectible accounts receivable
    1       —       1  
Equity in net (income) loss of non-consolidated affiliates
    5       (24 )     (19 )
Minority interests’ share
    (2 )     —       (2 )
Changes in assets and liabilities (net of effects from acquisitions and divestitures):
                       
Accounts receivable — third parties
    54       —       54  
Inventories
    105       —       105  
Prepaid expenses and other current assets
    (2 )     —       (2 )
Other long-term assets
    (2 )     —       (2 )
Accounts payable — third parties
    (124 )     —       (124 )
Accounts payable — related parties
    3       —       3  
Accrued expenses and other current liabilities
    (57 )     —       (57 )
Accrued postretirement benefits
    8       —       8  
Other long-term liabilities
    7       —       7  
                         
Net cash provided by (used in) operating activities
    9       (6 )     3  
                         
INVESTING ACTIVITIES
                       
Capital expenditures
    (57 )     —       (57 )
Proceeds from sales of assets
    1       —       1  
Changes to investment in and advances to non-consolidated affiliates
    3       —       3  
Proceeds from loans receivable — net — related parties
    10       —       10  
Net proceeds from settlement of derivative instruments
    66       6       72  
                         
Net cash provided by (used in) investing activities
    23       6       29  
                         
FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock
    92       —       92  
Proceeds from issuance of debt
    960               960  
Principal repayments
    (905 )     —       (905 )
Short-term borrowings — net
    (65 )     —       (65 )
Dividends — minority interests
    (1 )     —       (1 )
Debt issuance costs
    (35 )     —       (35 )
                         
Net cash provided by (used in) financing activities
    46       —       46  
                         
Net increase (decrease) in cash and cash equivalents
    78       —       78  
Effect of exchange rate changes on cash balances held in foreign currencies
    1       —       1  
Cash and cash equivalents — beginning of period
    102       —       102  
                         
Cash and cash equivalents — end of period
  $ 181     $ —     $ 181  
                         


13


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
3.   Restructuring Programs
 
The following table summarizes the activity in our restructuring reserves (in millions).
 
                                                         
                      Other Exit
       
    Severance Reserves     Related Reserves     Total
 
          North
                North
          Restructuring
 
    Europe     America     Total     Europe     America     Total     Reserves  
 
Successor:
                                                       
Balance as of March 31, 2008
  $ 4     $ 3     $ 7     $ 16     $ 1     $ 17     $ 24  
Provisions (recoveries) — net
    —       (1 )     (1 )     —       —       —       (1 )
Cash payments
    (1 )     —       (1 )     (1 )     —       (1 )     (2 )
Adjustments — other
    —       2       2       —       —       —       2  
                                                         
Balance as of June 30, 2008
    3       4       7       15       1       16       23  
Cash payments
    —       (2 )     (2 )     (2 )     —       (2 )     (4 )
Adjustments — other
    (2 )     —       (2 )     (1 )     —       (1 )     (3 )
                                                         
Balance as of September 30, 2008
  $ 1     $ 2     $ 3     $ 12     $ 1     $ 13     $ 16  
                                                         
 
4.   Inventories
 
Inventories consist of the following (in millions).
 
                         
    As of        
    September 30, 2008     March 31, 2008        
    Successor     Successor        
 
Finished goods
  $ 330     $ 357          
Work in process
    570       638          
Raw materials
    428       386          
Supplies
    87       75          
                         
      1,415       1,456          
Allowances
    (2 )     (1 )        
                         
Inventories
  $ 1,413     $ 1,455          
                         


14


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
5.   Property, Plant and Equipment
 
Property, plant and equipment — net, consists of the following (in millions).
 
                 
    As of  
    September 30, 2008     March 31, 2008  
          (Restated)  
    Successor     Successor  
 
Land and property rights
  $ 235     $ 258  
Buildings
    805       826  
Machinery and equipment
    2,431       2,460  
                 
      3,471       3,544  
Accumulated depreciation and amortization
    (518 )     (331 )
                 
      2,953       3,213  
Construction in progress
    79       144  
                 
Property, plant and equipment — net
  $ 3,032     $ 3,357  
                 
 
Total depreciation expense is shown in the table below (in millions). We capitalized no material amounts of interest on construction projects related to property, plant and equipment for the periods presented.
 
                                           
    Three Months
  Six Months
  May 16, 2007
    April 1, 2007
    Ended
  Ended
  Through
    Through
    September 30,   September 30,
  September 30,
    May 15,
    2008   2007   2008   2007     2007
        (Restated)       (Restated)      
    Successor   Successor   Successor   Successor     Predecessor
Depreciation expense related to property, plant and equipment
  $ 97     $ 93     $ 203     $ 142       $ 28  
 
The components of amortization expense related to intangible assets are as follows (in millions):
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Successor     Successor     Successor       Predecessor  
Total Amortization expense related to intangible assets
  $ 15     $ 15     $ 30     $ 22       $ —  
Less: Amortization expense related to intangible assets included in Cost of goods sold(A)
    (5 )     (5 )     (10 )     (8 )       —  
                                           
Amortization expense related to intangible assets included in Depreciation and amortization
  $ 10     $ 10     $ 20     $ 14       $ —   
                                           
 
 
(A) Relates to amortization of favorable energy and other supply contracts.


15


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
6.  Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions
 
The following table summarizes the ownership structure and our ownership percentage of the non-consolidated affiliates in which we have an investment as of September 30, 2008, and which we account for using the equity method. We have no material investments in affiliates that we account for using the cost method.
 
             
        Ownership
 
Affiliate Name
  Ownership Structure   Percentage  
 
Aluminium Norf GmbH
  Corporation Unincorporated Joint     50 %
Consorcio Candonga
  Venture Limited Liability     50 %
MiniMRF LLC
  Company     50 %
Deutsche Aluminium Verpackung Recycling GmbH
  Corporation     30 %
France Aluminium Recyclage S.A. 
  Public Limited Company     20 %
 
The following table summarizes the condensed results of operations of our equity method affiliates (on a 100% basis, in millions) on a historical basis of accounting. These results do not include the incremental depreciation and amortization expense that we record in our equity method accounting, which arises as a result of the amortization of fair value adjustments we made to our investments in non-consolidated affiliates due to the Arrangement. For the three and six months ended September 30, 2008, we recorded $9 million and $18 million, respectively, for the incremental depreciation and amortization expense, net of tax, as part of our equity method accounting for these investments. For the three months ended September 30, 2007, we recorded incremental depreciation and amortization expense of $8 million, which was more than offset by $24 million of tax benefits associated with this amortization and a statutory tax rate change, as part of our equity method accounting for these investments. For the period from May 16, 2007 through September 30, 2007, we recorded incremental depreciation and amortization expense of $11 million, which was more than offset by $24 million of tax benefits associated with this amortization and a statutory tax rate change, as part of our equity method accounting for these investments.
 
                                         
    Three Months
    Six Months
    May 16, 2007
    April 1, 2007
 
    Ended
    Ended
    Through
    Through
 
    September 30,     September 30,
    September 30,
    May 15,
 
    2008     2007     2008     2007     2007  
 
Net sales
  $ 167     $ 138     $ 324     $ 223     $ 45  
Costs, expenses and provisions for taxes on income
    146       130       288       211       43  
                                         
Net income
  $ 21     $ 8     $ 36     $ 12     $ 2  
                                         
 
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. We earned less than $1 million of interest income on a loan due from Aluminium


16


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Norf GmbH during each of the periods presented in the table below. The following table describes the nature and amounts of significant transactions that we had with related parties (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Successor     Successor     Successor       Predecessor  
Purchases of tolling services and electricity
                                         
Aluminium Norf GmbH(A)
  $ 74     $ 66     $ 147     $ 106       $ 21  
Consorcio Candonga(B)
    10       3       13       6         1  
                                           
Total purchases from related parties
  $ 84     $ 69     $ 160     $ 112       $ 22  
                                           
 
 
(A) We purchase tolling services (the conversion of customer-owned metal) from Aluminium Norf GmbH.
 
(B) We purchase electricity from Consorcio Candonga for our operations in South America.
 
The following table describes the period-end account balances that we have with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We have no other material related party balances.
 
                 
    As of  
    September 30, 2008     March 31, 2008  
    Successor     Successor  
 
Accounts receivable(A)
  $ 24     $ 31  
Other long-term receivables(A)
  $ 29     $ 41  
Accounts payable(B)
  $ 57     $ 55  
 
 
(A) The balances represent current and non-current portions of a loan due from Aluminium Norf GmbH.
 
(B) We purchase tolling services from Aluminium Norf GmbH and electricity from Consorcio Candonga.
 
7.   Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities are comprised of the following (in millions).
 
                 
    As of  
    September 30, 2008     March 31, 2008  
    Successor     Successor  
 
Accrued compensation and benefits
  $ 122     $ 141  
Accrued settlement of legal claim
    —       39  
Accrued interest payable
    18       15  
Accrued income taxes
    3       35  
Current portion of fair value of unfavorable sales contracts
    225       242  
Current portion of fair value of derivative instruments
    385       148  
Other current liabilities
    212       230  
                 
Accrued expenses and other current liabilities
  $ 965     $ 850  
                 


17


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
8.   Debt
 
Debt consists of the following (in millions).
 
                                                         
          As of  
          September 30, 2008     March 31, 2008  
                Unamortized
                Unamortized
       
    Interest
          Fair Value
    Carrying
          Fair Value
    Carrying
 
    Rates(A)     Principal     Adjustments(B)     Value     Principal     Adjustments(B)     Value  
                Successor                 Successor        
 
Novelis Inc.
                                                       
7.25% Senior Notes, due February 2015
    7.25 %   $ 1,399     $ 63     $ 1,462     $ 1,399     $ 67     $ 1,466  
Floating rate Term Loan facility, due July 2014
    5.88 %     296       —       296       298       —       298  
Novelis Corporation
                                                       
Floating rate Term Loan facility, due July 2014
    5.88 %(C)     652       —       652       655       —       655  
Novelis Switzerland S.A.
                                                       
Capital lease obligation, due January 2020 (Swiss francs (CHF) 52 million)
    7.50 %     47       (3 )     44       54       (4 )     50  
Capital lease obligation, due August 2011 (CHF 3 million)
    2.49 %     3       —       3       3       —       3  
Novelis Korea Limited
                                                       
Bank loan, due October 2010
    5.44 %     100       —       100       100       —       100  
Bank loans, due September 2010 through June 2011 (Korean won (KRW) 400 million)
    3.50 %(D)     —       —       —       1       —       1  
Other
                                                       
Other debt, due April 2009 through December 2012
    1.40 %(D)     1       —       1       2       —       2  
                                                         
Total debt
            2,498       60       2,558       2,512       63       2,575  
Less: current portion
            (14 )     —       (14 )     (15 )     —       (15 )
                                                         
Long-term debt — net of current portion
          $ 2,484     $ 60     $ 2,544     $ 2,497     $ 63     $ 2,560  
                                                         
 
 
(A) Interest rates are as of September 30, 2008 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement.
 
(B) Debt was recorded at fair value as a result of the Arrangement.
 
(C) Excludes the effect of related interest rate swaps.
 
(D) Weighted average interest rate.


18


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Due to the change in the market price of our 7.25% Senior Notes from 105.25% of par value as of May 14, 2007 to 86% of par value as of September 30, 2008, the estimated fair value of this debt has decreased $270 million to $1.203 billion.
 
Interest Rate Swaps
 
During the quarter ended December 31, 2007, we entered into interest rate swaps to fix the variable London Interbank Offered Rate (LIBOR) interest rate for up to $600 million of our floating rate Term Loan facility at effective weighted average interest rates and amounts expiring as follows: (i) 4.0% on $500 million through March 31, 2009 and (ii) 4.0% on $400 million through March 31, 2010. An interest rate swap at an interest rate of 4.1% on $100 million of our Term Loan facility expired on September 30, 2008. We are still obligated to pay any applicable margin, as defined in our New Credit Facilities, in addition to these interest rates.
 
As of September 30, 2008 approximately 76% of our debt was fixed rate and approximately 24% was variable rate.
 
Short-Term Borrowings and Lines of Credit
 
As of September 30, 2008, our short-term borrowings were $351 million consisting of (1) $328 million of short-term loans under our ABL facility, (2) a $10 million short-term loan in Italy and (3) $13 million in bank overdrafts. As of September 30, 2008, $20 million of our ABL facility was utilized for letters of credit and we had $364 million in remaining availability under this revolving credit facility.
 
The New Credit Facilities include customary affirmative and negative covenants. Under the ABL facility, if our excess availability, as defined under the borrowing, is less than 10% of the borrowing base, we are required to maintain a minimum fixed charge coverage ratio of 1 to 1. As of September 30, 2008, our fixed charge coverage ratio is less than 1 to 1. As a result, our borrowing availability is limited to 90% of the available borrowing base to avoid potential default of our financial covenants, resulting in a reduction of availability under our ABL facility of $80 million.
 
As of September 30, 2008, we had an additional $170 million outstanding under letters of credit in Korea not included in our revolving credit facility. The weighted average interest rate on our total short-term borrowings was 5.60% and 4.12% as of September 30, 2008 and March 31, 2008, respectively.
 
9.   Share-Based Compensation
 
Novelis Long-Term Incentive Plan
 
In June 2008, our board of directors authorized the Novelis Long-Term Incentive Plan FY 2009 — FY 2012 (2009 LTIP) covering the performance period from April 1, 2008 through March 31, 2012. Under the 2009 LTIP, stock appreciation rights (SARs) are to be granted to certain of our executive officers and key employees. The SARs will vest at the rate of 25% per year, subject to performance criteria (see below) and expire seven years from the date the plan was authorized by the board. Each SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant compared to the date of exercise, converted from Indian rupees to the participant’s payroll currency at the time of exercise. The amount of cash paid would be limited to (i) 2.5 times the target payout if exercised within one year of vesting or (ii) 3 times the target payout if exercised after one year of vesting. The SARs do not transfer any shareholder rights in Hindalco to a participant. As of September 30, 2008, no SARs have been awarded.
 
The performance criterion for vesting is based on the actual overall Novelis Operating Earnings before Interest, Depreciation, Amortization and Taxes (Operating EBITDA, as defined in the 2009 LTIP) compared to


19


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
the target Operating EBITDA established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target Operating EBITDA, at which point 75% of the SARs for that period would vest, with an equal pro rata amount of SARs vesting through 100% achievement of the target.
 
Share-Based Compensation Expense
 
As a result of our acquisition by Hindalco on May 15, 2007, all of our share-based compensation awards (except for our Recognition Awards) were accelerated to vest, cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction. Compensation expense resulting from the accelerated vesting of plan awards, totaling $45 million is included in Selling, general and administrative expenses in our condensed consolidated statement of operations for the period from April 1, 2007 through May 15, 2007. Compensation expense of $1 million was recognized during the period from May 16, 2007 through September 30, 2007.
 
On October 29, 2008, the board of directors approved an amendment to the 2009 LTIP (Amended 2009 LTIP). The design elements of the Amended 2009 LTIP are largely unchanged from the original 2009 LTIP. However, the Amended 2009 LTIP now specifies that (a) the plan shall be administered by the Compensation Committee of the Board of Directors, (b) all payments shall be made in cash upon exercise (less applicable withholdings), and (c) the Compensation Committee has the authority to make adjustments in the number and price of SARs covered by the plan in order to prevent dilution or enlargement of the rights of employees that would otherwise result from a change in the capital structure of the Company (e.g., dividends, stock splits, rights issuances, reorganizations, liquidation of assets, etc.).
 
For each of the three and six months ended September 30, 2008 and for the three months ended September 30, 2007, compensation expense related to share-based awards was less than $1 million.
 
10.   Postretirement Benefit Plans
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Successor     Successor     Successor       Predecessor  
Pension Benefit Plans
                                         
Service cost
  $ 11     $ 12     $ 21     $ 18       $ 6  
Interest cost
    15       12       30       18         6  
Expected return on assets
    (13 )     (11 )     (26 )     (16 )       (5 )
Amortization — prior service cost
    (1 )     —       (1 )     —         —  
Curtailment/settlement losses
    —       —       1       —         —  
                                           
Net periodic benefit cost
  $ 12     $ 13     $ 25     $ 20       $ 7  
                                           
 


20


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Successor     Successor     Successor       Predecessor  
Other Postretirement Benefit Plans
                                         
Service cost
  $ 1     $ 1     $ 3     $ 2       $ 1  
Interest cost
    2       2       5       3         1  
Amortization — actuarial losses
    1       —       1       —         —  
Curtailment/settlement losses
    —       —       (2 )     —         —  
                                           
Net periodic benefit cost
  $ 4     $ 3     $ 7     $ 5       $ 2  
                                           
 
The expected long-term rate of return on plan assets is 6.9% in fiscal 2009.
 
Employer Contributions to Plans
 
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland, Malaysia and Brazil. We contributed the following amounts to all plans (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Predecessor     Successor     Successor       Predecessor  
Funded pension plans
  $ 7     $ 11     $ 11     $ 16       $ 4  
Unfunded pension plans
    4       4       8       6         2  
Savings and defined contribution pension plans
    4       4       9       6         2  
                                           
Total contributions
  $ 15     $ 19     $ 28     $ 28       $ 8  
                                           
 
During the remainder of fiscal 2009, we expect to contribute an additional $24 million to our funded pension plans, $9 million to our unfunded pension plans and $8 million to our savings and defined contribution plans. For the six months ended September 30, 2008, actual returns for our worldwide funded pension plans were significantly below our expected rate of return of 6.9% due to adverse conditions in the equity markets. Continued actual returns below our expected rate may unfavorably impact the amount and timing of future contributions to funded plans.

21


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
11.   Currency (Gains) Losses
 
The following currency (gains) losses are included in the accompanying condensed consolidated statements of operations (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
          (Restated)
          (Restated)
         
    Successor     Successor     Successor     Successor       Predecessor  
Net (gain) loss on change in fair value of currency derivative instruments(A)
  $ (7 )   $ (2 )   $ (39 )   $ (18 )     $ (10 )
Net (gain) loss on translation of monetary assets and liabilities(B)
    36       8       56       15         4  
                                           
    $ 29     $ 6     $ 17     $ (3 )     $ (6 )
                                           
 
 
(A) Included in (Gain) loss on change in fair value of derivative instruments — net.
 
(B) Included in Other (income) expenses — net.
 
The following currency gains (losses) are included in Accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets (net of tax effect and in millions).
 
                 
    Six Months
    May 16, 2007
 
    Ended
    Through
 
    September 30, 2008     March 31, 2008  
          (Restated)
 
    Successor     Successor  
 
Cumulative currency translation adjustment — beginning of period
  $ 59     $ —  
Effect of changes in exchange rates
    (65 )     59  
                 
Cumulative currency translation adjustment — end of period
  $ (6 )   $ 59  
                 
 
12.   Financial Instruments and Commodity Contracts
 
In conducting our business, we use various derivative and non-derivative instruments to manage the risks arising from fluctuations in exchange rates, interest rates, aluminum prices and energy prices. Such instruments are used for risk management purposes only. We may be exposed to losses in the future if the counterparties to the contracts fail to perform. We are satisfied that the risk of such non-performance is remote, due to our monitoring of credit exposures. Our maximum potential loss may exceed the amount recognized in the accompanying September 30, 2008 condensed consolidated balance sheet.
 
The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is always linked to the timing of the underlying exposure, with the connection between the two being regularly monitored.
 
The current and noncurrent portions of derivative assets are presented on the face of our accompanying condensed consolidated balance sheets. The current and noncurrent portions of derivative liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in the accompanying condensed consolidated balance sheets.


22


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The fair values of our financial instruments and commodity contracts as of September 30, 2008 and March 31, 2008 are as follows (in millions):
 
                                         
    As of September 30, 2008  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent     Assets/(Liabilities)  
Successor                              
 
Derivatives designated as hedging instruments:
                                       
Cross-currency swaps
  $ —     $ —     $ —     $ (65 )   $ (65 )
Interest rate swaps
    —       —       —       (4 )     (4 )
Electricity swap
    —       6       —       —       6  
                                         
Total derivatives designated as hedging instruments
    —       6       —       (69 )     (63 )
                                         
Derivatives not designated as hedging instruments:
                                       
Foreign exchange forward contracts
    43       1       (50 )     (16 )     (22 )
Cross-currency swaps
    12       —       (9 )     —       3  
Interest rate currency swaps
    —       23       —       —       23  
Aluminum forward contracts
    126       11       (297 )     (7 )     (167 )
Aluminum options
    2       5       (22 )     (7 )     (22 )
Embedded derivative instruments
    54       —       —       —       54  
Natural gas swaps
    —       —       (7 )     —       (7 )
                                         
Total derivatives not designated as hedging instruments
    237       40       (385 )     (30 )     (138 )
                                         
Total derivative fair value
  $ 237     $ 46     $ (385 )   $ (99 )   $ (201 )
                                         
 


23


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    As of March 31, 2008  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent     Assets/(Liabilities)  
Successor                              
 
Derivatives designated as hedging instruments:
                                       
Cross-currency swaps
  $ —     $ —     $ —     $ (184 )   $ (184 )
Interest rate swaps
    —       —       (3 )     (12 )     (15 )
Electricity swap
    3       11       —       —       14  
                                         
Total derivatives designated as hedging instruments
    3       11       (3 )     (196 )     (185 )
                                         
Derivatives not designated as hedging instruments:
                                       
Foreign exchange forward contracts
    43       4       (112 )     (4 )     (69 )
Cross-currency swaps
    19       —       (4 )     (1 )     14  
Interest rate currency swaps
    2       2       —       —       4  
Aluminum forward contracts
    130       4       (9 )     —       125  
Aluminum options
    1       —       —       —       1  
Embedded derivative instruments
    —       —       (20 )     —       (20 )
Natural gas swaps
    5       —       —       —       5  
                                         
Total derivatives not designated as hedging instruments
    200       10       (145 )     (5 )     60  
                                         
Total derivative fair value
  $ 203     $ 21     $ (148 )   $ (201 )   $ (125 )
                                         
 
Net Investment Hedges
 
We use cross-currency swaps to manage our exposure to fluctuating exchange rates arising from our loans to and investments in our European operations. We have designated these as net investment hedges. The effective portion of gain or loss on the derivative is included in Other comprehensive income (loss). The ineffective portion of gain or loss on the derivative is included in (Gain) loss on change in fair value of derivative instruments — net.
 
The following table summarizes the amount of gain (loss) we recognized in Other comprehensive income (loss) related to our net investment hedge derivatives (in millions).
 
                                           
    Three Months
  Six Months
  May 16, 2007
    April 1, 2007
    Ended
  Ended
  Through
    Through
    September 30,   September 30,
  September 30,
    May 15,
    2008   2007   2008   2007     2007
    Successor   Successor   Successor   Successor     Predecessor
Cross-currency swaps
  $ 81     $ (28 )   $ 120     $ (28 )     $ (8 )
                                           

24


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Cash Flow Hedges
 
We own an interest in an electricity swap which we have designated as a cash flow hedge against our exposure to fluctuating electricity prices. The effective portion of gain or loss on the derivative is included in Other comprehensive income (loss) and reclassified into (Gain) loss on change in fair value of derivatives  — net in our accompanying condensed consolidated statements of operations and comprehensive income (loss).
 
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate arising from our variable rate debt. We have designated these as cash flow hedges. The effective portion of gain or loss on the derivative is included in Other comprehensive income (loss) and reclassified into Interest expense and amortization of debt issuance costs  — net in our accompanying condensed consolidated statements of operations and comprehensive income (loss).
 
For all derivatives designated as cash flow hedges, gains or losses representing hedge ineffectiveness are recognized in (Gain) loss on change in fair value of derivative instruments  — net in our current period earnings. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective, the derivative will be de-designated as a cash flow hedge. This could occur if the underlying hedged exposure is determined to no longer be probable, or if our ongoing assessment of hedge effectiveness determines that the hedge relationship no longer meets the measures we have established at the inception of the hedge. Gains or losses recognized to date in Accumulated other comprehensive income (loss) would be immediately reclassified into current period earnings, as would any subsequent changes in the fair value of any such derivative.
 
During the next twelve months we expect to realize $1 million in effective net gains from our cash flow hedges. The maximum period over which we have hedged our exposure to cash flow variability is through 2017.
 
The following table summarizes the (1) the amount of gain or (loss) recognized in Other comprehensive income (loss) (OCI), (2) the amount of gain or (loss) reclassified from Accumulated OCI into income and (3) the amount of gain or (loss) recognized in income (ineffective portion) related to our cash flow hedge derivatives (in millions).
 
Three Month Comparison:
 
                                                 
            Amount of Gain or (Loss)
        Amount of Gain or (Loss)
  Recognized in Income on
    Amount of Gain or (Loss)
  Reclassified from Accumulated
  Derivative (Ineffective Portion
    Recognized in OCI on Derivative
  OCI into Income
  and Amount Excluded from
    (Effective Portion)   (Effective Portion)   Effectiveness Testing)
    Three Months
  Three Months
  Three Months
  Three Months
  Three Months
  Three Months
    Ended
  Ended
  Ended
  Ended
  Ended
  Ended
    September 30,
  September 30,
  September 30,
  September 30,
  September 30,
  September 30,
    2008   2007   2008   2007   2008   2007
    Successor   Successor   Successor   Successor   Successor   Successor
 
Electricity swap
  $ (12 )   $ 4     $ (4 )   $ 2     $ —     $ —  
Interest rate swaps
  $ 1     $ —     $ —     $ —     $ —     $ —  


25


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Six Month Comparison:
 
                         
            Amount of Gain or (Loss)
            Recognized in Income
    Amount of Gain or (Loss) Recognized
  Amount of Gain or (Loss)
  on Derivative
    in OCI on Derivative
  Reclassified from Accumulated
  (Ineffective Portion and Amount
    (Effective Portion)   OCI into Income (Effective Portion)   Excluded from Effectiveness Testing)
    Six Months
  Six Months
  Six Months
    Ended
  Ended
  Ended
    September 30,
  September 30,
  September 30,
    2008   2008   2008
    Successor   Successor   Successor
 
Electricity swap
  $ —     $ (7 )   $ —  
Interest rate swaps
  $ 11     $ —     $ —  
 
                                                       
            Amount of Gain or (Loss)
    Amount of Gain or (Loss)
  Amount of Gain or (Loss)
  Recognized in Income on Derivative
    Recognized in OCI on
  Reclassified from Accumulated
  (Ineffective Portion and Amount
    Derivative (Effective Portion)   OCI into Income (Effective Portion)   Excluded from Effectiveness Testing)
    May 16, 2007
    April 1, 2007
  May 16, 2007
    April 1, 2007
  May 16, 2007
    April 1, 2007
    Through
    Through
  Through
    Through
  Through
    Through
    September 30,
    May 15,
  September 30,
    May 15,
  September 30,
    May 15,
    2007     2007   2007     2007   2007     2007
    Successor     Predecessor   Successor     Predecessor   Successor     Predecessor
Foreign exchange forward contracts
  $ —       $ 3     $ —       $ (1 )   $ —       $ —  
Electricity swap
  $ 6       $ 4     $ 2       $ —     $ —       $ —   
 
Derivative Instruments Not Designated as Hedges
 
We use foreign exchange forward contracts and cross currency swaps to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain of our operations.
 
We use aluminum forward contracts and options to hedge our exposure to changes in the London Metal Exchange (LME) price of aluminum. These exposures arise from firm commitments to sell aluminum in future periods at fixed or capped prices, the forecasted output of our smelter operations in South America, and the forecasted metal price lag associated with firm commitments to sell aluminum in future periods at prices based on the LME.
 
We have an embedded derivative which arises from a contractual relationship with a customer that entitles us to pass-through the economic effect of trading positions that we take with other third parties on their behalf.
 
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America.
 
While each of these derivatives is intended to be effective in helping us manage risk, they have not been designated as hedging instruments under FASB Statement No. 133. The change in fair value of these derivatives is included in (Gain) loss on change in fair value of derivative instruments — net in the condensed consolidated statement of operations and comprehensive income (loss).


26


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table summarizes the gains (losses) recognized in current period earnings (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
    Successor     Successor     Successor     Successor       Predecessor  
Derivative Instruments Not Designated as Hedges
                                         
Foreign exchange forward contracts
  $ 17     $ (4 )   $ 7     $ 12       $ 11  
Interest rate currency swaps
    15       (2 )     24       (2 )       (1 )
Aluminum forward contracts
    (207 )     (30 )     (191 )     (34 )       9  
Aluminum options
    (27 )     —       (25 )     1         —  
Embedded derivative instruments
    53       15       58       12         2  
Natural gas swaps
    (16 )     (2 )     (9 )     (3 )       1  
Cross currency swaps
    (25 )     (9 )     8       (6 )       (3 )
                                           
Gain (loss) recognized
    (190 )     (32 )     (128 )     (20 )       19  
Derivative Instruments Designated as Cash Flow Hedges
                                         
Electricity swap
    5       2       9       4         1  
                                           
Gain (loss) on change in fair value of derivative instruments — net
  $ (185 )   $ (30 )   $ (119 )   $ (16 )     $ 20  
                                           
 
13.   Fair Value Measurements
 
FASB Statement No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. Our adoption of FASB Statement No. 157 on April 1, 2008 resulted in (1) a gain of less than $1 million for the three months ended June 30, 2008, which is included in (Gain) loss on change in fair value of derivative instruments — net in our condensed consolidated statement of operations, (2) a $1 million decrease to the fair value of effective portion of hedges — net included in Accumulated other comprehensive income (loss) and (3) a $35 million increase to the foreign currency translation adjustment included in Accumulated other comprehensive income (loss) during the quarter ended June 30, 2008. These adjustments are primarily due to the inclusion of nonperformance risk (i.e., credit spreads) in our valuation models related to certain of our cross-currency swap derivative instruments (see Note 12 — Financial Instruments and Commodity Contracts).
 
FASB Statement No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. FASB Statement No. 157 will be the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in FASB Statement No. 13, for purposes of lease classification or measurement. FASB Statement No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets


27


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under FASB Statement No. 157 are described as follows:
 
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
 
Level 3 — Inputs that are unobservable for the asset or liability.
 
The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:
 
Derivative contracts
 
For certain of our derivative contracts whose fair values are based upon trades in liquid markets, such as aluminum forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
 
The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for foreign exchange rates. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts and certain energy-related forward contracts (e.g., natural gas).
 
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include certain of our energy-related forward contracts (e.g., electricity) and certain foreign currency forward contracts. Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.
 
FASB Statement No. 157 requires that for Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk).
 
The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2008 (in millions).
 
                                 
    Fair Value Measurements Using  
    Level 1     Level 2     Level 3     Total  
Successor:                        
 
Assets — Derivative instruments
  $ —     $ 277     $ 6     $ 283  
Liabilities — Derivative instruments
  $ —     $ (468 )   $ (16 )   $ (484 )
 
Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts (primarily energy-related and certain foreign currency forward contracts) in which at least one significant unobservable input is used in the valuation model. We incurred $22 million of unrealized losses related to Level 3 financial instruments that were still held as of September 30, 2008. These unrealized losses are


28


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
included in (Gain) loss on change in fair value of derivative instruments — net. The following table presents a reconciliation of activity for Level 3 derivative contracts on a net basis (in millions).
 
                                                 
            Net Realized/
           
        Net Realized/
  Unrealized
           
        Unrealized
  Gains (Losses)
           
    Beginning
  Gains
  Included
          Ending
    Balance
  (Losses)
  in Other
  Net Purchases,
  Net Transfers
  Balance
    April 1,
  Included in
  Comprehensive
  Issuances and
  in and/or
  September 30,
    2008   Earnings(B)   Income (Loss)(C)   Settlements   (out) of Level 3   2008
Successor:                        
 
Derivative instruments(A)
  $ 11     $ (5 )   $ (8 )   $ (9 )   $ 1     $ (10 )
 
 
(A) Represents derivative assets net of derivative liabilities.
 
(B) Included in (Gain) loss on change in fair value of derivative instruments — net.
 
(C) Included in Change in fair value of effective portion of hedges — net.
 
14.   Other (Income) Expenses — Net
 
Other (income) expenses — net is comprised of the following (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
          (Restated)
          (Restated)
         
    Successor     Successor     Successor     Successor       Predecessor  
Exchange (gains) losses — net
  $ 36     $ 8     $ 56     $ 15       $ 4  
(Gain) loss on reversal of accrued legal claim(A)
    (26 )     —       (26 )     —         —  
(Gain) loss on partial reversal of accrued social contribution tax
    —       (14 )     —       (14 )       —  
Restructuring charges (recoveries) — net
    —       —       (1 )     1         1  
Impairment charges on long-lived assets
    —       —       1       —         —  
(Gain) loss on disposal of property, plant and equipment — net
    (1 )     —       (2 )     —         —  
Other — net
    1       4       4       7         (1 )
                                           
Other (income) expenses — net
  $ 10     $ (2 )   $ 32     $ 9       $ 4  
                                           
 
 
(A) See Note 16 — Commitments and Contingencies for a discussion regarding the settlement of the Reynolds Boat Case.
 
15.   Income Taxes
 
The Provision (benefit) for taxes on income (loss) for the three and six months ended September 30, 2008 was based on the estimated effective tax rates applicable for the fiscal year ending March 31, 2009, after considering items specifically related to the interim period. The Provision (benefit) for taxes on income (loss) for the periods from May 16, 2007 through September 30, 2007 (as restated) and April 1, 2007 through May 15, 2007 were based on the estimated effective tax rates applicable for the year ended March 31, 2008, after considering items specifically related to the interim periods.


29


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions, except percentages).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
          (Restated)
          (Restated)
         
    Successor     Successor     Successor     Successor       Predecessor  
Pre-tax income (loss) before equity in net (income) loss of non-consolidated affiliates and minority interests’ share
  $ (274 )   $ (19 )   $ (210 )   $ (38 )     $ (95 )
                                           
Canadian statutory tax rate
    31 %     33 %     31 %     33 %       33 %
                                           
Provision (benefit) at the Canadian statutory rate
    (85 )     (6 )     (65 )     (13 )       (31 )
Increase (decrease) for taxes on income (loss) resulting from:
                                         
Exchange translation items
    (22 )     30       (13 )     49         23  
Exchange remeasurement of deferred income taxes
    (41 )     4       (21 )     7         3  
Change in valuation allowances
    15       19       18       41         13  
Expense (income) items not subject to tax
    10       (5 )     6       (19 )       (9 )
Enacted statutory tax rate changes
    2       (25 )     2       (25 )       —  
Tax rate differences on foreign earnings
    (54 )     (2 )     (68 )     —         2  
Uncertain tax positions
    —       —       1       —         —  
Other — net
    6       5       6       7         3  
                                           
Provision (benefit) for taxes on income (loss)
  $ (169 )   $ 20     $ (134 )   $ 47       $ 4  
                                           
Effective tax rate
    62 %     (105 )%     64 %     (124 )%       (4 )%
                                           
 
Our effective tax rate differs from the Canadian statutory rate primarily due to the following factors: (1) 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, which is shown above as exchange translation items; (2) the remeasurement of deferred income taxes due to foreign currency changes, which is shown above as exchange remeasurement of deferred income taxes; (3) changes 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 (4) differences between the Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions shown above as tax rate differences on foreign earnings.
 
Tax Uncertainties
 
Adoption of FASB Interpretation No. 48
 
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.


30


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
During the quarter ended September 30, 2008, our unrecognized tax benefits decreased $7 million as a result of tax positions taken during a prior period and settlements with taxing authorities. Our reserves for uncertain tax positions totaled $54 million and $61 million as of September 30, 2008 and March 31, 2008, respectively. As of September 30, 2008 and March 31, 2008, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods based on anticipated settlement dates was $46 million and $47 million, respectively.
 
Tax authorities are currently examining certain of our prior years’ tax returns for 2004-2006. We are evaluating potential adjustments related to these examinations and do not anticipate that settlement of the examinations will result in a material payment.
 
During the quarter ended September 30, 2008, taxing authorities in Germany concluded their audit of the tax years 1999-2003. As a result of this settlement, we reduced our unrecognized tax benefits by $10 million including cash payments to taxing authorities of $6 million and a reduction to Goodwill of $4 million.
 
Separately, we are awaiting a court ruling regarding the utilization of certain operating losses. We anticipate that it is reasonably possible that this ruling will result in a $12 million decrease in unrecognized tax benefits by March 31, 2009 related to this matter. We have fully funded this contingent liability through a judicial deposit, which is included in Other long-term assets — third parties since January 2007.
 
With the exception of the ongoing tax examinations described above, we are not currently under examination by any income tax authorities for years before 2004. With few exceptions, our tax returns for all tax years before 2001 are no longer subject to examination by taxing authorities.
 
Our continuing practice and policy is to record potential interest and penalties related to unrecognized tax benefits in our Provision (benefit) for taxes on income (loss). As of September 30, 2008 and March 31, 2008, we had $12 million and $14 million (as restated) accrued for potential interest on income taxes, respectively. For the three and six months ended September 30, 2008, our Provision (benefit) for taxes on income (loss) included an additional charge of $1 and $2 million of potential interest, respectively. For the three months ended September 30, 2007 and the periods from May 16, 2007 through September 30, 2007 and from April 1, 2007 through May 15, 2007, our Provision (benefit) for taxes on income (loss) included charges for an additional $1 million, $3 million and $1 million of potential interest, respectively.
 
16.   Commitments and Contingencies
 
Primary Supplier
 
Alcan is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from Alcan as a percentage of our total combined metal purchases.
 
                                           
    Three Months
  Six Months
  May 16, 2007
    April 1, 2007
    Ended
  Ended
  Through
    Through
    September 30,   September 30,
  September 30,
    May 15,
    2008   2007   2008   2007     2007
    Successor   Successor   Successor   Successor     Predecessor
Purchases from Alcan as a percentage of total metal purchases in kt(A)
    36 %     37 %     35 %     36 %       34 %
 
 
(A) One kilotonne (kt) is 1,000 metric tonnes. One metric tonne is equivalent to 2,204.6 pounds.
 
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-


31


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
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 was 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 sought to 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 had completed their review and they were 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 at September 30, 2006 represented the amount of the settlement claim that was funded by our insurers but was still in dispute with and under review by the parties as described above. The $39 million liability was included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet for all periods through and as of June 30, 2008.
 
On September 4, 2008, Novelis, our insurers, and Alcan entered into a settlement agreement to resolve the insurance coverage dispute related to the Reynolds boat case. Pursuant to that settlement agreement, we paid approximately $13 million to our insurers on September 8, 2008 and recognized a non-cash pre-tax gain of $26 million included in Other (income) expenses — net upon the reversal of our previously recorded $39 million liability. Our insurers returned our letter of credit that had been on deposit pending the outcome of settlement discussions. This concludes the Reynolds Boat Case insurance coverage matter.
 
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.


32


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
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 States Court of Appeals for the Eleventh Circuit and filed its appellate brief on July 11, 2008. On August 13, 2008, Novelis Corporation filed its response brief with the United States Court of Appeals for the Eleventh Circuit. CCE filed its response on September 5, 2008.
 
On October 24, 2008, the United States Court of Appeals for the Eleventh Circuit affirmed the decision of the U.S. District Court for the Northern District of Georgia to dismiss CCE’s lawsuit against Novelis Corporation for breach of the “most favored nations” clause.
 
Anheuser-Busch Litigation.  On September 19, 2006, Novelis Corporation filed a lawsuit against Anheuser-Busch, Inc. (Anheuser-Busch) in federal court in Ohio. Anheuser-Busch subsequently filed suit against Novelis Corporation and the Company in federal court in Missouri. On January 3, 2007, Anheuser-Busch’s suit was transferred to the Ohio federal court.
 
Novelis Corporation alleged that Anheuser-Busch 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 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 asked for a declaratory judgment that Anheuser-Busch 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 filed a motion for summary judgment. On May 22, 2008, the court granted Anheuser-Busch’s motion for summary judgment. Novelis Corporation filed a notice of appeal with the United States Court of Appeals for the Sixth Circuit on June 20, 2008.
 
On August 18, 2008, Novelis and Anheuser-Busch entered into an agreement to terminate the litigation between the parties. Pursuant to the litigation termination agreement, Anheuser-Busch agreed to drop its claims against Novelis in consideration for the withdrawal of our appeal. The parties then filed a Notice of Withdrawal with the United States Court of Appeals for the Sixth Circuit on August 19, 2008. This concludes the Anheuser-Busch litigation matter.


33


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
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. Or, 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, management and the board of the joint venture are conducting their activities as normal.
 
Environmental Matters
 
The following describes certain environmental matters relating to our business. None of the environmental matters include government sanctions of $100,000 or more.
 
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 September 30, 2008 will be approximately $43 million. Of this amount,


34


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
$33 million is included in Other long-term liabilities, with the remaining $10 million included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2008. Management has reviewed the environmental matters, including those 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 (PRPs) unless otherwise noted.
 
Butler Tunnel Site.  Novelis Corporation was a party in a 1989 U.S. Environmental Protection Agency (EPA) lawsuit before the U.S. District Court for the Middle District of Pennsylvania involving the Butler Tunnel Superfund site, a third-party disposal site. In May 1991, the Court granted summary judgment against Novelis Corporation for alleged disposal of hazardous waste. After unsuccessful appeals, Novelis Corporation paid the entire judgment plus interest.
 
The EPA filed a second cost recovery action against Novelis Corporation seeking recovery of expenses associated with the installation of an early warning and response system for potential future releases from the Butler Tunnel site. In January 2008, Novelis Corporation and the Department of Justice, on behalf of the EPA, entered into a consent decree whereby Novelis Corporation agreed to pay $1.9 million in three installments in settlement of its liability with the U.S. government.
 
Prior to the execution of the Novelis Corporation consent decree, the EPA entered into consent decrees with the other Butler Tunnel PRPs to finance and construct the early warning and response system. On October 30, 2008, the trustee for the PRPs provided a detailed analysis of the past and future costs associated with the implementation of the early warning system and advised us of their intention to file a contribution action against us. Given the success of these types of civil claims in environmental cases and our prior adverse court rulings, we have recognized a liability for $3.8 million reflecting our portion of the previous and remaining costs to complete the early warning and response system.
 
Brazil Tax Matters
 
Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of September 30, 2008 and March 31, 2008, we had cash deposits aggregating approximately $33 million and $36 million, respectively, in judicial depository accounts pending finalization of the related cases. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included in Other long-term assets — third parties in our accompanying condensed consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Minister of Treasury about various forms of manufacturing taxes and social security contributions, for which we have made no judicial deposits but for which we have established reserves ranging from $7 million to $94 million as of September 30, 2008. In total, these reserves approximate $113 million and $111 million as of September 30,


35


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
2008 and March 31, 2008, respectively, and are included in Other long-term liabilities in our accompanying condensed consolidated balance sheets.
 
On July 16, 2008, the second instance court in Brazil ruled in favor of the Ministry of Treasury in the amount of $5.5 million in one of these tax disputes. On August 11, 2008, we requested a clarification of the court’s order to better understand the reasoning behind the decision and prepare our appeal. The request for clarification suspends the deadline for appeal, which usually must be filed within 30 days of receiving the order. While we are fully reserved for these disputed credits, we must make a judicial deposit of $5.5 million at the time we file the appeal.
 
Guarantees of Indebtedness
 
We have issued guarantees on behalf of certain of our subsidiaries and non-consolidated affiliates, including:
 
  •  certain of our wholly-owned subsidiaries and
 
  •  Aluminium Norf GmbH, which is a fifty percent (50%) owned joint venture that does not meet the requirements for consolidation under FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities.
 
In the case of our wholly-owned subsidiaries, the indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries or non-consolidated affiliates holds any assets of any third parties as collateral to offset the potential settlement of these guarantees.
 
Since we consolidate wholly-owned and majority-owned subsidiaries in our condensed consolidated financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our condensed consolidated balance sheets.
 
The following table discloses information about our obligations under guarantees of indebtedness of others as of September 30, 2008 (in millions). We did not have any obligations under guarantees of indebtedness related to our majority-owned subsidiaries as of September 30, 2008.
 
                 
    Maximum
    Liability
 
    Potential
    Carrying
 
Type of Entity
  Future Payment     Value  
 
Wholly-owned subsidiaries
  $ 89     $ 63  
Aluminium Norf GmbH
  $ 14     $ —  
 
We have no retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.
 
17.   Segment and Major Customer Information
 
Segment Information
 
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments: North America, Europe, Asia and South America.


36


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
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 11 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 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 the financial information for the segments shown in the tables below to the relevant GAAP-based measures, we must remove our proportional share of each line item that we included in the segment amounts. See Note 6 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
 
The tables below show selected segment financial information (in millions). The Corporate and Other column in the tables below includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. It also includes consolidating and other elimination accounts.
 
Selected Segment Financial Information
 
                                                         
                    Adjustment to
       
                    Eliminate
       
    North
          South
  Proportional
  Corporate
   
Total Assets
  America   Europe   Asia   America   Consolidation   and Other   Total
(Successor)                            
 
September 30, 2008
  $ 4,003     $ 3,775     $ 985     $ 1,486     $ (191 )   $ 266     $ 10,324  
March 31, 2008 (Restated)
  $ 3,888     $ 4,171     $ 1,081     $ 1,478     $ (199 )   $ 263     $ 10,682  
 
Comparison of Three Month Data:
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
Three Months Ended September 30, 2008
  America     Europe     Asia     America     Consolidation     and Other     Total  
(Successor)                                          
 
Net sales (to third parties)
  $ 1,111     $ 1,097     $ 458     $ 300     $ (7 )   $ —     $ 2,959  
Intersegment sales
    2       4       —       —       —       (6 )     —  
Segment Income
    2       62       (3 )     48       —       —       109  
Depreciation and amortization
    41       54       13       19       (20 )     —       107  
Capital expenditures
    10       17       6       9       (6 )     1       37  
 


37


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
Three Months Ended September 30, 2007
  America     Europe     Asia     America     Consolidation     and Other     Total  
(Successor)                                          
 
Net sales (to third parties)
  $ 1,050     $ 1,092     $ 438     $ 241     $ —     $ —     $ 2,821  
Intersegment sales
    2       1       4       11       —       (18 )     —  
Segment Income (Restated)
    89       68       18       46       —       —       221  
Depreciation and amortization (Restated)
    40       47       16       15       (15 )     —       103  
Capital expenditures
    8       16       6       7       (3 )     1       35  
 
Comparison of Six Month Data:
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
Six Months Ended September 30, 2008
  America     Europe     Asia     America     Consolidation     and Other     Total  
(Successor)                                          
 
Net sales (to third parties)
  $ 2,194     $ 2,315     $ 968     $ 595     $ (10 )   $ —     $ 6,062  
Intersegment sales
    2       5       1       —       —       (8 )     —  
Segment Income
    44       173       28       95       —       —       340  
Depreciation and amortization
    83       117       28       36       (42 )     1       223  
Capital expenditures
    17       36       11       15       (10 )     1       70  
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
May 16, 2007 Through September 30, 2007
  America     Europe     Asia     America     Consolidation     and Other     Total  
(Successor)                                          
 
Net sales (to third parties)
  $ 1,624     $ 1,686     $ 683     $ 375     $ —     $ —     $ 4,368  
Intersegment sales
    3       1       6       27       —       (37 )     —  
Segment Income (Restated)
    112       111       16       68       —       —       307  
Depreciation and amortization (Restated)
    61       72       24       22       (23 )     —       156  
Capital expenditures
    14       25       11       8       (3 )     2       57  
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
April 1, 2007 Through May 15, 2007
  America     Europe     Asia     America     Consolidation     and Other     Total  
(Predecessor)                                          
 
Net sales (to third parties)
  $ 446     $ 510     $ 216     $ 109     $ —     $ —     $ 1,281  
Intersegment sales
    —       —       1       7       —       (8 )     —  
Segment Income
    (24 )     32       6       18       —       —       32  
Depreciation and amortization
    7       11       7       5       (3 )     1       28  
Capital expenditures
    4       8       4       3       (3 )     1       17  

38


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table shows the reconciliation from Total Segment Income to Net income (loss) (in millions).
 
                                           
    Three Months
    Six Months
    May 16, 2007
      April 1, 2007
 
    Ended
    Ended
    Through
      Through
 
    September 30,     September 30,
    September 30,
      May 15,
 
    2008     2007     2008     2007       2007  
          (Restated)
          (Restated)
         
    Successor     Predecessor     Successor     Successor       Predecessor  
Total Segment Income
  $ 109     $ 221     $ 340     $ 307       $ 32  
Interest expense and amortization of debt issuance costs — net
    (41 )     (56 )     (81 )     (81 )       (26 )
Unrealized gains (losses) on change in fair value of derivative instruments — net(A)
    (221 )     (87 )     (200 )     (102 )       5  
Realized gains (losses) on corporate derivative instruments — net
    —       30       —       38         (3 )
Depreciation and amortization
    (107 )     (103 )     (223 )     (156 )       (28 )
Impairment charges on long-lived assets
    —       —       (1 )     —         —  
Minority interests’ share
    —       —       (2 )     2         1  
Adjustment to eliminate proportional consolidation(B)
    (18 )     7       (36 )     (2 )       (7 )
Restructuring recoveries (charges) — net
    —       —       1       (1 )       (1 )
Gain (loss) on sales of property, plant and equipment and businesses — net
    1       —       2       —         —  
Corporate selling, general and administrative expenses
    (16 )     (16 )     (30 )     (24 )       (35 )
Other costs — net(C)
    21       5       18       2         1  
Sale transaction fees
    —       —       —       —         (32 )
Benefit (provision) for taxes on income (loss)
    169       (20 )     134       (47 )       (4 )
                                           
Net income (loss)
  $ (103 )   $ (19 )   $ (78 )   $ (64 )     $ (97 )
                                           
 
 
(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. Total realized and unrealized gains (losses) are shown in the table below and are included in the aggregate each period in (Gain) loss on change in fair value of derivative instruments — net on our condensed consolidated statements of operations.
 


39


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                           
    Three Months
  Six Months
  May 16, 2007
    April 1, 2007
    Ended
  Ended
  Through
    Through
    September 30,   September 30,
  September 30,
    May 15,
    2008   2007   2008   2007     2007
        (Restated)
      (Restated)
     
    Successor   Successor   Successor   Successor     Predecessor
(Gains) losses on change in fair value of derivative instruments — net:
                                         
Realized and included in Segment Income
  $ (36 )   $ (27 )   $ (81 )   $ (48 )     $ (18 )
Realized on corporate derivative instruments
    —       (30 )     —       (38 )       3  
Unrealized
    221       87       200       102         (5 )
                                           
(Gains) losses on change in fair value of derivative instruments — net
  $ 185     $ 30     $ 119     $ 16       $ (20 )
                                           
 
(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 condensed consolidated statements of operations. See Note 6 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
 
(C) Other costs — net includes a $26 million gain on the reversal of a legal accrual for the Reynolds Boat Case during the three and six months ended September 30, 2008. See Note 16 — Commitments and Contingencies for additional discussion.
 
Information about Major Customers
 
All of our operating segments had Net sales to Rexam Plc (Rexam), our largest customer. The table below shows our net sales to Rexam as a percentage of total Net sales.
 
                       
    Three Months
  Six Months
  May 16, 2007
    April 1, 2007
    Ended
  Ended
  Through
    Through
    September 30,   September 30,
  September 30,
    May 15,
    2008   2007   2007   2007     2007
    Successor   Successor   Successor   Successor     Predecessor
Net sales to Rexam as a percentage of total net sales
  16.9%   15.6%   16.2%   14.7%     13.5%
 
18.   Supplemental Guarantor Information
 
In connection with the issuance of our Senior Notes, certain of our wholly-owned subsidiaries provided guarantees of the Senior Notes. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.

40


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following information presents condensed consolidating statements of operations, balance sheets and statements of cash flows of the Parent, the Guarantors, and the Non-Guarantors. Investments include investment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting.
 
Novelis Inc.
 
Condensed Consolidating Statement of Operations
(In millions)
 
                                         
    Three Months Ended September 30, 2008 (Successor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 389     $ 2,482     $ 767     $ (679 )   $ 2,959  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    384       2,364       722       (679 )     2,791  
Selling, general and administrative expenses
    6       62       21       —       89  
Depreciation and amortization
    6       77       24       —       107  
Research and development expenses
    7       3       —       —       10  
Interest expense and amortization of debt issuance costs — net
    7       31       3       —       41  
(Gain) loss on change in fair value of derivative instruments — net
    3       197       (15 )     —       185  
Equity in net (income) loss of affiliates
    81       (2 )     —       (81 )     (2 )
Other (income) expenses — net
    (3 )     (22 )     35       —       10  
                                         
      491       2,710       790       (760 )     3,231  
                                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (102 )     (228 )     (23 )     81       (272 )
Provision (benefit) for taxes on income (loss)
    1       (165 )     (5 )     —       (169 )
                                         
Income (loss) before minority interests’ share
    (103 )     (63 )     (18 )     81       (103 )
Minority interests’ share
    —       —       —       —       —  
                                         
Net income (loss)
  $ (103 )   $ (63 )   $ (18 )   $ 81     $ (103 )
                                         


41


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Novelis Inc.
 
Condensed Consolidating Statement of Operations
(In millions)
 
                                         
    Three Months Ended September 30, 2007 (Successor)  
                Non-
             
Restated
  Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 369     $ 2,340     $ 736     $ (624 )   $ 2,821  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    365       2,117       697       (624 )     2,555  
Selling, general and administrative expenses
    8       62       18       —       88  
Depreciation and amortization
    5       75       23       —       103  
Research and development expenses
    7       2       1       —       10  
Interest expense and amortization of debt issuance costs — net
    15       35       6       —       56  
(Gain) loss on change in fair value of derivative instruments — net
    1       21       8       —       30  
Equity in net (income) loss of affiliates
    (9 )     (20 )     —       9       (20 )
Other (income) expenses — net
    (8 )     7       (1 )     —       (2 )
                                         
      384       2,299       752       (615 )     2,820  
                                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (15 )     41       (16 )     (9 )     1  
Provision (benefit) for taxes on income (loss)
    4       15       1       —       20  
                                         
Income (loss) before minority interests’ share
    (19 )     26       (17 )     (9 )     (19 )
Minority interests’ share
    —       —       —       —       —  
                                         
Net income (loss)
  $ (19 )   $ 26     $ (17 )   $ (9 )   $ (19 )
                                         


42


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Novelis Inc.
 
Condensed Consolidating Statement of Operations
(In millions)
 
                                         
    Six Months Ended September 30, 2008 (Successor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 784     $ 5,064     $ 1,603     $ (1,389 )   $ 6,062  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    771       4,741       1,499       (1,389 )     5,622  
Selling, general and administrative expenses
    6       124       43       —       173  
Depreciation and amortization
    12       166       45       —       223  
Research and development expenses
    15       6       1       —       22  
Interest expense and amortization of debt issuance costs — net
    14       60       7       —       81  
(Gain) loss on change in fair value of derivative instruments — net
    3       135       (19 )     —       119  
Equity in net (income) loss of affiliates
    49       —       —       (49 )     —  
Other (income) expenses — net
    (10 )     (9 )     51       —       32  
                                         
      860       5,223       1,627       (1,438 )     6,272  
                                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (76 )     (159 )     (24 )     49       (210 )
Provision (benefit) for taxes on income (loss)
    2       (132 )     (4 )     —       (134 )
                                         
Income (loss) before minority interests’ share
    (78 )     (27 )     (20 )     49       (76 )
Minority interests’ share
    —       —       (2 )     —       (2 )
                                         
Net income (loss)
  $ (78 )   $ (27 )   $ (22 )   $ 49     $ (78 )
                                         


43


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Novelis Inc.
 
Condensed Consolidating Statement of Operations
(In millions)
 
 
                                         
    May 16, 2007 Through September 30, 2007 (Successor)  
                Non-
             
Restated
  Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 614     $ 3,687     $ 1,155     $ (1,088 )   $ 4,368  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    612       3,368       1,099       (1,088 )     3,991  
Selling, general and administrative expenses
    13       87       30       —       130  
Depreciation and amortization
    8       113       35       —       156  
Research and development expenses
    9       9       5       —       23  
Interest expense and amortization of debt issuance costs — net
    18       55       8       —       81  
(Gain) loss on change in fair value of derivative instruments — net
    (12 )     17       11       —       16  
Equity in net (income) loss of affiliates
    16       (19 )     —       (16 )     (19 )
Other (income) expenses — net
    (12 )     21       —       —       9  
                                         
      652       3,651       1,188       (1,104 )     4,387  
                                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    (38 )     36       (33 )     16       (19 )
Provision (benefit) for taxes on income (loss)
    26       20       1       —       47  
                                         
Income (loss) before minority interests’ share
    (64 )     16       (34 )     16       (66 )
Minority interests’ share
    —       —       2       —       2  
                                         
Net income (loss)
  $ (64 )   $ 16     $ (32 )   $ 16     $ (64 )
                                         


44


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Novelis Inc.
 
Condensed Consolidating Statement of Operations
(In millions)
 
                                         
    April 1, 2007 Through May 15, 2007 (Predecessor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 129     $ 1,020     $ 359     $ (227 )   $ 1,281  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    131       961       340       (227 )     1,205  
Selling, general and administrative expenses
    29       51       15       —       95  
Depreciation and amortization
    2       18       8       —       28  
Research and development expenses
    5       1       —       —       6  
Interest expense and amortization of debt issuance costs — net
    3       20       3       —       26  
(Gain) loss on change in fair value of derivative instruments — net
    (2 )     (19 )     1       —