EXHIBIT 99.1
Published on May 22, 2006
Exhibit 99.1
NOVELIS CONCLUDES ACCOUNTING RESTATEMENT AND REVIEW
REVIEW AND RESTATEMENT RESULTS IN $11 MILLION BENEFIT TO NET INCOME FOR
THE SIX MONTHS ENDED JUNE 30, 2005
COMPANY REPORTS THIRD QUARTER 2005 RESULTS; PROVIDES HIGHLIGHTS OF
FOURTH QUARTER 2005 AND FULL YEAR 2006
ATLANTA, May 16 /PRNewswire-FirstCall/ -- Novelis Inc. (NYSE: NVL) (TSX: NVL)
today announced that it has concluded its restatement and review of the
contingencies, reserves and adjustments made to create the Company's opening
balance sheet. The overall impact was an increase to net income of $11 million
for the first six months of 2005, including a $4 million net gain from
out-of-period errors that were recorded in the first quarter.
Novelis' completed financial results for the third quarter and nine months ended
September 30, 2005, are included in this press release. The Company has also
filed with the U.S. Securities and Exchange Commission its amended quarterly
reports for the first and second quarters of 2005, and its quarterly report for
the third quarter of 2005.
"Our financial review process was extremely thorough and comprehensive," said
Brian W. Sturgell, president and chief executive officer of Novelis. "The review
covered several years and a number of complex issues, and it required
documentation involving individual plants and the input and approval of a number
of outside parties. As a result, the process took longer than we originally
anticipated.
"We look forward to finalizing our financial results for the fourth quarter of
2005 and refocusing all of our energies on 2006 and beyond," added Sturgell.
$2 Million Net Positive Impact from Prior-Year Review
On January 31, 2006, Novelis reported that the review process could result in
the need to restate the Company's financial statements for 2002, 2003 or 2004.
At the conclusion of the review, the Company determined that no restatement of
the prior-year results was necessary because the full net income impact was a $2
million net gain, the components of which were immaterial to any of the prior
years. The review process identified a total of $4 million of favorable
prior-year adjustments. The original Form 10-Q for the first quarter of 2005
included a $2 million negative impact from prior year out-of-period errors.
Therefore, the net impact of prior-year adjustments on net income recorded in
the first quarter of 2005 is positive $2 million.
Six-Months Restatement Summary
As previously announced, in November 2005, the Audit Committee of Novelis' Board
of Directors decided to delay the release of the Company's third quarter
financial statements, restate the previously issued financial statements for the
first and second quarters of 2005, and conduct a review of contingent
liabilities and reserves, equity accounts and other adjustments made to arrive
at the opening balance sheet of Novelis as a public entity.
The decision to restate the first and second quarters of 2005 related to two
issues: a favorable court ruling in June 2005 in a long-standing Brazilian tax
litigation matter that resulted in a $4.6 million pre-tax gain from the partial
reversal of a related reserve in the second quarter; and tax accounting for
currency translations on loans made by Novelis to its European subsidiaries
that, after completion of the review, required no net adjustment to net income
for the six-month period.
Components of the $11 million increase in net income for the six months ended
June 30, 2005, are included in the following chart, which reconciles net income
as previously reported to net income as restated.
Summary of Restatement Adjustments
Six Months Ended
($ in millions) June 30, 2005
- ---------------------------------------------------------- ----------------
Net income - as previously reported $ 11
Net adjustments:
1. Misapplication of GAAP related to liability recognition 3
2. Errors in income tax accounting 4
3. Out-of-period errors 4
Total net adjustments 11
Net income - as restated $ 22
1. Misapplication of GAAP related to liability recognition: The only
individually significant item included was the Brazilian tax litigation matter
referenced above.
2. Errors in income tax accounting: Errors in this category included the
following:
a. A shift in an agreement by one of the Company's German operations from a
manufacturing and sale arrangement to a tolling arrangement, triggering
additional deferred income taxes on the potential deemed disposition of
goodwill.
b. Tax accounting for currency translation on loans made by Novelis to its
European subsidiaries, as referenced above, with the impact in the second
quarter offsetting the impact in the first quarter.
c. Calculation errors leading to the incorrect allocation of other currency
gains and losses between capital and operating for income tax purposes,
which impacted the effective tax rate used.
d. The tax treatment on certain spin transactions and related foreign currency
gains and losses.
3. Out-of-period errors: This relates to errors in prior years that were
corrected in the first quarter of 2005. The original Form 10-Q for the first
quarter of 2005 included a $2 million negative impact from prior year
out-of-period errors. The review process identified a total of $4 million of
favorable prior-year adjustments, and therefore the net impact of prior-year
adjustments on net income for the first quarter of 2005 is positive $2 million.
Third Quarter 2005 Results
For the third quarter of 2005, sales and operating revenues increased almost 3%
to $2,053 million from $2,000 million in the third quarter of 2004. Rolled
product shipments were 725 kilotonnes (kt), essentially unchanged from the third
quarter of 2004. Net income declined to $10 million from $34 million in the same
period of 2004, due primarily to the following items on an after-tax basis:
- Unrealized gains of $28 million on the change in market value of
derivatives in 2005, compared to unrealized gains of $16 million in
2004.
- Foreign currency balance sheet translation losses of $21 million in
2005, mainly in Canada and South America, compared to a loss of $8
million in 2004.
- An increase of $20 million in the Company's interest expense as a
stand-alone company in 2005, compared with the carve-out allocation of
interest expense from Alcan for 2004.
Earnings per share were $0.14 for the third quarter of 2005 versus $0.47 in the
same period of 2004.
The following table highlights certain key financial and operating results
for the quarter and nine months ended September 30, 2005, and September 30,
2004, respectively.
*See Attachment A for a description of Regional Income and a reconciliation of
Regional Income to Income Before Income Taxes and Other Items. Attachment B
provides the reconciliation of Net Income to Free Cash Flow.
The following table reconciles the changes from 2004 Regional Income to 2005
Regional Income by significant component of change, for both the quarterly and
year-to-date periods ended September 30.
In the third quarter of 2005, Regional Income was $153 million versus $184
million in the third quarter of 2004. Regional Income in the third quarter of
2005 was positively impacted by increases in pricing, as the Company's regions
worked to offset higher costs. Metal timing differences had a positive impact on
Regional Income for the quarter, as the price of metal charged to customers rose
faster in the period than did the price of metal charged to cost of goods sold.
These benefits were more than offset by the negative effect of currency, namely
the Brazilian Real and the Korean Won, as well as the can price ceiling in North
America and high energy and transportation costs. Capacity utilization was very
strong in three of the four regions, with European economies continuing to be
sluggish.
Regional Results
Novelis North America
Novelis North America experienced a decline in shipments and Regional Income in
the third quarter of 2005 versus the same period in 2004. These lower shipments
occurred for the most part in the industrial products segment, particularly in
the distributor and automotive markets.
Regional Income in North America declined, as rising costs related to freight,
energy and operating expenses were only partially offset by an improvement in
conversion prices and the release of an environmental reserve. Metal prices
negatively impacted Regional Income by $4 million. However, the significant
negative effect of the can price ceiling was mostly offset by favorable metal
timing differences.
Novelis Europe
Shipments in Europe were flat, while Regional Income declined almost 19%.
Novelis Europe achieved an increase in can sheet shipments, with new aluminum
can making lines operating in Eastern Europe and can producer line conversions
from steel to aluminum taking place throughout Western Europe. However, reduced
shipments in the foil and packaging markets partially offset this benefit.
The decrease in Regional Income was attributable to higher energy costs, lower
ingot shipments associated with the closure of the Borgofranco facility, and an
adverse currency impact. Metal timing had a positive impact on Regional Income
for the quarter.
Novelis Asia
Novelis Asia's shipments grew 7% in the third quarter of 2005 versus the third
quarter of 2004. The growth in shipments was due in large part to can market
share advances in China and Southeast Asia.
Regional Income climbed by 21% in the third quarter of 2005 versus the third
quarter of 2004. Regional Income in Asia for the quarter benefited from improved
costs and increased shipments. The strengthening of the Korean Won had a $3
million adverse impact on the segment. However, this was partially offset by
favorable metal timing differences.
Novelis South America
In South America, shipments of rolled products increased in the quarter due
primarily to the growth in the regional can market.
Regional Income in South America declined due to higher energy costs, higher
smelter production costs, and a negative impact of $8 million as a result of the
strengthening of the Brazilian Real by 26% during the third quarter of 2005
versus the third quarter of 2004. The favorable impact of increasing London
Metal Exchange (LME) prices on production from the smelters resulted in a $6
million benefit to Regional Income.
Balance Sheet Highlights
Cash and cash equivalents at the end of the third quarter of 2005 were $124
million, down slightly from $127 million at the end of the second quarter of
2005.
As of September 30, 2005, Novelis had reduced its debt to $2,685 million from
$2,951 million at the time of Novelis' spin-off from Alcan, a total reduction of
$266 million.
Working capital improvements positively impacted cash flows during the third
quarter. As a result of these working capital improvements and a review of the
overall impact of rising metal prices on working capital, Novelis was able to
revise its estimate of the impact on cash of metal price movements for the
long-term. The Company now expects that for every $100 change in the price of
metal per tonne, working capital is impacted by approximately $30 million,
compared with its previous estimate of $40 million. Most of the difference is
attributable to structural improvements made in working capital levels in 2005.
The Company continues to make progress on working capital turns, and any
sustained improvements should further reduce the impact from metal price
fluctuations.
Full Year 2005 and 2006 Highlights
Novelis took actions during the third and fourth quarters of 2005 that have
significant implications for 2006 and beyond. As previously announced, for the
first half of 2006, the Company hedged its metal price ceiling exposure above
its internal hedge volume by purchasing $29 million in call options positioned
to cover the exposure at the ceiling price for the first six months.
For the second half of 2006, the Company has hedged its metal price ceiling
exposure above its internal hedge volume with call option positions at various
strike prices above the ceiling price. As a result, at anticipated sales volumes
and at today's metal price, the maximum metal price ceiling exposure (beyond
internal hedges) is expected to be $45 million, in addition to the $14 million
cost of the options for the last six months of 2006. The maximum exposure
assumes the hedge effectiveness of Novelis' used beverage can (UBC) and smelter
output in this unusually high and sustained metal price environment. The options
were paid in cash in 2005, but will be expensed for accounting purposes in 2006.
The Company expects that, beginning in 2007, it will no longer have metal price
ceiling exposure beyond its internal hedge position since the Company's total
volume, subject to contracts with a metal price ceiling, will decrease to
approximately 10% from the 2006 level of 20%. This remaining can ceiling
exposure volume level is roughly at or below the Company's internal hedge
volume.
Novelis was aggressive in repaying debt in 2005, paying down more than $300
million. In the first quarter of 2006, the Company repaid $80 million of its
Term Loan, as well as other debt, driven by cash flows from operations and
working capital improvements. Notably, the Company was able to do this during a
period of sustained high metal prices, which required additional working
capital.
As the Company modified its metal hedging strategy, it also revised its currency
hedging strategy. Novelis South America has entered into Brazilian Real foreign
currency forward contracts, which will hedge the rate at which U.S.
dollar-denominated revenue is converted into Real to pay for local costs such as
labor and electricity. These contracts currently cover approximately one-half of
the Company's projected net, Real-denominated cash flow exposure in South
America for the next twelve months. The covered amount is slightly more than
$100 million and has an average rate of $R2.32 per U.S. dollar.
Novelis expects Regional Income for the fourth quarter of 2005 to improve versus
$116 million in the fourth quarter of 2004. However, Regional Income for the
full year 2005 is expected to decrease compared with record Regional Income of
$654 million in 2004. The decline would be primarily due to high metal prices
and the ceiling price effect on North American can sheet sales, currency impacts
and continued increases in energy and transportation costs. For the first nine
months of 2005, the overall adverse metal effect was $24 million, while energy
and transportation costs increased.
Foreign currency fluctuations negatively affected Regional Income for the first
nine months of 2005 by approximately $25 million, and are also expected to have
a negative impact on results in the fourth quarter, primarily due to the
strengthening of the Brazilian Real from an average of $R2.920 per U.S. dollar
in 2004 to an average of $R2.417 per U.S. dollar in 2005, a 21 percent change in
dollar-equivalent terms.
Outlook for 2006
Preliminary data suggests that Novelis' financial results in the first half of
2006 will benefit from positive metal timing. However, the expenses related to
the restatement and review process will negatively impact the half- year
results.
With respect to the second half of 2006, a number of factors contribute to
uncertainty and hinder visibility. These include fluctuating metal prices
affecting the direction of metal timing, the Company's remaining $45 million
risk exposure on metal option hedging, the effectiveness of its internal hedges
from used beverage cans and its Brazilian smelters, and currency trends. In
addition, Novelis will incur additional costs in the second half of 2006 as it
brings current its financial statements.
With the 2005 restatement and review process completed, the Company is taking
the steps necessary to put the financial reporting process back on a normal
cycle. Novelis has received the waiver from its lenders extending the reporting
deadlines for the full year 2005 and the first, second and third quarters of
2006, and will now focus on returning to a normal reporting cycle no later than
year end. The business continues to move forward, and the time is right to turn
to accelerating execution of the strategy and focusing on profitable portfolio
opportunities and growth.
Attachment A
The following table summarizes the reconciliation of Regional Income to Income
before income taxes and other items.
* Corporate costs include the $45 million gain realized on the monetization of
cross-currency interest rate swaps in the second quarter of 2005.
Regional Income comprises earnings before interest, income taxes, equity income,
minority interests, depreciation and amortization and excludes certain items,
such as corporate, restructuring costs, impairment and other rationalization
charges. These items are managed by our corporate head office, which focuses on
strategy development and oversees governance, policy, legal compliance, human
resources and finance matters. Regional Income is the measure by which
management evaluates the profitability and financial performance of our
operating segments.
Financial information for the regional groups includes the results of certain
joint ventures on a proportionately consolidated basis, which is consistent with
the way the regional groups are managed. Under GAAP, these joint ventures are
accounted for under the equity method. Therefore, in order to reconcile Regional
Income to Income before income taxes and other items, the Regional Income
attributable to these joint ventures is removed from Regional Income for us and
the net after-tax results are reported as equity income.
The change in the fair market value of derivatives, with the exception of
unrealized gains or losses on certain cash flow hedges, has been removed from
individual regional results and is shown on a separate line in the
reconciliation between total Regional Income and Income before income taxes and
other items. This presentation provides a portrayal of our underlying regional
group results that is in line with our portfolio approach to risk management.
Attachment B
The following table summarizes the reconciliation of Net Income to Free
Cash Flow.
Nine Months
Free Cash Flow --------------
($ in millions) 2005 2004
- ----------------------------------------------- ----- -----
Net income 32 148
Unrealized losses (gains) on derivatives - (36)
Other non-cash income items(A) 87 206
Increase (decrease) in interest payable 19 (1)
Increase (decrease) in accrued income taxes 59 (18)
Other changes in assets and liabilities(B) 169 (7)
Net cash provided by operating activities 366 292
Dividends (27) (4)
Premiums paid and net proceeds on derivatives 70 -
Capital expenditures (104) (95)
Free cash flow (C) 305 193
Ending cash balance 124 27
(A) Other non-cash income items comprise: Depreciation and amortization,
Deferred income taxes, Write-off and amortization of debt issue costs, Provision
for uncollectible accounts, Gains from sale of fixed assets, Equity in net
income of non-consolidated affiliates, Provision for asset impairments and Stock
option compensation, and realized losses (gains) on derivatives.
(B) Other changes in assets and liabilities comprise: increases or decreases in
Accounts receivable (third and related parties), Prepaid expenses, Inventories,
Other current assets, Accounts payable trade (third and related parties),
Accrued expenses, Deferred charges and other assets, Deferred credits and other
liabilities and Other items . net.
(C) Free cash flow (which is a non-GAAP measure) consists of cash provided by
operating activities plus or minus capital expenditures, premiums paid and net
proceeds on derivatives and dividends. Dividends include those paid by our less
than wholly-owned subsidiaries to their minority shareholders and dividends to
our common shareholders. Management believes that free cash flow is relevant to
investors as it provides a measure of the cash generated internally that is
available for debt service and other value creation opportunities. However, free
cash flow does not necessarily represent cash available for discretionary
activities, as certain debt service obligations must be funded out of free cash
flow. We believe the line on our unaudited condensed consolidated and combined
statement of cash flows entitled "Cash provided by operating activities" is the
most directly comparable measure to free cash flow. Our method of calculating
free cash flow may not be consistent with that of other companies.
Novelis is the global leader in aluminum rolled products and aluminum can
recycling. The Company operates in 11 countries and has approximately 13,000
employees. Novelis has the unrivaled capability to provide its customers with a
regional supply of technologically sophisticated rolled aluminum products
throughout Asia, Europe, North America, and South America. Through its advanced
production capabilities, the Company supplies aluminum sheet and foil to the
automotive and transportation, beverage and food packaging, construction and
industrial, and printing markets. For more information, visit www.novelis.com .
Statements made in this news release which describe Novelis' intentions,
expectations or predictions may be forward-looking statements within the meaning
of securities laws. Examples of forward-looking statements in this news release
include, among other matters, our expectations with respect to the impact on
cash of metal price movements, our metal price ceiling exposure, our performance
expectations for the fourth quarter of 2005, our outlook for 2006 and our
efforts to return to a normal SEC reporting cycle by the end of 2006. Novelis
cautions that, by their nature, forward-looking statements involve risk and
uncertainty and that Novelis' actual results could differ materially from those
expressed or implied in such statements. We do not intend, and we disclaim any
obligation, to update any forward-looking statements, whether as a result of new
information, future events or otherwise. Factors that could cause actual results
or outcomes to differ from the results expressed or implied by forward-looking
statements include, among other things: continuing obligations and other
relationships resulting from our spin-off from Alcan; the level of our
indebtedness and our ability to generate cash; relationships with, and financial
and operating conditions of, our customers and suppliers; changes in the prices
and availability of aluminum (or premiums associated with such price) or other
raw materials we use; fluctuations in the supply of, and prices for, energy in
the areas in which we maintain production facilities; our ability to access
financing for future capital requirements; changes in the relative values of
various currencies; factors affecting our operations, such as litigation, labor
relations and negotiations, breakdown of equipment and other events; economic,
regulatory and political factors within the countries in which we operate or
sell our products, including changes in duties or tariffs; competition from
other aluminum rolled products producers as well as from substitute materials
such as steel, glass, plastic and composite materials; changes in general
economic conditions; changes to and volatility of metal prices; our ability to
improve and maintain effective internal control over financial reporting and
disclosure controls and procedures in the future; our ability to properly
account for adjustments made to arrive at our opening balance sheet as of
January 6, 2005; changes in market value of derivatives; the effectiveness of
our hedging activities, including our internal UBC and smelter hedges; the
continued cooperation of debt holders and regulatory authorities with respect to
extensions of our 2006 filing deadlines; cyclical demand and pricing within the
principal markets for our products as well as seasonality in certain of our
customers' industries; and changes in government regulations, particularly those
affecting environmental, health or safety compliance. The financial information
provided in this news release was prepared by management and has not been
audited. The above list of factors is not exhaustive. Other important risk
factors are included under the caption "Risk Factors" in our registration
statement on Form S-4, as amended and filed with the SEC, and may be discussed
in subsequent filings with the SEC. The risk factors included in our
registration statement on Form S-4, as amended, are specifically incorporated by
reference into this news release.
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (unaudited)
(in millions of US$, except per share amounts)
Third Quarter Nine Months
--------------- ---------------
Periods ended September 30 2005 2004 2005 2004
- ----------------------------------------- ----- ----- ----- -----
Sales and operating revenues
- third parties 2,053 1,893 6,337 5,416
- related parties - 107 - 323
2,053 2,000 6,337 5,739
Costs and expenses
Cost of sales and operating expenses,
excluding depreciation and
amortization noted below
- third parties 1,833 1,661 5,677 4,744
- related parties - 96 - 288
Depreciation and amortization 56 60 173 178
Selling, general and administrative
expenses 79 72 243 182
Research and development expenses 10 3 29 13
Research and development expenses -
related parties - 10 - 28
Other expenses (income) - net
- third parties (27) - (38) 8
- related parties - 1 (1) (21)
Interest expense
- third parties 48 10 142 31
- related parties - 7 - 24
1,999 1,920 6,225 5,475
Income before income taxes and other
items 54 80 112 264
Income taxes 37 45 67 111
Income before other items 17 35 45 153
Equity in net income of non-consolidated
affiliates 2 1 6 4
Minority interests in earnings of
consolidated affiliates (9) (2) (19) (9)
Net income 10 34 32 148
Earnings per share
Net income per share - basic 0.14 0.47 0.43 2.01
Net income per share - diluted 0.14 0.47 0.43 2.00
Dividends per common share 0.09 - 0.27 -
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS (unaudited)
(in millions of US$, except number of shares)
September 30, December 31,
As of 2005 2004
- ---------------------------------------------- ------------- -------------
ASSETS
Current assets
Cash and cash equivalents 124 31
Trade receivables (net of allowances of
$28 in 2005 and $33 in 2004)
- third parties 959 710
- related parties - 87
Other receivables
- third parties 8 5
- related parties 30 846
Prepaid expenses 52 36
Inventories
Aluminum 941 1,081
Raw materials 20 20
Other supplies 126 125
1,087 1,226
Other current assets 181 77
Total current assets 2,441 3,018
Deferred charges and other assets 219 71
Long-term receivables from related parties 77 104
Property, plant and equipment, net 2,170 2,348
Investments in non-consolidated affiliates 100 122
Intangible assets (net of accumulated
amortization of $10 in 2005 and $9 in 2004) 29 35
Goodwill 228 256
Total assets 5,264 5,954
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS (unaudited) - (Continued)
(in millions of US$, except number of shares)
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (unaudited)
(in millions of US$)
Nine months ended September 30 2005 2004
- ----------------------------------------------------- -------- ------
OPERATING ACTIVITIES
Net cash provided by operating activities 366 292
INVESTING ACTIVITIES
Capital expenditures (104) (95)
Proceeds from sales of fixed assets and investments 9 8
Proceeds from loans receivable - net
- third parties 19 -
- related parties 373 501
Premiums paid on purchased derivatives (26) -
Net proceeds from settlement of derivatives 96 501
Net cash provided by investing activities 367 414
FINANCING ACTIVITIES
Proceeds from issuance of new debt - third parties 2,750 443
Principal repayments
- third parties (1,742) (895)
- related parties (1,180) -
Short-term borrowings - net
- third parties (137) (133)
- related parties (302) 4
Dividends - common shareholders (20) -
Dividends - minority interest (7) (4)
Net receipts from (payments to) Alcan 72 (121)
Debt issuance costs paid (71) -
Net cash used in financing activities (637) (706)
Net increase in cash and cash equivalents 96 -
Effect of exchange rate changes on cash balances
held in foreign currencies (3) -
Cash and cash equivalents - beginning of period 31 27
Cash and cash equivalents - end of period 124 27
SOURCE Novelis Inc.
-0- 05/16/2006
/CONTACT: Media, Charles Belbin, +1-404-814-4260, or
charles.belbin@novelis.com, or Investors, Holly K. Ash, +1-404-814-4212, or
holly.ash@novelis.com, both of Novelis Inc./
/Web site: http://www.novelis.com /
(NVL)