10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 8, 2012
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2011
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32312
Novelis Inc.
(Exact name of registrant as specified in its charter)
Canada | 98-0442987 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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3560 Lenox Road, Suite 2000 Atlanta, Georgia |
30326 | |
(Address of principal executive offices) | (Zip Code) |
Telephone: (404) 760-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | 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 ¨ No x
As of January 31, 2012, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrants outstanding shares were held indirectly by Hindalco Industries Ltd., the registrants parent company.
Table of Contents
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||||||
Item 1. |
3 | |||||
3 | ||||||
Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011 (unaudited) |
4 | |||||
5 | ||||||
6 | ||||||
7 | ||||||
Notes to the Condensed Consolidated Financial Statements (unaudited) |
8 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
39 | ||||
Item 3. |
56 | |||||
Item 4. |
59 | |||||
PART II. OTHER INFORMATION | ||||||
Item 1. |
60 | |||||
Item 1A. |
60 | |||||
Item 6. |
61 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions)
Three Months Ended December 31, |
Nine Months Ended December 31, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 2,462 | $ | 2,560 | $ | 8,455 | $ | 7,617 | ||||||||
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Cost of goods sold (exclusive of depreciation and amortization) |
2,224 | 2,232 | 7,481 | 6,628 | ||||||||||||
Selling, general and administrative expenses |
95 | 94 | 281 | 272 | ||||||||||||
Depreciation and amortization |
79 | 100 | 249 | 307 | ||||||||||||
Research and development expenses |
10 | 9 | 34 | 27 | ||||||||||||
Interest expense and amortization of debt issuance costs |
74 | 46 | 228 | 125 | ||||||||||||
Interest income |
(3 | ) | (4 | ) | (11 | ) | (10 | ) | ||||||||
Loss on early extinguishment of debt |
| 74 | | 74 | ||||||||||||
Restructuring charges, net |
1 | 20 | 31 | 35 | ||||||||||||
Equity in net loss of non-consolidated affiliates |
4 | 5 | 9 | 11 | ||||||||||||
Other (income) expense, net |
(1 | ) | (14 | ) | (85 | ) | (53 | ) | ||||||||
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2,483 | 2,562 | 8,217 | 7,416 | |||||||||||||
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Income (loss) before income taxes |
(21 | ) | (2 | ) | 238 | 201 | ||||||||||
Income tax (benefit) provision |
(10 | ) | 33 | 42 | 104 | |||||||||||
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Net income (loss) |
(11 | ) | (35 | ) | 196 | 97 | ||||||||||
Net income attributable to noncontrolling interests |
1 | 11 | 26 | 31 | ||||||||||||
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Net income (loss) attributable to our common shareholder |
$ | (12 | ) | $ | (46 | ) | $ | 170 | $ | 66 | ||||||
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See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)
December 31, 2011 |
March 31, 2011 |
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ASSETS | ||||||||
Current assets |
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Cash and cash equivalents |
$ | 436 | $ | 311 | ||||
Accounts receivable, net |
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third parties (net of allowances of $4 and $7 as of December 31, 2011 and March 31, 2011, respectively) |
1,267 | 1,480 | ||||||
related parties |
35 | 28 | ||||||
Inventories |
1,091 | 1,338 | ||||||
Prepaid expenses and other current assets |
74 | 50 | ||||||
Fair value of derivative instruments |
89 | 165 | ||||||
Deferred income tax assets |
54 | 39 | ||||||
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Total current assets |
3,046 | 3,411 | ||||||
Property, plant and equipment, net |
2,646 | 2,543 | ||||||
Goodwill |
611 | 611 | ||||||
Intangible assets, net |
648 | 707 | ||||||
Investment in and advances to nonconsolidated affiliates |
671 | 743 | ||||||
Fair value of derivative instruments, net of current portion |
6 | 17 | ||||||
Deferred income tax assets |
40 | 52 | ||||||
Other longterm assets |
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third parties |
167 | 193 | ||||||
related parties |
16 | 19 | ||||||
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Total assets |
$ | 7,851 | $ | 8,296 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities |
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Current portion of longterm debt |
$ | 22 | $ | 21 | ||||
Shortterm borrowings |
227 | 17 | ||||||
Accounts payable |
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third parties |
992 | 1,378 | ||||||
related parties |
52 | 50 | ||||||
Fair value of derivative instruments |
97 | 82 | ||||||
Accrued expenses and other current liabilities |
466 | 568 | ||||||
Deferred income tax liabilities |
30 | 43 | ||||||
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Total current liabilities |
1,886 | 2,159 | ||||||
Longterm debt, net of current portion |
4,322 | 4,065 | ||||||
Deferred income tax liabilities |
509 | 552 | ||||||
Accrued postretirement benefits |
507 | 526 | ||||||
Other longterm liabilities |
326 | 359 | ||||||
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Total liabilities |
7,550 | 7,661 | ||||||
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Commitments and contingencies |
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Shareholders equity |
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Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of December 31, 2011 and March 31, 2011 |
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Additional paidin capital |
1,660 | 1,830 | ||||||
Accumulated deficit |
(1,272 | ) | (1,442 | ) | ||||
Accumulated other comprehensive (loss) income |
(121 | ) | 57 | |||||
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Total equity of our common shareholder |
267 | 445 | ||||||
Noncontrolling interests |
34 | 190 | ||||||
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Total equity |
301 | 635 | ||||||
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Total liabilities and equity |
$ | 7,851 | $ | 8,296 | ||||
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See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
Nine Months
Ended December 31, |
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2011 | 2010 | |||||||
OPERATING ACTIVITIES |
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Net income |
$ | 196 | $ | 97 | ||||
Adjustments to determine net cash provided by operating activities: |
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Depreciation and amortization |
249 | 307 | ||||||
Gain on unrealized derivatives and other realized derivatives in investing activities, net |
(67 | ) | (58 | ) | ||||
Loss on extinguishment of debt |
| 74 | ||||||
Deferred income taxes |
11 | 12 | ||||||
Writeoff and amortization of fair value adjustments, net |
20 | 8 | ||||||
Equity in net loss of nonconsolidated affiliates |
9 | 11 | ||||||
(Gain) loss on foreign exchange remeasurement of debt |
16 | | ||||||
(Gain) loss on sale of assets |
1 | (11 | ) | |||||
Non-cash impairment charges |
14 | 5 | ||||||
Amortization of debt issuance costs |
12 | 6 | ||||||
Other, net |
(9 | ) | (8 | ) | ||||
Changes in assets and liabilities: |
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Accounts receivable |
152 | (37 | ) | |||||
Inventories |
193 | (220 | ) | |||||
Accounts payable |
(426 | ) | 22 | |||||
Other current assets |
(16 | ) | (7 | ) | ||||
Other current liabilities |
(123 | ) | 21 | |||||
Other noncurrent assets |
14 | (8 | ) | |||||
Other noncurrent liabilities |
(41 | ) | 4 | |||||
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Net cash provided by operating activities |
205 | 218 | ||||||
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INVESTING ACTIVITIES |
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Capital expenditures |
(297 | ) | (132 | ) | ||||
Proceeds from sales of assets |
11 | 28 | ||||||
Proceeds from investment in and advances to nonconsolidated affiliates, net |
1 | 1 | ||||||
(Outflow) proceeds from related party loans receivable, net |
(5 | ) | 8 | |||||
Proceeds from settlement of other undesignated derivative instruments, net |
95 | 81 | ||||||
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Net cash (used in) provided by investing activities |
(195 | ) | (14 | ) | ||||
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FINANCING ACTIVITIES |
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Proceeds from issuance of debt |
274 | 3,985 | ||||||
Principal payments |
(16 | ) | (2,486 | ) | ||||
Shortterm borrowings, net |
211 | 49 | ||||||
Return of capital to our common shareholder |
| (1,700 | ) | |||||
Dividends, noncontrolling interest |
(1 | ) | (18 | ) | ||||
Acquisition of noncontrolling interest in Novelis Korea Ltd. |
(343 | ) | | |||||
Debt issuance costs |
(2 | ) | (174 | ) | ||||
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Net cash provided by (used in) financing activities |
123 | (344 | ) | |||||
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Net (decrease) increase in cash and cash equivalents |
133 | (140 | ) | |||||
Effect of exchange rate changes on cash balances held in foreign currencies |
(8 | ) | | |||||
Cash and cash equivalents beginning of period |
311 | 437 | ||||||
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Cash and cash equivalents end of period |
$ | 436 | $ | 297 | ||||
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See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (unaudited)
(In millions, except number of shares)
Equity of our Common Shareholder | ||||||||||||||||||||||||||||
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive Income (Loss) |
Non- controlling |
Total | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit | (AOCI) | Interests | Equity | ||||||||||||||||||||||
Balance as of March 31, 2011 |
1,000 | $ | | $ | 1,830 | $ | (1,442 | ) | $ | 57 | $ | 190 | $ | 635 | ||||||||||||||
Net income attributable to our common shareholder |
| | | 170 | | | 170 | |||||||||||||||||||||
Net income attributable to noncontrolling interests |
| | | | | 26 | 26 | |||||||||||||||||||||
Currency translation adjustment, net of tax provision of $ included in AOCI |
| | | | (128 | ) | (9 | ) | (137 | ) | ||||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $28 included in AOCI |
| | | | (52 | ) | (2 | ) | (54 | ) | ||||||||||||||||||
Change in pension and other benefits, net of tax provision of $1 included in AOCI |
| | | | 5 | | 5 | |||||||||||||||||||||
Noncontrolling interest cash dividends |
| | | | | (1 | ) | (1 | ) | |||||||||||||||||||
Acquisition of noncontrolling interest in Novelis Korea Ltd |
| | (170 | ) | | (3 | ) | (170 | ) | (343 | ) | |||||||||||||||||
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Balance as of December 31, 2011 |
1,000 | $ | | $ | 1,660 | $ | (1,272 | ) | $ | (121 | ) | $ | 34 | $ | 301 | |||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In millions)
Three Months Ended December 31, 2011 |
Three Months Ended December 31, 2010 |
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Attributable to Our Common Shareholder |
Attributable
to Noncontrolling Interests |
Total |
Attributable to Our Common Shareholder |
Attributable
to Noncontrolling Interests |
Total | |||||||||||||||||||
Net income (loss) |
$ | (12 | ) | $ | 1 | $ | (11 | ) | $ | (46 | ) | $ | 11 | $ | (35 | ) | ||||||||
Other comprehensive income (loss): |
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Currency translation adjustment |
(48 | ) | 5 | (43 | ) | (33 | ) | | (33 | ) | ||||||||||||||
Net change in fair value of effective portion of cash flow hedges |
54 | (2 | ) | 52 | 22 | | 22 | |||||||||||||||||
Net change in pension and other benefits |
3 | | 3 | (17 | ) | | (17 | ) | ||||||||||||||||
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Other comprehensive income (loss) before income tax effect |
9 | 3 | 12 | (28 | ) | | (28 | ) | ||||||||||||||||
Income tax (benefit) provision related to items of other comprehensive income (loss) |
18 | | 18 | (2 | ) | | (2 | ) | ||||||||||||||||
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Other comprehensive income (loss), net of tax |
(9 | ) | 3 | (6 | ) | (26 | ) | | (26 | ) | ||||||||||||||
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Comprehensive income (loss) |
$ | (21 | ) | $ | 4 | $ | (17 | ) | $ | (72 | ) | $ | 11 | $ | (61 | ) | ||||||||
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Nine Months Ended December 31, 2011 |
Nine Months Ended December 31, 2010 |
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Attributable to Our Common Shareholder |
Attributable
to Noncontrolling Interests |
Total |
Attributable to Our Common Shareholder |
Attributable
to Noncontrolling Interests |
Total | |||||||||||||||||||
Net income |
$ | 170 | $ | 26 | $ | 196 | $ | 66 | $ | 31 | $ | 97 | ||||||||||||
Other comprehensive income (loss): |
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Currency translation adjustment |
(128 | ) | (9 | ) | (137 | ) | 5 | 1 | 6 | |||||||||||||||
Net change in fair value of effective portion of cash flow hedges |
(80 | ) | (2 | ) | (82 | ) | 32 | | 32 | |||||||||||||||
Net change in pension and other benefits |
6 | | 6 | (17 | ) | | (17 | ) | ||||||||||||||||
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Other comprehensive income (loss) before income tax effect |
(202 | ) | (11 | ) | (213 | ) | 20 | 1 | 21 | |||||||||||||||
Income tax (benefit) provision related to items of other comprehensive income (loss) |
(27 | ) | | (27 | ) | 5 | | 5 | ||||||||||||||||
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Other comprehensive income (loss), net of tax |
(175 | ) | (11 | ) | (186 | ) | 15 | 1 | 16 | |||||||||||||||
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Comprehensive income (loss) |
$ | (5 | ) | $ | 15 | $ | 10 | $ | 81 | $ | 32 | $ | 113 | |||||||||||
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See accompanying notes to the condensed consolidated financial statements.
7
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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. and became Rio Tinto Alcan Inc. References herein to Rio Tinto 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 worlds leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the beverage and food can, transportation, construction and industrial, and foil products markets. As of December 31, 2011, we had operations in eleven countries on four continents: North America, South America, Asia and Europe, 29 operating plants and seven research and development facilities. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2011 filed with the United States Securities and Exchange Commission (SEC) on May 26, 2011. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairments of long-lived assets, intangible assets and equity investments; (4) actuarial assumptions related to pension and other postretirement benefit plans; (5) income tax reserves and valuation allowances and (6) assessment of loss contingencies, including environmental, litigation and other tax reserves.
Acquisition of Novelis Common Stock
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 Companys 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.
Consolidation Policy
Our consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our consolidated financial statements.
Reclassification
Certain reclassifications of the prior period amounts and presentation have been made to conform to the presentation adopted for the current period.
For the three and nine months ended December 31, 2010, we reclassified $(30) million and $(58) million, respectively, from (Gain) loss on change in fair value of derivative instruments, net to Other (income) expense, net to conform with the current year presentation. This reclassification had no impact on Income (loss) before income taxes, Net income (loss), the condensed consolidated balance sheets or condensed consolidated statements of cash flows. See footnote 12 Other (income) expense, net for details of Other (income) expense, net.
Recently Issued Accounting Standards
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
GAAP and IFRSs. ASU No. 2011-04 develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards (IFRSs) and improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and IFRSs. ASU No. 2011-04 will be effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this standard will have no impact on our consolidated financial position, but will require additional disclosure.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders equity and requires all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in US GAAP for the presentation of reclassification adjustments must continue to be followed. These standards are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. We are currently evaluating the potential impact, if any, of the adoption of ASU No. 2011-05 on our consolidated financial statements and disclosures.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which contains changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity may also elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. ASU No. 2011-08 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, although early adoption is permitted. We plan to early adopt ASU No. 2011-08 for the year ended March 31, 2012 and will elect to perform the qualitative assessment to determine if further analysis is required for any of our reporting units.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The requirements are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. We are currently evaluating the potential impact, if any, of the adoption of ASU No. 2011-11 on our consolidated financial statements and disclosures.
2. | RESTRUCTURING PROGRAMS |
Restructuring charges, net for the nine months ended December 31, 2011 is $31 million, which includes $14 million of non-cash asset impairments that were not recorded through the restructuring liability. The following table summarizes our restructuring liability activity by segment (in millions).
Europe |
North America |
Asia |
South America |
Corporate |
Total
Restructuring Liabilities |
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Balance as of March 31, 2011 |
$ | 37 | $ | 6 | $ | | $ | 4 | $ | 3 | $ | 50 | ||||||||||||
Provisions, net |
13 | 4 | | | | 17 | ||||||||||||||||||
Cash payments |
(19 | ) | (5 | ) | | (2 | ) | (1 | ) | (27 | ) | |||||||||||||
Adjustments other |
(3 | ) | | | | | (3 | ) | ||||||||||||||||
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Balance as of December 31, 2011 |
$ | 28 | $ | 5 | $ | | $ | 2 | $ | 2 | $ | 37 | ||||||||||||
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Europe
Total Restructuring charges, net for the nine months ended December 31, 2011 consisted of $16 million of severance across our European plants, fixed asset impairments related to restructuring actions initiated in prior years and other exit costs. For the nine months ended December 31, 2011, we made $10 million in severance payments, $2 million in payments for environmental remediation, and $7 million in other exit related payments.
9
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The Company ceased operations associated with the Bridgnorth, UK foil rolling and laminating operations at the end of April 2011. In the nine months ended December 31, 2011, based on negotiations for the sale of the land and buildings on the Bridgnorth site, we recorded an additional $7 million of fixed asset impairment and restructuring charges related to the sale and site closure and made payments of $11 million in severance and other exit payments related to this plan.
In the nine months ended December 31, 2011 we recorded $4 million of severance charges for restructuring programs related to our European general and administrative functions.
As of December 31, 2011, the restructuring liability balance of $28 million was comprised of $20 million of environmental remediation liabilities, $5 million of severance costs and $3 million of other costs.
North America
In the nine months ended December 31, 2011, we recorded an additional $2 million of termination benefits related to the previously announced relocation of our North American headquarters from Cleveland to Atlanta and we made $5 million in payments related to previously announced separation programs. We also recorded $2 million of one-time termination benefits associated with our decision to relocate our primary research and development operations to Kennesaw, Georgia. As of December 31, 2011, the restructuring liability balance of $5 million was comprised of $4 million of severance costs and $1 million of other costs.
South America
Total Restructuring charges, net for the nine months ended December 31, 2011, consisted of $11 million of severance costs, fixed asset impairments related to current period restructuring actions and impairments related to actions initiated in prior years. For the nine months ended December 31, 2011, we made $2 million in severance and other exit related payments.
In the nine months ended December 31, 2011, we announced that we ceased production of converter foil (9 microns thickness or less) for flexible packaging and stopped production of one rolling mill at our Santo André plant in Brazil. The decision was made due to overcapacity in the foil market and increased competition from low-cost countries. Approximately 74 positions were eliminated in the Santo Andre plant related to ceasing these operations. For the nine months ended December 31, 2011, the Company recorded $3 million in asset impairment costs related to the write down of land and building to fair value and $1 million in severance related costs.
As of December 31 2011, the restructuring liability balance of $2 million was comprised of environmental remediation liabilities.
Corporate
As of December 31, 2011, the restructuring liability balance of $2 million was comprised of lease termination costs incurred in the relocation of our corporate headquarters to a new facility in Atlanta and other contract termination fees.
3. | INVENTORIES |
Inventories consisted of the following (in millions).
December 31, 2011 |
March 31, 2011 |
|||||||
Finished goods |
$ | 264 | $ | 293 | ||||
Work in process |
373 | 529 | ||||||
Raw materials |
352 | 414 | ||||||
Supplies |
102 | 102 | ||||||
|
|
|
|
|||||
Inventories |
$ | 1,091 | $ | 1,338 | ||||
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|
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
4. | CONSOLIDATION |
Purchase of Noncontrolling Interest in Novelis Korea Limited
During the three months ended December 31, 2011, we acquired 31.2% of the shares of Novelis Korea Ltd. for $343 million (KRW 393.9 billion). The transaction resulted in our ownership of 99% of the outstanding shares of Novelis Korea Limited. The acquisition was recorded as a reduction to equity of $343 million.
The following table summarizes the change in ownership interest (in millions).
Nine months
ended December 31, 2011 |
||||
Net income attributable to our common shareholder |
$ | 170 | ||
Decrease in additional paid-in capital for purchase of shares in Novelis Korea Limited |
(170 | ) | ||
Change from net income attributable to our common shareholder and transfers from noncontrolling interest |
$ | | ||
|
|
Variable Interest Entities (VIE)
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows), formerly known as ARCO Aluminum, Inc. (ARCO). Effective August 1, 2011, a consortium of Japanese companies purchased ARCO. The transaction did not impact Novelis interest in Logan. Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and Tri-Arrows to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logans creditors do not have recourse to our general credit.
Novelis has a majority voting right on Logans board of directors and has the ability to direct the majority of Logans production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify Novelis as Logans primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.
The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our condensed consolidated balance sheets (in millions). There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or Tri-Arrows.
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
December 31, 2011 |
March 31, 2011 |
|||||||
Assets | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2 | $ | 1 | ||||
Accounts receivable |
23 | 27 | ||||||
Inventories |
44 | 36 | ||||||
|
|
|
|
|||||
Total current assets |
69 | 64 | ||||||
Property, plant and equipment, net |
16 | 13 | ||||||
Goodwill |
12 | 12 | ||||||
Deferred income taxes |
54 | 52 | ||||||
Other long-term assets |
4 | 3 | ||||||
|
|
|
|
|||||
Total assets |
$ | 155 | $ | 144 | ||||
|
|
|
|
|||||
Liabilities | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 26 | $ | 26 | ||||
Accrued expenses and other current liabilities |
15 | 11 | ||||||
|
|
|
|
|||||
Total current liabilities |
41 | 37 | ||||||
Accrued postretirement benefits |
124 | 120 | ||||||
Other long-term liabilities |
2 | 2 | ||||||
|
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|
|
|||||
Total liabilities |
$ | 167 | $ | 159 | ||||
|
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|
|
5. | INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS |
The following table summarizes our share of the condensed results of operations of our equity method affiliates (in millions). These results include the incremental depreciation and amortization expense that we record in our equity method accounting as a result of fair value adjustments made to our investments in non-consolidated affiliates due to the Arrangement.
Three Months Ended December 31, |
Nine Months Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 61 | $ | 52 | $ | 188 | $ | 167 | ||||||||
Costs, expenses and provisions for taxes on income |
65 | 57 | 197 | 178 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (4 | ) | $ | (5 | ) | $ | (9 | ) | $ | (11 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Purchase of tolling services from Aluminium Norf GmbH (Norf) |
$ | 61 | $ | 51 | $ | 188 | $ | 166 | ||||||||
|
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|
|
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. For the three and nine months ended December 31, 2011 and 2010, we earned less than $1 million of interest income on a loan due from Norf.
We have guaranteed the indebtedness for a credit facility and loan on behalf of Norf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million Euros. As of December 31, 2011, our guarantee was $1 million.
The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances.
December 31, 2011 |
March 31, 2011 |
|||||||
Accounts receivable |
$ | 35 | $ | 28 | ||||
Other long-term assets |
$ | 16 | $ | 19 | ||||
Accounts payable |
$ | 52 | $ | 50 |
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
6. | DEBT |
Debt consists of the following (in millions).
December 31, 2011 | March 31, 2011 | |||||||||||||||||||||||||||
Interest Rates(A) |
Principal |
Unamortized Carrying Value Adjustments |
Carrying Value |
Principal |
Unamortized Carrying Value Adjustments |
Carrying Value |
||||||||||||||||||||||
Third party debt: |
||||||||||||||||||||||||||||
Short term borrowings |
4.30 | % | $ | 227 | $ | | $ | 227 | $ | 17 | $ | | $ | 17 | ||||||||||||||
Novelis Inc. |
||||||||||||||||||||||||||||
Floating rate Term Loan Facility, due March 2017 |
3.75 | % | 1,709 | (39 | )(B) | 1,670 | 1,496 | (38 | )(B) | 1,458 | ||||||||||||||||||
8.375% Senior Notes, due December 2017 |
8.375 | % | 1,100 | | 1,100 | 1,100 | | 1,100 | ||||||||||||||||||||
8.75% Senior Notes, due December 2020 |
8.75 | % | 1,400 | | 1,400 | 1,400 | (1 | ) | 1,399 | |||||||||||||||||||
7.25% Senior Notes, due February 2015 |
7.25 | % | 74 | 2 | 76 | 74 | 3 | 77 | ||||||||||||||||||||
Novelis Korea Limited |
||||||||||||||||||||||||||||
Facility Loan, due December 2014 |
4.63 | % | 26 | | 26 | | | | ||||||||||||||||||||
Term Loan, due December 2014 |
4.96 | % | 17 | | 17 | | | | ||||||||||||||||||||
Novelis Switzerland S.A. |
||||||||||||||||||||||||||||
Capital lease obligation, due December 2019 (Swiss francs (CHF) 41 million) |
7.50 | % | 44 | (2 | ) | 42 | 48 | (3 | ) | 45 | ||||||||||||||||||
Novelis Brazil |
||||||||||||||||||||||||||||
BNDES loans, due December 2018 through April 2021 |
5.50 | % | 15 | (4 | ) | 11 | 5 | (2 | ) | 3 | ||||||||||||||||||
Other |
||||||||||||||||||||||||||||
Other debt, due December 2011 through November 2015 |
4.27 | % | 2 | | 2 | 4 | | 4 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total debt third parties |
4,614 | (43 | ) | 4,571 | 4,144 | (41 | ) | 4,103 | ||||||||||||||||||||
Less: Short term borrowings |
(227 | ) | | (227 | ) | (17 | ) | | (17 | ) | ||||||||||||||||||
Current portion of long term debt |
(22 | ) | | (22 | ) | (21 | ) | | (21 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Long-term debt, net of current portion third parties: |
$ | 4,365 | $ | (43 | ) | $ | 4,322 | $ | 4,106 | $ | (41 | ) | $ | 4,065 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(A) | Interest rates are as of December 31, 2011 and exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of the Arrangement, the debt exchange completed in fiscal 2009, the series of refinancing transactions we completed in fiscal 2011, and the additional borrowing in fiscal 2012. |
(B) | Debt existing at the time of the Arrangement was recorded at fair value. In connection with a series of refinancing transactions a portion of the historical fair value adjustments were allocated to the Term Loan Facility. The balance also includes the unamortized discount on the Term Loan Facility. |
Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized carrying value adjustments and using exchange rates as of December 31, 2011 for our debt denominated in foreign currencies) are as follows (in millions).
As of December 31, 2011 |
Amount | |||
Short-term borrowings and Current portion of long term debt due within one year |
$ | 249 | ||
2 years |
24 | |||
3 years |
68 | |||
4 years |
99 | |||
5 years |
25 | |||
Thereafter |
4,149 | |||
|
|
|||
Total |
$ | 4,614 | ||
|
|
13
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
Senior Notes
On December 17, 2010, we issued $1.1 billion in aggregate principal amount of 8.375% Senior Notes Due 2017 (the 2017 Notes) and $1.4 billion in aggregate principal amount of 8.75% Senior Notes Due 2020 (the 2020 Notes, and together with the 2017 Notes, the Notes).
Also, on December 17, 2010, we commenced a cash tender offer and consent solicitation for our 7.25% Senior Notes due 2015 (the 7.25% Notes) and our 11.5% Senior Notes due 2015 (the 11.5% Notes). The entire $185 million aggregate outstanding principal amount of the 11.5% Notes was tendered and redeemed. Of the $1.1 billion aggregate principal amount of the 7.25% Notes, $74 million was not redeemed and is expected to remain outstanding through maturity in February 2015. The 7.25% Notes that remain outstanding are no longer subject to substantially all of the restrictive covenants and certain events of default originally included in the indenture for the 7.25% Notes.
Senior Secured Credit Facilities
On December 7, 2011, we borrowed an incremental $225 million through our existing term loan credit facility (Term Loan Facility). The senior secured credit facilities consist of (1) a $1.5 billion six-year secured and an incremental $225 million five-year secured term loan credit facility, due March 2017 (collectively referred to as Term Loan Facility) and (2) an $800 million five-year asset based loan facility (ABL Facility) that may be increased by an additional $200 million. The interest rate on the Term Loan Facility are the higher of LIBOR or a floor of 100 basis points, plus a spread ranging from 2.75% to 3.0% depending on the Companys net leverage ratio, as defined in the Term Loan Facility agreement. The senior secured credit facilities contain various affirmative covenants, including covenants with respect to our financial statements, litigation and other reporting requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations) causing new subsidiaries to pledge collateral and guaranty our obligations. The senior secured credit facilities also contain certain negative covenants as specified in the agreements. Substantially all of our assets are pledged as collateral under the senior secured credit facilities.
Korean Bank Loans
In December 2011, Novelis Korea Limited (Novelis Korea) entered into three separate loan agreements with local banks. The Novelis Korea bank loans consist of the following: (1) a $26 million (KRW 30 billion) loan due December 2014, (2) a $17 million (KRW 20 billion) loan due December 2014, and (3) a short term borrowing of $17 million (KRW 20 billion). All three bank loans have variable interest rates with the base rate tied to Koreas 91-day CD rate plus an applicable spread ranging from 1.08% to 1.41%.
On January 18, 2012 Novelis Korea entered into interest rate swaps for the two 3 year loans maturing December 2014. The rates were fixed at 4.485% for the $26 million (KRW 30 billion) loan and 4.815% for the $17 million (KRW 20 billion) loan.
Short-Term Borrowings and Lines of Credit
As of December 31, 2011, our short-term borrowings were $227 million consisting of $208 million of short-term loans under our ABL Facility, $1 million in bank overdrafts, a $17 million (KRW 20 billion) Novelis Korea bank loan, and $1 million in other short term borrowings. As of December 31, 2011, $23 million of the ABL Facility was utilized for letters of credit, and we had $422 million in remaining availability under the ABL Facility. The weighted average interest rate on our total short-term borrowings was 4.30% and 2.43% as of December 31, 2011 and March 31, 2011, respectively.
As of December 31, 2011, we had $48 million of outstanding letters of credit in Korea which are not related to the ABL Facility.
BNDES Loans
In February 2011 through December 2011, Novelis Brazil entered into eleven new loan agreements (the BNDES loans) with Brazils National Bank for Economic and Social Development (BNDES) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). The agreements provided for a commitment of Brazilian Real (R$) borrowings at a fixed rate of 5.5% up to an aggregate of $18 million (R$34 million). As of December 31, 2011, we had $15 million (R$28 million) outstanding under the BNDES loan agreements with maturity dates of December 2018 through April 2021.
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt. Prior to the completion of the December 17, 2010 refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the refinancing transactions on December 17, 2010, we ceased hedge accounting for these swaps. No interest rate swaps were designated as of December 31, 2011.
14
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
7. | SHARE-BASED COMPENSATION |
The board of directors has authorized four long term incentive plans as follows:
| The Novelis Long-Term Incentive Plan FY 2009 FY 2012 (2009 LTIP) was authorized in June 2008. Under the 2009 LTIP, phantom stock appreciation rights (SARs) were granted to certain of our executive officers and key employees. |
| The Novelis Long-Term Incentive Plan FY 2010 FY 2013 (2010 LTIP) was authorized in June 2009. Under the 2010 LTIP, SARs were granted to certain of our executive officers and key employees. |
| The Novelis Long-Term Incentive Plan FY 2011 FY 2014 (2011 LTIP) was authorized in May 2010. The 2011 LTIP provides for SARs and phantom restricted stock units (RSUs). |
| The Novelis Long-Term Incentive Plan FY 2012 FY 2015 (2012 LTIP) was authorized in May 2011. The 2012 LTIP provides for SARs and RSUs. |
Under all four plans, SARs vest at the rate of 25% per year, subject to performance criteria and expire seven years from their grant date. 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 and the market value on the date of exercise, subject to a maximum payout as defined by the plan. If the SAR is exercised within one year of vesting, the maximum payout is equal to two and a half times the target. If the SAR is exercised after one year of vesting, the maximum payout is equal to three times the target. The RSUs under the 2011 LTIP and 2012 LTIP vest in full three years from the grant date and are not subject to performance criteria. The payout on the RSUs is limited to three times the grant price.
Total compensation expense related to SARs and RSUs under the long term incentive plans for the respective periods is presented in the table below (in millions). These amounts are included in Selling, general and administrative expenses in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2013, 2014 and 2015 have not yet been established, measurement periods for SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year SARs has been recorded for the three and nine months ended December 31, 2011 and 2010.
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Novelis Long-Term Incentive Plan 2009 |
$ | | $ | 1 | $ | 2 | $ | 4 | ||||||||
Novelis Long-Term Incentive Plan 2010 |
(1 | ) | 1 | (2 | ) | 7 | ||||||||||
Novelis Long-Term Incentive Plan 2011 |
| 2 | (3 | ) | 3 | |||||||||||
Novelis Long-Term Incentive Plan 2012 |
| | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total compensation (income) expense |
$ | (1 | ) | $ | 4 | $ | (2 | ) | $ | 14 | ||||||
|
|
|
|
|
|
|
|
15
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The tables below show the RSUs activity under our 2012 LTIP and 2011 LTIP and the SARs activity under our 2012 LTIP, 2011 LTIP, 2010 LTIP and 2009 LTIP.
2012 LTIP - RSUs |
Number of RSUs |
Grant Date
Fair Value (in Indian Rupees) |
Aggregate Intrinsic Value (USD in millions) |
|||||||||
RSUs outstanding as of March 31, 2011 |
| | $ | | ||||||||
Granted |
923,620 | 188.20 | 2 | |||||||||
Forfeited/Cancelled |
(26,380 | ) | 192.38 | |||||||||
|
|
|||||||||||
RSUs outstanding as of December 31, 2011 |
897,240 | 188.07 | $ | 2 | ||||||||
|
|
2012 LTIP - SARs |
Number of SARs |
Weighted Average Exercise Price (in Indian Rupees) |
Weighted
Average Remaining Contractual Term (In years) |
Aggregate Intrinsic Value (USD in millions) |
||||||||||||
SARs outstanding as of March 31, 2011 |
| | | $ | | |||||||||||
Granted |
7,030,830 | 186.78 | | |||||||||||||
Forfeited/Cancelled |
(170,345 | ) | 192.38 | |||||||||||||
|
|
|||||||||||||||
SARs outstanding as of December 31, 2011 |
6,860,485 | 188.09 | 6.4 | $ | | |||||||||||
|
|
2011 LTIP - RSUs |
Number of RSUs |
Grant Date
Fair Value (in Indian Rupees) |
Aggregate Intrinsic Value (USD in millions) |
|||||||||
RSUs outstanding as of March 31, 2011 |
906,057 | 148.79 | $ | 4 | ||||||||
Forfeited/Cancelled |
(40,388 | ) | 147.10 | |||||||||
|
|
|||||||||||
RSUs outstanding as of December 31, 2011 |
865,669 | 148.86 | $ | 2 | ||||||||
|
|
2011 LTIP - SARs |
Number of SARs |
Weighted Average Exercise Price (in Indian Rupees) |
Weighted
Average Remaining Contractual Term (In years) |
Aggregate Intrinsic Value (USD in millions) |
||||||||||||
SARs outstanding as of March 31, 2011 |
7,117,652 | 148.79 | 6.2 | $ | 10 | |||||||||||
Exercised |
(69,222 | ) | 147.10 | |||||||||||||
Forfeited/Cancelled |
(277,433 | ) | 147.10 | |||||||||||||
|
|
|||||||||||||||
SARs outstanding as of December 31, 2011 |
6,770,997 | 148.87 | 5.4 | $ | | |||||||||||
|
|
2010 LTIP - SARs |
Number of SARs |
Weighted Average Exercise Price (in Indian Rupees) |
Weighted
Average Remaining Contractual Term (In years) |
Aggregate Intrinsic Value (USD in millions) |
||||||||||||
SARs outstanding as of March 31, 2011 |
11,052,491 | 88.46 | 5.2 | $ | 25 | |||||||||||
Exercised |
(1,527,246 | ) | 87.33 | |||||||||||||
Forfeited/Cancelled |
(253,202 | ) | 88.10 | |||||||||||||
|
|
|||||||||||||||
SARs outstanding as of December 31, 2011 |
9,272,043 | 88.07 | 4.5 | $ | 5 | |||||||||||
|
|
16
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
2009 LTIP - SARs |
Number of SARs |
Weighted Average Exercise Price (in Indian Rupees) |
Weighted
Average Remaining Contractual Term (In years) |
Aggregate Intrinsic Value (USD in millions) |
||||||||||||
SARs outstanding as of March 31, 2011 |
8,944,822 | 60.50 | 4.2 | $ | 14 | |||||||||||
Exercised |
(3,166,188 | ) | 60.50 | |||||||||||||
Forfeited/Cancelled |
(186,685 | ) | 60.50 | |||||||||||||
|
|
|||||||||||||||
SARs outstanding as of December 31, 2011 |
5,591,949 | 60.50 | 3.5 | $ | 6 | |||||||||||
|
|
The fair value of each SAR is based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The fair value of each SAR under the 2012 LTIP, 2011 LTIP, 2010 LTIP and 2009 LTIP was estimated as of December 31, 2011 using the following assumptions:
2012 LTIP | 2011 LTIP | 2010 LTIP | 2009 LTIP | |||||||||||||
Risk-free interest rate |
8.52 | % | 8.47 | % | 8.32 | % | 8.19 | % | ||||||||
Dividend yield |
1.17 | % | 1.17 | % | 1.17 | % | 1.17 | % | ||||||||
Volatility |
52 | % | 54 | % | 57 | % | 58 | % |
The fair value of the SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria. Since the performance criteria for fiscal years 2013, 2014 and 2015 have not yet been established and therefore, measurement periods for SARs relating to those periods have not yet commenced, no compensation expense for those tranches has been recorded for the nine months ended December 31, 2011. As of December 31, 2011, 7,083,354 SARs were exercisable.
Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $13 million which is expected to be realized over a weighted average period of 2.19 years. Unrecognized compensation expense is $1 million related to 2011 RSUs and $1.6 million related to 2012 RSUs, which will be recognized over the remaining vesting period of 1.5 years and 2.5 years, respectively.
8. | POSTRETIREMENT BENEFIT PLANS |
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; unfunded pension plans in Germany; unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.
17
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
Pension Benefit Plans | Other Benefits | |||||||||||||||
Three Months
Ended December 31, |
Three Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 10 | $ | 9 | $ | 2 | $ | 2 | ||||||||
Interest cost |
17 | 16 | 3 | 2 | ||||||||||||
Expected return on assets |
(16 | ) | (14 | ) | | | ||||||||||
Amortization losses |
2 | 2 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 13 | $ | 13 | $ | 5 | $ | 4 | ||||||||
|
|
|
|
|
|
|
|
Pension Benefit Plans | Other Benefits | |||||||||||||||
Nine Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 30 | $ | 27 | $ | 6 | $ | 6 | ||||||||
Interest cost |
51 | 48 | 8 | 6 | ||||||||||||
Expected return on assets |
(47 | ) | (42 | ) | | | ||||||||||
Amortization losses |
8 | 8 | 1 | | ||||||||||||
Amortization prior service cost |
(1 | ) | | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 41 | $ | 41 | $ | 15 | $ | 12 | ||||||||
|
|
|
|
|
|
|
|
The expected long-term rate of return on plan assets is 6.72% in fiscal 2012.
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, including the Rio Tinto Alcan plans that cover our employees (in millions).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Funded pension plans |
$ | 10 | $ | 15 | $ | 31 | $ | 32 | ||||||||
Unfunded pension plans |
3 | 3 | 10 | 9 | ||||||||||||
Savings and defined contribution pension plans |
5 | 4 | 15 | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total contributions |
$ | 18 | $ | 22 | $ | 56 | $ | 54 | ||||||||
|
|
|
|
|
|
|
|
During the remainder of fiscal 2012, we expect to contribute an additional $23 million to our funded pension plans, $3 million to our unfunded pension plans and $4 million to our savings and defined contribution plans.
We implemented a new retirement pension plan in South Korea at the end of December 2011, in accordance with the Employee Retirement Benefits Security Act of South Korea, which requires companies to convert from retirement insurance plans to retirement pension plans. Included in our expected contributions for the remainder of our fiscal 2012 is $5 million of contributions we plan to make related to interim settlement elections by employees.
We exited our former defined contribution pension plan in Switzerland and have entered into a new defined contribution pension plan. As a result, we expect to contribute approximately $7 million to the plan over the next ten years to the new defined contribution plan.
18
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
9. | CURRENCY (GAINS) LOSSES |
The following currency (gains) losses are included in Other (income) expense, net in the accompanying condensed consolidated statements of operations (in millions).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Gain) loss on remeasurement of monetary assets and liabilities, net |
$ | (1 | ) | $ | 11 | $ | 15 | $ | 10 | |||||||
Loss released from accumulated other comprehensive income |
1 | | 1 | | ||||||||||||
Gain recognized on balance sheet remeasurement currency exchange contracts, net |
(4 | ) | | (11 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Currency (gains) losses, net |
$ | (4 | ) | $ | 11 | $ | 5 | $ | 10 | |||||||
|
|
|
|
|
|
|
|
The following currency gains (losses) are included in AOCI, net of tax and Noncontrolling interests (in millions).
Nine Months
Ended December 31, 2011 |
||||
Cumulative currency translation adjustment beginning of period |
$ | 114 | ||
Effect of changes in exchange rates |
(137 | ) | ||
|
|
|||
Cumulative currency translation adjustment end of period |
$ | (23 | ) | |
|
|
19
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
10. | FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS |
The fair values of our financial instruments and commodity contracts as of December 31, 2011 and March 31, 2011 are as follows (in millions).
December 31, 2011 | ||||||||||||||||||||
Assets | Liabilities |
Net Fair
Value Assets/(Liabilities) |
||||||||||||||||||
Current | Noncurrent | Current | Noncurrent(A) | |||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||
Cash flow hedges |
||||||||||||||||||||
Currency exchange contracts |
$ | 9 | $ | 1 | $ | (12 | ) | $ | (12 | ) | $ | (14 | ) | |||||||
Aluminum contracts |
12 | | | | 12 | |||||||||||||||
Net Investment hedges |
||||||||||||||||||||
Currency exchange contracts |
2 | | | | 2 | |||||||||||||||
Fair value hedges |
||||||||||||||||||||
Aluminum contracts |
| | (11 | ) | | (11 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivatives designated as hedging instruments |
23 | 1 | (23 | ) | (12 | ) | (11 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||
Aluminum contracts |
37 | | (47 | ) | (1 | ) | (11 | ) | ||||||||||||
Currency exchange contracts |
29 | 5 | (9 | ) | (1 | ) | 24 | |||||||||||||
Interest rate swaps |
| | (1 | ) | | (1 | ) | |||||||||||||
Electricity swap |
| | (9 | ) | (27 | ) | (36 | ) | ||||||||||||
Energy contracts |
| | (8 | ) | (1 | ) | (9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivatives not designated as hedging instruments |
66 | 5 | (74 | ) | (30 | ) | (33 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivative fair value |
$ | 89 | $ | 6 | $ | (97 | ) | $ | (42 | ) | $ | (44 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
March 31, 2011 | ||||||||||||||||||||
Assets | Liabilities |
Net Fair
Value Assets/(Liabilities) |
||||||||||||||||||
Current | Noncurrent | Current | Noncurrent(A) | |||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||
Cash flow hedges |
||||||||||||||||||||
Currency exchange contracts |
$ | 43 | $ | 10 | $ | (1 | ) | $ | | $ | 52 | |||||||||
Aluminum contracts |
44 | | | | 44 | |||||||||||||||
Fair value hedges |
||||||||||||||||||||
Aluminum contracts |
9 | | | | 9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivatives designated as hedging instruments |
96 | 10 | (1 | ) | | 105 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||
Aluminum contracts |
54 | 5 | (49 | ) | | 10 | ||||||||||||||
Currency exchange contracts |
15 | 2 | (19 | ) | (1 | ) | (3 | ) | ||||||||||||
Interest rate swaps |
| | (4 | ) | | (4 | ) | |||||||||||||
Electricity swap |
| | (6 | ) | (23 | ) | (29 | ) | ||||||||||||
Energy contracts |
| | (3 | ) | | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivatives not designated as hedging instruments |
69 | 7 | (81 | ) | (24 | ) | (29 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total derivative fair value |
$ | 165 | $ | 17 | $ | (82 | ) | $ | (24 | ) | $ | 76 | ||||||||
|
|
|
|
|
|
|
|
|
|
(A) | The noncurrent portions of derivative liabilities are included in Other long-term liabilities in the accompanying condensed consolidated balance sheets. |
20
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
Aluminum
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 prices, the forecasted output of our smelter operation in South America and the forecasted metal price lag associated with sales of aluminum in future periods at prices based on the LME.
We identify and designate certain aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. Such exposures do not extend beyond two years in length. We recognized losses on changes in fair value of derivative contracts of $15 million and gains on changes in the fair value of designated hedged items of $15 million in sales revenue for the nine months ended December 31, 2011, of which less than $1 million relates to firm commitment sales that occurred during the period. We recognized losses on changes in fair value of derivative contracts of $4 million and gains on changes in the fair value of designated hedged items of $4 million in sales revenue for the three months ended December 31, 2011, of which $2 million relates to firm commitment sales that occurred during the period. We had 34 kt and 25 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of December 31, 2011 and March 31, 2011, respectively.
We identify and designate certain aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. Price risk exposure arises from commitments to sell aluminum in future periods at fixed price. Such exposures do not extend beyond one year in length. We had 0 kt and 183 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of December 31, 2011 and March 31, 2011, respectively.
We identify and designate certain aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal sales that vary based on changes in the price of aluminum. Price risk exposure arises due to fixed costs associated with our smelter operations in South America. Price risk exposure also arises due to the timing lag between the LME based pricing of raw material metal purchases and the LME based pricing of finished product sales. Such exposures do not extend beyond one year in length. We had 52 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of December 31, 2011. No aluminum forward sales contracts were designated as cash flow hedges as of March 31, 2011.
The remaining balance of our aluminum derivative contracts are not designated as accounting hedges. As of December 31, 2011 and March 31, 2011, we had short positions of 100 kt and 146 kt, respectively, of outstanding aluminum contracts not designated as hedges. The average duration of undesignated contracts is less than four months. The following table summarizes our notional amount (in kt).
December 31, 2011 |
March 31, 2011 |
|||||||
Hedge Type |
||||||||
Purchase (Sale) |
||||||||
Cash flow purchases |
| 183 | ||||||
Cash flow sales |
(52 | ) | | |||||
Fair value |
34 | 25 | ||||||
Not designated |
(100 | ) | (146 | ) | ||||
|
|
|
|
|||||
Total |
(118 | ) | 62 |
Foreign Currency
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 operations.
We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had $1 billion and $644 million of outstanding foreign currency forwards designated as cash flow hedges as of December 31, 2011 and March 31, 2011, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to net investment in foreign subsidiaries. We had $42 million of outstanding foreign currency forwards designated as net investment hedges as of December 31, 2011. We had no contracts designated as net investment hedges as of March 31, 2011. We recorded gains of $5 million in OCI for the nine months ended December 31, 2011 related to these hedges.
21
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
As of December 31, 2011 and March 31, 2011, we had outstanding currency exchange contracts with a total notional amount of $1.2 billion and $1.6 billion, respectively, which were not designated as hedges.
Energy
We own an interest in an electricity swap which we designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of March 31, 2011, due to significant credit deterioration of our counterparty, we discontinued hedge accounting for this electricity swap. Approximately 1.2 million of notional megawatt hours remain outstanding as of December 31, 2011.
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of December 31, 2011 and March 31, 2011, we had 8.3 million MMBTUs and 6.7 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
Interest Rate
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt.
Prior to the completion of the December 17, 2010 refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the refinancing transaction, our exposure to changes in the benchmark LIBOR interest rate was limited. We ceased hedge accounting for these swaps and released all AOCI into earnings during the year ended March 31, 2011. No interest rate swaps were designated as cash flow hedges as of December 31, 2011 and March 31, 2011.
We had $220 million of outstanding interest rate swaps that were not designated as hedges as of December 31, 2011 and March 31, 2011.
Other
For certain customers, we enter into contractual relationships that entitle us to pass through the economic effect of trading positions that we take with other third parties on our customers behalf. We recognize a derivative position with both the customer and the third party for these types of contracts and we classify cash settlement amounts associated with these derivatives as part of operating activities in the condensed consolidated statements of cash flows. These derivatives expired in February 2010 with the last cash settlement occurring in October 2010.
22
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments recognized in Other (income) expense, net (in millions).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Derivative Instruments Not Designated as Hedges |
||||||||||||||||
Aluminum contracts |
$ | 4 | $ | (12 | ) | $ | 85 | $ | 5 | |||||||
Balance sheet remeasurement currency exchange contracts |
4 | | 11 | | ||||||||||||
Other currency exchange contracts |
11 | 38 | 23 | 49 | ||||||||||||
Energy contracts |
(15 | ) | (1 | ) | (18 | ) | (5 | ) | ||||||||
Interest Rate swaps |
| (5 | ) | | (5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gain recognized |
4 | 20 | 101 | 44 | ||||||||||||
Derivative Instruments Designated as Hedges |
||||||||||||||||
Cash flow hedges |
||||||||||||||||
Aluminum contracts (C) |
| 4 | (3 | ) | 4 | |||||||||||
Currency exchange contracts (A) |
3 | 4 | 11 | 4 | ||||||||||||
Balance Sheet remeasurement currency exchange contracts (B) |
(1 | ) | | (1 | ) | 6 | ||||||||||
Electricity swap (B) |
| 2 | | 6 | ||||||||||||
Fair Value hedges |
||||||||||||||||
Aluminum contracts |
(4 | ) | | (15 | ) | | ||||||||||
Fixed priced firm sales commitments (C) |
4 | | 15 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gain recognized |
2 | 10 | 7 | 14 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gain (loss) recognized |
$ | 6 | $ | 30 | $ | 108 | $ | 58 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance sheet remeasurement currency exchange contracts |
$ | 3 | $ | | $ | 10 | $ | | ||||||||
Realized gains, net |
66 | 21 | 136 | 95 | ||||||||||||
Unrealized gains (losses) on other derivative instruments, net |
(63 | ) | 9 | (38 | ) | (37 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gain recognized |
$ | 6 | $ | 30 | $ | 108 | $ | 58 | ||||||||
|
|
|
|
|
|
|
|
(A) | Amount represents excluded forward market premium/discount and hedging relationship ineffectiveness. |
(B) | Amount represents ineffectiveness and amounts released to income from AOCI. |
(C) | An immaterial amount of ineffectiveness exists in both cash flow and fair value hedging relationships involving aluminum derivatives. |
23
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions). Within the next twelve months, we expect to reclassify $23 million of losses from AOCI to earnings.
Amount of Gain
(Loss) Recognized in OCI (Effective Portion) |
Amount of Gain
(Loss) Recognized in OCI (Effective Portion) |
Amount of Gain
(Loss) Recognized in Other (Income) Expense, net (Ineffective and Excluded Portion) |
Amount of Gain
(Loss) Recognized in Other (Income) Expense, net (Ineffective and Excluded Portion) |
|||||||||||||||||||||||||||||
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||||||||||||||||
Derivatives in Cash Flow |
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
Electricity swap (A) |
$ | | $ | 2 | $ | | $ | 10 | $ | | $ | | $ | | $ | | ||||||||||||||||
Aluminum contracts |
7 | 15 | (41 | ) | 15 | | 4 | (3 | ) | 4 | ||||||||||||||||||||||
Currency exchange contracts |
4 | | (50 | ) | 6 | 3 | 4 | 11 | 4 | |||||||||||||||||||||||
Interest rate swaps |
| 2 | | 1 | | (5 | ) | | (5 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 11 | $ | 19 | $ | (91 | ) | $ | 32 | $ | 3 | $ | 3 | $ | 8 | $ | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
(Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Three Months Ended December 31, |
Amount of Gain
(Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Nine Months Ended December 31, |
Location of Gain
(Loss) Reclassified from AOCI into Earnings |
||||||||||||||||
Derivatives in Cash Flow |
2011 | 2010 | 2011 | 2010 | ||||||||||||||
Electricity swap (A) |
$ | (1 | ) | $ | 2 | $ | (4 | ) | $ | 5 | Other (income) expense, net | |||||||
Aluminum contracts |
(43 | ) | | (17 | ) | | Cost of goods sold | |||||||||||
Aluminum contracts |
4 | | 4 | | Sales | |||||||||||||
Currency exchange contracts |
(1 | ) | | 9 | | Cost of goods sold and SG&A | ||||||||||||
Currency exchange contracts |
(2 | ) | | (2 | ) | | Sales | |||||||||||
Currency exchange contracts |
| | (1 | ) | | Other (income) expense, net and Interest Expense |
||||||||||||
Interest rate swaps |
| (5 | ) | | (5 | ) | Other (income) expense, net and Interest Expense |
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | (43 | ) | $ | (3 | ) | $ | (11 | ) | $ | | |||||||
|
|
|
|
|
|
|
|
(A) | AOCI related to de-designated electricity swap is amortized to income over the remaining term of the hedged item. |
11. | FAIR VALUE MEASUREMENTS |
We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent that observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that we have the ability to access at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
24
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
Level 3 Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing 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 derivative contracts that have fair values 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. 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 commodity location premium contracts. Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.
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).
As of December 31, 2011 and March 31, 2011, we did not have any Level 1 financial instruments.
The following tables present our derivative assets and liabilities which are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2011 and March 31, 2011 (in millions).
December 31, 2011 | March 31, 2011 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Level 2 Instruments |
||||||||||||||||
Aluminum contracts |
$ | 49 | $ | (59 | ) | $ | 111 | $ | (48 | ) | ||||||
Currency exchange contracts |
46 | (34 | ) | 70 | (21 | ) | ||||||||||
Energy contracts |
| (9 | ) | | (3 | ) | ||||||||||
Interest rate swaps |
| (1 | ) | | (4 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Level 2 Instruments |
95 | (103 | ) | 181 | (76 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Level 3 Instruments |
||||||||||||||||
Aluminum contracts |
| | 1 | (1 | ) | |||||||||||
Electricity swap |
| (36 | ) | | (29 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Level 3 Instruments |
| (36 | ) | 1 | (30 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 95 | $ | (139 | ) | $ | 182 | $ | (106 | ) | ||||||
|
|
|
|
|
|
|
|
25
Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
We recognized unrealized losses of $10 million for the nine months ended December 31, 2011 related to Level 3 financial instruments that were still held as of December 31, 2011. These unrealized losses are included in Other (income) expense, net.
The following table presents a reconciliation of fair value activity for Level 3 derivative contracts (in millions).
Level 3
Electricity Swap |
||||
Balance as of March 31, 2011 |
$ | (29 | ) | |
Realized/unrealized gain included in earnings(A) |
(3 | ) | ||
Settlements |
(4 | ) | ||
|
|
|||
Balance as of December 31, 2011 |
$ | (36 | ) | |
|
|
(A) | Included in Other (income) expense, net. |
Financial Instruments Not Recorded at Fair Value
The table below presents the estimated fair value of certain financial instruments that are not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term debt using market and/or broker ask prices when available. When not available, we use a standard credit adjusted discounted cash flow model.
December 31, 2011 | March 31, 2011 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Assets |
||||||||||||||||
Long-term receivables from related parties |
$ | 16 | $ | 16 | $ | 19 | $ | 19 | ||||||||
Liabilities |
||||||||||||||||
Total debt third parties (excluding short term borrowings) |
$ | 4,344 | $ | 4,515 | $ | 4,086 | $ | 4,370 |
12. | OTHER (INCOME) EXPENSE, NET |
Other (income) expense, net is comprised of the following (in millions).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Foreign currency remeasurement (gains) losses, net (A) |
$ | (4 | ) | $ | 11 | $ | 5 | $ | 10 | |||||||
(Gain) loss on change in fair value of other unrealized derivative instruments, net |
63 | (9 | ) | 38 | 37 | |||||||||||
(Gain) on change in fair value of other realized derivative instruments, net |
(66 | ) | (21 | ) | (136 | ) | (95 | ) | ||||||||
(Gain) loss on sale of assets, net |
(1 | ) | 2 | 1 | (11 | ) | ||||||||||
(Gain) on litigation settlement in Brazil (B) |
| | (8 | ) | | |||||||||||
Loss on Brazilian tax litigation, net (C) |
3 | 2 | 10 | 6 | ||||||||||||
Other, net |
4 | 1 | 5 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other (income) expense, net |
$ | (1 | ) | $ | (14 | ) | $ | (85 | ) | $ | (53 | ) | ||||
|
|
|
|
|
|
|
|
(A) | Includes Gain recognized on balance sheet remeasurement currency exchange contracts, net. |
(B) | We received and recognized a gain of $8 million during the nine months ended December 31, 2011 as settlement related to a lawsuit we filed against a Brazilian vendor. |
(C) | See footnote 14 Commitments and Contingencies, Brazil Tax Matters for further details. |
26
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
13. | INCOME TAXES |
A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions, except percentages).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pre-tax income (loss) before equity in net income (loss) of non-consolidated affiliates and noncontrolling interests |
$ | (17 | ) | $ | 3 | $ | 247 | $ | 212 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Canadian statutory tax rate |
27 | % | 29 | % | 27 | % | 29 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Provision at the Canadian statutory rate |
(5 | ) | 1 | 67 | 62 | |||||||||||
Increase (decrease) for taxes on income (loss) resulting from: |
||||||||||||||||
Exchange translation items |
| | (13 | ) | | |||||||||||
Exchange remeasurement of deferred income taxes |
(1 | ) | 4 | (30 | ) | 15 | ||||||||||
Change in valuation allowances |
22 | 15 | 61 | 30 | ||||||||||||
Expense (income) items not subject to tax |
(1 | ) | 2 | 2 | 4 | |||||||||||
Dividends not subject to tax |
(10 | ) | | (41 | ) | | ||||||||||
Enacted tax rate changes |
| | 3 | | ||||||||||||
Tax rate differences on foreign earnings |
4 | 9 | 12 | (5 | ) | |||||||||||
Uncertain tax positions, net |
(20 | ) | 1 | (19 | ) | (2 | ) | |||||||||
Other net |
1 | 1 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income tax (benefit) provision |
$ | (10 | ) | $ | 33 | $ | 42 | $ | 104 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Effective tax rate |
59 | % | 1,100 | % | 17 | % | 49 | % | ||||||||
|
|
|
|
|
|
|
|
As of December 31, 2011, we had a net deferred tax liability of $445 million. This amount includes gross deferred tax assets of approximately $707 million and a valuation allowance of $291 million.
During the quarter ended December 31, 2011, we agreed to certain findings presented by taxing authorities related to tax audits in certain jurisdictions for the years 2004 through 2008. As a result of these findings, we reduced our unrecognized tax benefits, including interest, by approximately $23 million. Of this amount, approximately $6 million will be settled in cash payments to the tax authorities with the remaining amount recorded as a reduction to the income tax provision. Certain examination findings relate to issues which impact multiple tax jurisdictions. Depending on the proposed resolution of these issues in one jurisdiction, we will pursue competent authority relief from the offsetting tax jurisdiction(s), and therefore have recorded an offsetting deferred tax asset of approximately $4 million in one such jurisdiction in the three months ended December 31, 2011.
Tax authorities continue to examine certain other of our tax filings for fiscal years 2004 through 2009. As a result of further settlement of audits, judicial decisions, the filing of amended tax returns or the expiration of statutes of limitations, our reserves for unrecognized tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months by an amount up to approximately $15 million.
14. | COMMITMENTS AND CONTINGENCIES |
We are party to, and may in the future be involved in, or subject to, disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. We have established a liability with respect to contingencies for which a loss is probable and we are able to reasonably estimate such loss. While the ultimate resolution of and liability and costs related to, these matters cannot be determined with reasonable certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially affect our financial condition or liquidity.
For certain matters in which the Company is involved, for which a loss is probable or reasonably possible, we are unable to reasonably estimate a loss. For certain other matters where we have not established a liability for which a loss is reasonably possible and the loss is reasonably estimable, we have estimated the aggregated range of loss as $0 to $50 million. This estimated aggregate range of reasonably possible losses is based upon currently available information. The Companys estimates involve significant judgment, and therefore, the estimate will change from time to time and actual losses may differ from the current estimate.
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The following describes certain contingencies relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.
Legal Proceedings
Coca-Cola Lawsuit. On December 30, 2011, Novelis Corporation entered into a settlement agreement with Coca-Cola Bottlers Sales and Services Company LLC (CCBSS), under which Novelis and CCBSS resolved all claims between them and agreed to dismiss the litigation filed in Georgia State Court on February 15, 2007, relating to certain pricing matters under an aluminum can stock supply agreement between the parties. The settlement ended the litigation without the payment of financial consideration by either party.
Environmental Matters
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may be expected to impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions regarding 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. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
With respect to environmental loss contingencies, we record a loss contingency whenever such contingency is probable and reasonably estimable. The evaluation model includes all asserted and unasserted claims that can be reasonably identified. Under this evaluation model, the liability and the related costs are quantified based upon the best available evidence regarding actual liability loss and cost estimates. Except for those loss contingencies where no estimate can reasonably be made, the evaluation model is fact-driven and attempts to estimate the full costs of each claim. Management reviews the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The estimated costs in respect of such reported liabilities are not offset by amounts related to cost-sharing between parties, insurance, indemnification arrangements or contribution from other potentially responsible parties unless otherwise noted.
We have established liabilities 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 December 31, 2011 will be approximately $40 million. Of this amount, $20 million is included in Other long-term liabilities, with the remaining $20 million included in Accrued expenses and other current liabilities in our consolidated balance sheet as of December 31, 2011. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Alcan Inc. 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 impact our operations or materially adversely affect our financial condition, results of operations or liquidity.
28
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
Brazil Tax Matters
As a result of legal proceedings with Brazils Ministry of Treasury regarding certain taxes, as of December 31, 2011 and March 31, 2011, we had cash deposits aggregating approximately $32 million and $50 million, respectively, with the Brazilian government. These deposits, which are included in Other long-term assets third parties in our accompanying condensed consolidated balance sheets, will be expended toward these legal proceedings.
In addition, under a federal tax dispute settlement program established by the Brazilian government, we have settled several disputes with Brazils Ministry of Treasury regarding various forms of manufacturing taxes and social security contributions. In most cases we are paying the settlement amounts over a period of 180 months, although in some cases we are paying the settlement amounts over a shorter period. We have established liabilities for these settlements as of December 31, 2011. In total, the liabilities approximate $160 million and $179 million as of December 31, 2011 and March 31, 2011, respectively. As of December 31, 2011, $12 million and $148 million of liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in our accompanying condensed consolidated balance sheets. As of March 31, 2011, $5 million and $174 million of liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively. We have recognized net interest expense of $10 million and $6 million as Loss on Brazilian tax litigation, net which is reported in Other (income) expense, net for the nine months ended December 31, 2011 and 2010, respectively.
On January 4, 2012, we received a favorable response concluding a formal consultation we had initiated with the Brazilian tax authorities in 2005 related to charging Value Added Tax (VAT) on certain specific commercial arrangements. The resolution of this matter resulted in no cash payments or liability and had no impact on our financial statements.
15. | SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER 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.
We measure the profitability and financial performance of our operating segments based on Segment income. Segment income provides a measure of our underlying segment results that is in line with our portfolio approach to risk management. We define Segment income as earnings before (a) depreciation and amortization; (b) interest expense and amortization of debt issuance costs; (c) interest income; (d) unrealized gains (losses) on change in fair value of derivative instruments, net, except for foreign currency derivatives on our foreign currency balance sheet exposures, which are included in segment income; (e) impairment of goodwill; (f) impairment charges on long-lived assets (other than goodwill); (g) gain or loss on extinguishment of debt; (h) noncontrolling interests share; (i) adjustments to reconcile our proportional share of Segment income from non-consolidated affiliates to income as determined on the equity method of accounting; (j) restructuring charges, net; (k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o) provision or benefit for taxes on income (loss) and (p) cumulative effect of accounting change, net of tax.
Adjustment to Eliminate Proportional Consolidation. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. In order to reconcile the financial information for the segments shown in the tables below to the relevant US GAAP-based measures, we must adjust proportional consolidation of each line item. See Note 4 Consolidation and Note 5 Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
29
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The tables below show selected segment financial information (in millions).
Selected Segment Financial Information
Total Assets |
North America |
Europe | Asia |
South America |
Other and Eliminations |
Total | ||||||||||||||||||
December 31, 2011 |
$ | 2,539 | $ | 2,693 | $ | 1,037 | $ | 1,496 | $ | 86 | $ | 7,851 | ||||||||||||
March 31, 2011 |
$ | 2,612 | $ | 3,170 | $ | 1,015 | $ | 1,481 | $ | 18 | $ | 8,296 |
Selected Operating Results Three Months Ended December 31, 2011 |
North America |
Europe | Asia |
South America |
Other and Eliminations |
Total | ||||||||||||||||||
Net sales |
$ | 912 | $ | 804 | $ | 398 | $ | 321 | $ | 27 | $ | 2,462 | ||||||||||||
Depreciation and amortization |
34 | 30 | 13 | 15 | (13 | ) | 79 | |||||||||||||||||
Capital expenditures |
29 | 20 | 24 | 50 | | 123 |
Selected Operating Results Three Months Ended December 31, 2010 |
North America |
Europe | Asia |
South America |
Other and Eliminations |
Total | ||||||||||||||||||
Net sales |
$ | 901 | $ | 835 | $ | 470 | $ | 321 | $ | 33 | $ | 2,560 | ||||||||||||
Depreciation and amortization |
41 | 36 | 14 | 20 | (11 | ) | 100 | |||||||||||||||||
Capital expenditures |
15 | 25 | 9 | 25 | (13 | ) | 61 |
Selected Operating Results Nine months Ended December 31, 2011 |
North America |
Europe | Asia |
South America |
Other and Eliminations |
Total | ||||||||||||||||||
Net sales |
$ | 3,052 | $ | 2,916 | $ | 1,432 | $ | 942 | $ | 113 | $ | 8,455 | ||||||||||||
Depreciation and amortization |
102 | 97 | 41 | 42 | (33 | ) | 249 | |||||||||||||||||
Capital expenditures |
75 | 55 | 62 | 107 | (2 | ) | 297 |
Selected Operating Results Nine Months Ended December 31, 2010 |
North America |
Europe | Asia |
South America |
Other and Eliminations |
Total | ||||||||||||||||||
Net sales |
$ | 2,743 | $ | 2,551 | $ | 1,340 | $ | 876 | $ | 107 | $ | 7,617 | ||||||||||||
Depreciation and amortization |
124 | 105 | 43 | 66 | (31 | ) | 307 | |||||||||||||||||
Capital expenditures |
32 | 43 | 22 | 46 | (11 | ) | 132 |
30
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
The following table shows the reconciliation from income from reportable segments to Net income (loss) attributable to our common shareholder (in millions).
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
North America |
$ | 94 | $ | 97 | $ | 324 | $ | 298 | ||||||||
Europe |
24 | 47 | 213 | 217 | ||||||||||||
Asia |
43 | 59 | 149 | 162 | ||||||||||||
South America |
52 | 35 | 134 | 115 | ||||||||||||
Depreciation and amortization |
(79 | ) | (100 | ) | (249 | ) | (307 | ) | ||||||||
Interest expense and amortization of debt issuance costs |
(74 | ) | (46 | ) | (228 | ) | (125 | ) | ||||||||
Interest income |
3 | 4 | 11 | 10 | ||||||||||||
Adjustment to eliminate proportional consolidation |
(9 | ) | (11 | ) | (34 | ) | (33 | ) | ||||||||
Unrealized gains (losses) on change in fair value of derivative instruments, net |
(63 | ) | 9 | (38 | ) | (37 | ) | |||||||||
Realized gains (losses) on derivative instruments not included in segment income |
(3 | ) | 4 | (1 | ) | 4 | ||||||||||
Loss on early extinguishment of debt |
| (74 | ) | | (74 | ) | ||||||||||
Restructuring charges, net |
(1 | ) | (20 | ) | (31 | ) | (35 | ) | ||||||||
Other costs, net |
(8 | ) | (6 | ) | (12 | ) | 6 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(21 | ) | (2 | ) | 238 | 201 | ||||||||||
Income tax (benefit) provision |
(10 | ) | 33 | 42 | 104 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(11 | ) | (35 | ) | 196 | 97 | ||||||||||
Net income attributable to noncontrolling interests |
1 | 11 | 26 | 31 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to our common shareholder |
$ | (12 | ) | $ | (46 | ) | $ | 170 | $ | 66 | ||||||
|
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|
|
|
|
|
|
Information about Major Customers and Primary Supplier
The table below shows our net sales to Rexam Plc (Rexam), Affiliates of Ball Corporation and Anheuser-Busch InBev (Anheuser-Busch), our three largest customers, as a percentage of total Net sales.
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Rexam |
15 | % | 16 | % | 13 | % | 16 | % | ||||||||
Affiliates of Ball Corporation |
13 | % | 8 | % | 10 | % | 8 | % | ||||||||
Anheuser-Busch |
11 | % | 13 | % | 10 | % | 13 | % |
Rio Tinto Alcan is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from Rio Tinto Alcan as a percentage of total combined metal purchases.
Three Months
Ended December 31, |
Nine Months
Ended December 31, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Purchases from Rio Tinto Alcan as a percentage of total |
29 | % | 33 | % | 29 | % | 33 | % |
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
16. | SUPPLEMENTAL INFORMATION |
Accumulated other comprehensive (loss) income, net of tax, consists of the following (in millions).
December 31, 2011 |
March 31, 2011 |
|||||||
Currency translation adjustment |
$ | (27 | ) | $ | 102 | |||
Fair value of effective portion of cash flow hedges |
(32 | ) | 22 | |||||
Pension and other benefits |
(62 | ) | (67 | ) | ||||
|
|
|
|
|||||
Accumulated other comprehensive (loss) income |
$ | (121 | ) | $ | 57 | |||
|
|
|
|
Supplemental cash flow information (in millions):
Nine Months
Ended December 31, |
||||||||
2011 | 2010 | |||||||
Interest paid |
$ | 266 | $ | 112 | ||||
Income taxes paid |
$ | 74 | $ | 83 |
As of December 31, 2011, we recorded $88 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to December 31, 2011.
17. | SUPPLEMENTAL GUARANTOR INFORMATION |
In connection with the issuance of our 7.25% Senior Notes, 2017 Notes and 2020 Notes, certain of our wholly-owned subsidiaries, which are 100% owned within the meaning of Rule 3-10(h)(1) of Regulation S-X, provided guarantees. 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, Portugal, Luxembourg and Switzerland, as well as certain businesses in Germany and France. 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 Notes.
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.
32
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
Three Months Ended December 31, 2011 | ||||||||||||||||||||
Parent | Guarantors |
Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 240 | $ | 1,991 | $ | 691 | $ | (460 | ) | $ | 2,462 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cost of goods sold (exclusive of depreciation and amortization) |
241 | 1,808 | 635 | (460 | ) | 2,224 | ||||||||||||||
Selling, general and administrative expenses |
5 | 66 | 24 | | 95 | |||||||||||||||
Depreciation and amortization |
14 | 59 | 21 | (15 | ) | 79 | ||||||||||||||
Research and development expenses |
5 | 4 | 1 | | 10 | |||||||||||||||
Interest expense and amortization of debt issuance costs |
77 | 12 | 1 | (16 | ) | 74 | ||||||||||||||
Interest income |
(15 | ) | (4 | ) | | 16 | (3 | ) | ||||||||||||
Restructuring charges, net |
1 | | | | 1 | |||||||||||||||
Equity in net (income) loss of non-consolidated affiliates |
(50 | ) | 3 | 1 | 50 | 4 | ||||||||||||||
Other (income) expense, net |
(22 | ) | | 6 | 15 | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
256 | 1,948 | 689 | (410 | ) | 2,483 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(16 | ) | 43 | 2 | (50 | ) | (21 | ) | ||||||||||||
Income tax provision (benefit) |
(4 | ) | (14 | ) | 8 | | (10 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(12 | ) | 57 | (6 | ) | (50 | ) | (11 | ) | |||||||||||
Net income attributable to noncontrolling interests |
| | 1 | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to our common shareholder |
$ | (12 | ) | $ | 57 | $ | (7 | ) | $ | (50 | ) | $ | (12 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2010 | ||||||||||||||||||||
Parent | Guarantors |
Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 254 | $ | 2,043 | $ | 751 | $ | (488 | ) | $ | 2,560 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cost of goods sold (exclusive of depreciation and amortization) |
246 | 1,794 | 680 | (488 | ) | 2,232 | ||||||||||||||
Selling, general and administrative expenses |
2 | 75 | 17 | | 94 | |||||||||||||||
Depreciation and amortization |
1 | 76 | 23 | | 100 | |||||||||||||||
Research and development expenses |
6 | 2 | 1 | | 9 | |||||||||||||||
Interest expense and amortization of debt issuance costs |
38 | 22 | 1 | (15 | ) | 46 | ||||||||||||||
Interest income |
(15 | ) | (4 | ) | | 15 | (4 | ) | ||||||||||||
Loss on the early debt extinguishment |
33 | 41 | | | 74 | |||||||||||||||
Restructuring charges, net |
| 19 | 1 | | 20 | |||||||||||||||
Equity in net (income) loss of non-consolidated affiliates |
(22 | ) | 5 | | 22 | 5 | ||||||||||||||
Other (income) expense, net |
(11 | ) | 5 | (8 | ) | | (14 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
278 | 2,035 | 715 | (466 | ) | 2,562 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before taxes |
(24 | ) | 8 | 36 | (22 | ) | (2 | ) | ||||||||||||
Income tax provision |
22 | 4 | 7 | | 33 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(46 | ) | 4 | 29 | (22 | ) | (35 | ) | ||||||||||||
Net income attributable to noncontrolling interests |
| | 11 | | 11 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to our common shareholder |
$ | (46 | ) | $ | 4 | $ | 18 | $ | (22 | ) | $ | (46 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
33
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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
Nine Months Ended December 31, 2011 | ||||||||||||||||||||
Parent | Guarantors |
Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 855 | $ | 6,832 | $ | 2,572 | $ | (1,804 | ) | $ | 8,455 | |||||||||
|
|
|
|
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Cost of goods sold (exclusive of depreciation and amortization) |
833 | 6,081 | 2,371 | (1,804 | ) | 7,481 | ||||||||||||||
Selling, general and administrative expenses |
8 | 215 | 58 | | 281 | |||||||||||||||
Depreciation and amortization |
14 | 185 | 65 | (15 | ) | 249 | ||||||||||||||
Research and development expenses |
22 | 10 | 2 | | 34 | |||||||||||||||
Interest expense and amortization of debt issuance costs |
231 | 41 | 3 | (47 | ) | 228 | ||||||||||||||
Interest income |
(45 | ) | (12 | ) | (1 | ) | 47 | (11 | ) | |||||||||||
Restructuring charges, net |
3 | 25 | 3 | | 31 | |||||||||||||||
Equity in net (income) loss of non-consolidated affiliates |
(350 | ) | 8 | 1 | 350 | 9 | ||||||||||||||
Other (income) expense, net |
(29 | ) | (57 | ) | (14 | ) | 15 | (85 | ) | |||||||||||
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687 | 6,496 | 2,488 | (1,454 | ) | 8,217 | |||||||||||||||
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Income (loss) before income taxes |
168 | 336 | 84 | (350 | ) | 238 | ||||||||||||||
Income tax provision (benefit) |
(2 | ) | 14 | 30 | | 42 | ||||||||||||||
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Net income (loss) |
170 | 322 | 54 | (350 | ) | 196 | ||||||||||||||
Net income attributable to noncontrolling interests |
| | 26 | | 26 | |||||||||||||||
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Net income (loss) attributable to our common shareholder |
$ | 170 | $ | 322 | $ | 28 | $ | (350 | ) | $ | 170 | |||||||||
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Nine Months Ended December 31, 2010 | ||||||||||||||||||||
Parent | Guarantors |
Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 775 | $ | 6,142 | $ | 2,198 | $ | (1,498 | ) | $ | 7,617 | |||||||||
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Cost of goods sold (exclusive of depreciation and amortization) |
738 | 5,407 | 1,981 | (1,498 | ) | 6,628 | ||||||||||||||
Selling, general and administrative expenses |
22 | 204 | 46 | | 272 | |||||||||||||||
Depreciation and amortization |
4 | 233 | 70 | | 307 | |||||||||||||||
Research and development expenses |
19 | 7 | 1 | | 27 | |||||||||||||||
Interest expense and amortization of debt issuance costs |
96 | 70 | 3 | (44 | ) | 125 | ||||||||||||||
Interest income |
(44 | ) | (9 | ) | (1 | ) | 44 | (10 | ) | |||||||||||
Loss on early debt extinguishment |
33 | 41 | | | 74 | |||||||||||||||