Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 14, 2012

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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)
 
 
3560 Lenox Road, Suite 2000
Atlanta, Georgia
 
30326
(Address of principal executive offices)
 
(Zip Code)
Telephone: (404) 760-4000
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    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  ý
As of July 31, 2012, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the registrant’s parent company.



Table of Contents

Novelis Inc.
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions)
 
Three Months Ended June 30,
 
2012
 
2011
Net sales
$
2,550

 
$
3,113

Cost of goods sold (exclusive of depreciation and amortization)
2,202

 
2,708

Selling, general and administrative expenses
102

 
95

Depreciation and amortization
73

 
89

Research and development expenses
12

 
12

Interest expense and amortization of debt issuance costs
74

 
77

Gain on assets held for sale
(5
)
 

Restructuring charges, net
5

 
19

Equity in net loss of non-consolidated affiliates
2

 
2

Other income, net
(27
)
 
(25
)
 
2,438

 
2,977

Income before income taxes
112

 
136

Income tax provision
21

 
59

Net income
91

 
77

Net income attributable to noncontrolling interests

 
15

Net income attributable to our common shareholder
$
91

 
$
62

See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In millions)
 
 
Three Months Ended June 30, 2012
 
Three Months Ended June 30, 2011
 
Attributable to
Our Common
Shareholder
 
Attributable to
Noncontrolling
Interests
 
Total
 
Attributable to
Our Common
Shareholder
 
Attributable to
Noncontrolling
Interests
 
Total
Net income
$
91

 
$

 
$
91

 
$
62


$
15

 
$
77

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(81
)
 
(1
)
 
(82
)
 
54

 
5

 
59

Net change in fair value of effective portion of cash flow hedges
(28
)
 

 
(28
)
 
(13
)
 

 
(13
)
Net change in pension and other benefits
24

 

 
24

 
1

 

 
1

Other comprehensive income (loss) before income tax effect
(85
)
 
(1
)
 
(86
)
 
42

 
5

 
47

Income tax (benefit) provision related to items of other comprehensive income (loss)
(1
)
 

 
(1
)
 
(4
)
 

 
(4
)
Other comprehensive income (loss), net of tax
(84
)
 
(1
)
 
(85
)
 
46

 
5

 
51

Comprehensive income (loss)
$
7

 
$
(1
)
 
$
6

 
$
108

 
$
20

 
$
128

 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the condensed consolidated financial statements.


4

Table of Contents

Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)
 
June 30,
2012
 
March 31,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
263

 
$
317

Accounts receivable, net
 
 
 
— third parties (net of allowances of $5 and $5 as of June 30, 2012 and March 31, 2012, respectively)
1,305

 
1,331

— related parties
29

 
36

Inventories
1,076

 
1,024

Prepaid expenses and other current assets
94

 
61

Fair value of derivative instruments
99

 
99

Deferred income tax assets
138

 
151

Assets held for sale
4

 
81

Total current assets
3,008

 
3,100

Property, plant and equipment, net
2,740

 
2,689

Goodwill
611

 
611

Intangible assets, net
669

 
678

Investment in and advances to non–consolidated affiliates
648

 
683

Fair value of derivative instruments, net of current portion
2

 
2

Deferred income tax assets
87

 
74

Other long–term assets
 
 
 
— third parties
164

 
168

— related parties
15

 
16

Total assets
$
7,944

 
$
8,021

LIABILITIES AND SHAREHOLDER’S EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long–term debt
$
23

 
$
23

Short–term borrowings
119

 
18

Accounts payable
 
 
 
— third parties
1,219

 
1,245

— related parties
48

 
51

Fair value of derivative instruments
107

 
95

Accrued expenses and other current liabilities
423

 
476

Deferred income tax liabilities
28

 
34

Liabilities held for sale

 
57

Total current liabilities
1,967

 
1,999

Long–term debt, net of current portion
4,315

 
4,321

Deferred income tax liabilities
563

 
581

Accrued postretirement benefits
661

 
687

Other long–term liabilities
309

 
310

Total liabilities
7,815

 
7,898

Commitments and contingencies

 

Shareholder’s equity
 
 
 
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of June 30, 2012 and March 31, 2012

 

Additional paid–in capital
1,659

 
1,659

Accumulated deficit
(1,288
)
 
(1,379
)
Accumulated other comprehensive loss
(275
)
 
(191
)
Total equity of our common shareholder
96

 
89

Noncontrolling interests
33

 
34

Total equity
129

 
123

Total liabilities and equity
$
7,944

 
$
8,021

See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents

Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)
 
Three Months Ended June 30,
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
Net income
$
91

 
$
77

Adjustments to determine net cash used in operating activities:
 
 
 
Depreciation and amortization
73

 
89

Gain on unrealized derivatives and other realized derivatives in investing activities, net
(16
)
 
(24
)
Gain on assets held for sale
(5
)
 

Deferred income taxes
(16
)
 
37

Write–off and amortization of fair value adjustments, net
8

 
3

Equity in net loss of non–consolidated affiliates
2

 
2

(Gain) loss on foreign exchange remeasurement of debt
(7
)
 

(Gain) loss on sale of assets
(2
)
 
1

Amortization of debt issuance costs
4

 
4

Other, net
1

 
14

Changes in assets and liabilities including assets and liabilities held for sale (net of effects from acquisitions and divestitures):
 
 
 
Accounts receivable
16

 
(92
)
Inventories
(75
)
 
(81
)
Accounts payable
19

 
(70
)
Other current assets
(31
)
 
(13
)
Other current liabilities
(54
)
 
(83
)
Other noncurrent assets
(2
)
 
9

Other noncurrent liabilities
(11
)
 
12

Net cash used in operating activities
(5
)
 
(115
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(167
)
 
(67
)
Proceeds from sales of assets, third party
10

 

Proceeds from sale of assets, related party
2

 

Proceeds from investment in and advances to non–consolidated affiliates, net

 
1

Proceeds (outflow) from related party loans receivable, net
2

 
(6
)
Proceeds (outflow) from settlement of other undesignated derivative instruments, net
1

 
(7
)
Net cash used in investing activities
(152
)
 
(79
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of debt
12

 
3

Principal payments
(5
)
 
(5
)
Short–term borrowings, net
92

 
190

Dividends, noncontrolling interest
(1
)
 

Net cash provided by financing activities
98

 
188

Net decrease in cash and cash equivalents
(59
)
 
(6
)
Effect of exchange rate changes on cash
5

 
2

Cash and cash equivalents — beginning of period
317

 
311

Cash and cash equivalents — end of period
$
263

 
$
307


See accompanying notes to the condensed consolidated financial statements.

6

Table of Contents

Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(In millions, except number of shares)
 
 
Equity of our Common Shareholder
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss) (AOCI)
 
Non-
controlling Interests
 
Total Equity
 
Shares
 
Amount
Balance as of March 31, 2012
1,000

 
$

 
$
1,659

 
$
(1,379
)
 
$
(191
)
 
$
34

 
$
123

Net income attributable to our common shareholder

 

 

 
91

 

 

 
91

Currency translation adjustment, net of tax provision of $ — included in AOCI

 

 

 

 
(81
)
 
(1
)
 
(82
)
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $9 included in AOCI

 

 

 

 
(19
)
 

 
(19
)
Change in pension and other benefits, net of tax provision of $8 included in AOCI

 

 

 

 
16

 

 
16

Balance as of June 30, 2012
1,000

 
$

 
$
1,659

 
$
(1,288
)
 
$
(275
)
 
$
33

 
$
129

See accompanying notes to the condensed consolidated financial statements.


7

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)




1.    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References herein to “Novelis,” the “Company,” “we,” “our,” or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited. In October 2007, the Rio Tinto Group purchased all the outstanding shares of Alcan, Inc. References herein to “Alcan” refer to Rio Tinto Alcan Inc.
Description of Business and Basis of Presentation
Novelis Inc. was formed in Canada on September 21, 2004. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the transportation, electronics, architectural and industrial markets. We also have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans (UBCs). As of June 30, 2012, we had manufacturing operations in nine countries on four continents: North America, South America, Asia and Europe, through 26 operating facilities, including recycling operations in ten of these plants. In addition to aluminum rolled products plants, our South American businesses include 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, 2012 filed with the United States Securities and Exchange Commission (SEC) on May 24, 2012. 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 our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairment of long lived assets and other intangible assets (4) equity investments; (5) actuarial assumptions related to pension and other postretirement benefit plans; (6) tax uncertainties and valuation allowances and (7) assessment of loss contingencies, including environmental and litigation liabilities. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.
Hindalco Ownership
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The aggregate purchase price for all of the Company’s common shares was $3.4 billion and Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion. Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.
Consolidation Policy
Our condensed 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 condensed consolidated financial statements.
We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated “Net income attributable to our common shareholder” includes our share of the net earnings (losses) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial statements for consolidated entities, compared to a two-line presentation of equity method investments and net losses.
We use the cost method to account for our investments in entities that we do not control and for which we do not have the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value.

8

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

Recently Adopted Accounting Standards
Effective for the interim periods and year ended March 31, 2013, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (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. We elected to present two separate but consecutive statements. Additionally, effective for the year ended March 31, 2012, we adopted the FASB 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 U.S. GAAP for the presentation of reclassification adjustments must continue to be followed. The adoption of this standard had no impact on our consolidated financial position other than the change in presentation and additional disclosure.
Recently Issued Accounting Standards
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 three months ended June 30, 2012 and June 30, 2011 is $5 million and $19 million, respectively. The following table summarizes our restructuring liability activity by segment (in millions).
 
 
Europe
 
North
America
 
Asia
 
South
America
 
Corporate
 
Total  Restructuring
Liabilities
Balance as of March 31, 2012
$
19

 
$
5

 
$

 
$
2

 
$
2

 
$
28

Provisions
1

 
4

 

 

 

 
5

Cash payments
(10
)
 
(2
)
 

 

 

 
(12
)
Adjustments — other
(1
)
 

 

 

 

 
(1
)
Balance as of June 30, 2012
$
9

 
$
7

 
$

 
$
2

 
$
2

 
$
20

As of June 30, 2012, $19 million of restructuring liabilities is classified as short-term and is included in "Accrued expenses and other current liabilities" and $1 million is classified as long-term and is included in "Other long-term liabilities" on our condensed consolidated balance sheets.
Europe
Total “Restructuring charges, net” for the three months ended June 30, 2012 consisted of $1 million of severance across our European plants and other exit costs related to restructuring actions initiated in prior years. For the three months ended June 30, 2012, we made $9 million in severance payments and $1 million in other exit related payments related to these previously announced plans.
As of June 30, 2012, the restructuring liability balance of $9 million was comprised of $8 million of severance costs and $1 million of environmental remediation liabilities and other costs.
North America
Total “Restructuring charges, net” for the three months ended June 30, 2012 were $4 million, consisting primarily of $3

9

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

million of severance costs related to the closure of our Saguenay Works facility, and $1 million of one-time termination benefits associated with our decision to relocate our primary research and development operations to Kennesaw, Georgia. For the three months ended June 30, 2012, we made $2 million in payments related to previously announced separation programs.
As of June 30, 2012, the restructuring liability balance of $7 million was comprised of $6 million of severance costs and $1 million of other costs.
South America
As of June 30, 2012, the restructuring liability balance of $2 million was comprised of environmental remediation liabilities.
Corporate
As of June 30, 2012, 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, Georgia and other contract termination fees.
 
3.    INVENTORIES
Inventories consisted of the following (in millions).
 
 
June 30,
2012
 
March 31,
2012
Finished goods
$
204

 
$
207

Work in process
383

 
380

Raw materials
391

 
340

Supplies
98

 
97

Inventories
$
1,076

 
$
1,024



4.    ASSETS HELD FOR SALE
During the three months ended June 30, 2012, we sold three aluminum foil and packaging plants in our Europe segment to American Industrial Acquisition Corporation (AIAC). The transaction included foil rolling and packaging operations in Rugles, France; Dudelange, Luxembourg; and Berlin, Germany. The transaction was a step in aligning our growth strategy of supplying aluminum flat-rolled products to the the higher-volume, premium markets of beverage cans, automobiles and specialty products. As of March 31, 2012, we classified the respective assets and liabilities of these plants as “Assets held for sale” and “Liabilities held for sale” in the consolidated balance sheet. During the three months ended June 30, 2012, we received cash proceeds of $9 million and we have an outstanding current receivable from AIAC of $10 million. As of June 30, 2012, the remaining “Assets held for sale” relates to land at one plant that we expect will be sold to AIAC within the next nine months. The "Assets held for sale" was measured at the lower of carrying value or fair value less cost to sell. The land held for sale as of June 30, 2012 approximates the estimated selling price less cost to sell.

During the three months ended June 30, 2012, we recorded a gain on the disposal of the assets and liabilities of $5 million, which is recorded as “Gain on assets held for sale” in the condensed consolidated statement of operations. During the year ended March 31, 2012, we recorded an estimated loss on the disposal of the assets and liabilities of $111 million, which was included in “Loss on assets held for sale” in the consolidated statement of operations.
 The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale (in millions).

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Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

 
June 30,
2012
 
March 31,
2012
Assets held for sale
 
 
 
Accounts receivable

 
53

Inventories

 
17

Prepaid expenses and other current assets

 
3

Property, plant and equipment, net
4

 
8

Total assets held for sale
$
4

 
$
81

 
 
 
 
Liabilities held for sale
 
 
 
Accounts payable

 
23

Accrued expenses and other current liabilities

 
20

Accrued postretirement benefits

 
10

Other liabilities

 
4

Total liabilities held for sale
$

 
$
57


5.    CONSOLIDATION

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 VIE’s 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). 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. Logan’s creditors do not have recourse to our general credit.
Novelis has a majority voting right on Logan’s board of directors and has the ability to direct the majority of Logan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify Novelis as Logan’s 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)

 
June 30,
2012
 
March 31,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
7

 
$
2

Accounts receivable
21

 
20

Inventories
43

 
42

Prepaid expenses and other current assets
1

 

Total current assets
72

 
64

Property, plant and equipment, net
13

 
15

Goodwill
12

 
12

Deferred income taxes
63

 
63

Other long-term assets
3

 
3

Total assets
$
163

 
$
157

Liabilities
 
 
 
Current liabilities
 
 
 
Accounts payable
$
27

 
$
24

Accrued expenses and other current liabilities
12

 
11

Total current liabilities
39

 
35

Accrued postretirement benefits
146

 
145

Other long-term liabilities
2

 
2

Total liabilities
$
187

 
$
182

 
6.
INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS

Included in the accompanying condensed consolidated financial statements are transactions and balances arising from businesses we conduct with our non-consolidated affiliates, which we classify as related party transactions and balances. The following table summarizes our share of the condensed results of operations of these non-consolidated affiliates, which we account for using the equity method, and also describes the nature and amounts of significant transactions that we had with these non-consolidated affiliates (in millions). These results include the incremental depreciation and amortization expense, net of tax, of $4 million for the three months ended June 30, 2012 and 2011, that we recorded in our equity method accounting as a result of fair value adjustments we made to our investments in non-consolidated affiliates due to the Arrangement.

 
Three Months Ended June 30,
 
2012
 
2011
Net sales
$
61

 
$
66

Costs, expenses and provisions for taxes on income
63

 
68

Net loss
$
(2
)
 
$
(2
)
Purchase of tolling services from Aluminium Norf GmbH (Alunorf)
$
61

 
$
66

     
As of June 30, 2012, we had a $15 million long-term related party loan receivable and $29 million in "Accounts receivable, net - related parties" from Alunorf. In the three months ended June 30, 2012 and 2011, we earned less than $1 million of interest income on the outstanding loan receivable.

We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of June 30, 2012, our guarantee was $1 million.
The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as

12

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances.
 
 
June 30,
2012
 
March 31,
2012
Accounts receivable
$
29

 
$
33

Other long-term assets
$
15

 
$
16

Accounts payable
$
48

 
$
51

Transactions with Hindalco
We occasionally have related party transactions with our parent company, Hindalco. During the three months ended June 30, 2012 we recorded “Net Sales” and collected cash proceeds of $3 million between Novelis and our parent related to sales of aluminum coils.
Novelis U.K. Limited entered into agreements with Hindalco to sell certain aluminum rolling equipment previously used in the operation of our plant located at Bridgnorth, England. We believe the terms of this transaction are comparable to the terms that would have been reached with a third party on an arms-length basis. In the three months ended June 30, 2012, Hindalco purchased $2 million of equipment related to the agreements.






































13

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

7.    DEBT
Debt consists of the following (in millions).
 
June 30, 2012
 
March 31, 2012
 
Interest
Rates(A)
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
Third party debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short term borrowings
3.57
%
 
$
119

 
$

 
  
 
$
119

 
$
18

 
$

 
  
 
$
18

Novelis Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate Term Loan Facility, due March 2017
4.00
%
 
1,701

 
(35
)
 
(B) 
 
1,666

 
1,705

 
(37
)
 
(B) 
 
1,668

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

 

 
 
 
1,400

7.25% Senior Notes, due February 2015
7.25
%
 
74

 
2

 
  
 
76

 
74

 
2

 
  
 
76

Novelis Korea Limited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Facility Loan, due December 2014
4.62
%
 
26

 

 
  
 
26

 
26

 

 
  
 
26

Term Loan, due December 2014
4.95
%
 
17

 

 
  
 
17

 
18

 

 
  
 
18

Novelis Switzerland S.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital lease obligation, due December 2019 (Swiss francs (CHF) 39 million)
7.50
%
 
41

 
(2
)
 
 
 
39

 
45

 
(2
)
 
 
 
43

Novelis Brazil
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BNDES loans, due December 2018 through April 2021
5.77
%
 
15

 
(3
)
 
 
 
12

 
15

 
(4
)
 
 
 
11

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, due July 2012 through November 2015
5.21
%
 
2

 

 
  
 
2

 
2

 

 
  
 
2

Total debt — third parties
 
 
4,495

 
(38
)
 
 
 
4,457

 
4,403

 
(41
)
 
 
 
4,362

Less: Short term borrowings
 
 
(119
)
 

 
  
 
(119
)
 
(18
)
 

 
  
 
(18
)
Current portion of long term debt
 
 
(23
)
 

 
  
 
(23
)
 
(23
)
 

 
  
 
(23
)
Long-term debt, net of current portion — third parties:
 
 
$
4,353

 
$
(38
)
 
 
 
$
4,315

 
$
4,362

 
$
(41
)
 
 
 
$
4,321

 
(A)
Interest rates are as of June 30, 2012 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.

14

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

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 June 30, 2012 for our debt denominated in foreign currencies) are as follows (in millions).
 
As of June 30, 2012
Amount
Short-term borrowings and Current portion of long term debt due within one year
$
142

2 years
25

3 years
142

4 years
24

5 years
1,640

Thereafter
2,522

Total
$
4,495

 
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.
The Notes contain customary covenants and events of default that will limit our ability and, in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and provide additional guarantees, (2) pay dividends beyond certain amounts and make other restricted payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of certain of the Company's subsidiaries to pay dividends or make other distributions to the Company, (7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions, (9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all or substantially all of the our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc., a division of the McGraw-Hill Companies, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Notes and no default or event of default under the Indenture has occurred and is continuing, most of the covenants will be suspended.
Senior Secured Credit Facilities
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 is the higher of LIBOR or a floor of 100 basis points, plus a spread ranging from 2.75% to 3.0% depending on the Company’s 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.
The senior secured credit facilities include various customary covenants and events of default, including limitations on our ability to (1) make certain restricted payments, (2) incur additional indebtedness, (3) sell certain assets, (4) enter into sale and leaseback transactions, (5) make investments, loans and advances, (6) pay dividends and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. In addition, under the ABL Facility, if (a) our excess availability under the ABL Facility is less than the greater of (i) 12.5% of the lesser of (x) the total ABL Facility commitment at any time and (y) the then applicable borrowing base and (ii) $90 million, at any time or (b) any event of default has occurred and is continuing, we are required to maintain a

15

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

minimum fixed charge coverage ratio of at least 1.1 to 1 until (1) such excess availability has subsequently been at least the greater of (i) 12.5% of the lesser of (x) the total ABL Facility commitments at such time and (y) the then applicable borrowing base for 30 consecutive days and (ii) $90 million and (2) no default is outstanding during such 30 day period. As of June 30, 2012 our excess availability under the ABL Facility was $607 million, or 76% of the lender commitments.
Further, under the Term Loan Facility we may not permit our total net leverage ratio as of the last day of our four consecutive quarters ending with any fiscal quarter to be greater than the ratio set forth below opposite the period in the table below during which the last day of such period occurs:
 
Period 
Total Net
Leverage Ratio
April 1, 2012 through March 31, 2013
4.50 to 1.0
April 1, 2013 through March 31, 2014
4.375 to 1.0
April 1, 2014 through March 31, 2015
4.25 to 1.0
April 1, 2015 and thereafter
4.0 to 1.0
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 Korea's 91-day CD rate plus an applicable spread ranging from 1.08% to 1.41%.
Short-Term Borrowings and Lines of Credit
In May 2012, Novelis Brazil entered into a short-term loan agreement (Novelis Brazil loan) with a local bank with maximum available financing of $40 million. As of June 30, 2012, our short-term borrowings were $119 million consisting of $90 million of short-term loans under our ABL Facility, $2 million in bank overdrafts, a $17 million (KRW 20 billion) Novelis Korea bank loan, and $10 million in short term loans under the Novelis Brazil loan. The weighted average interest rate on our total short-term borrowings was 3.57% and 4.83% as of June 30, 2012 and March 31, 2012, respectively.
As of June 30, 2012, $17 million of the ABL Facility was utilized for letters of credit, and we had $607 million in remaining availability under the ABL Facility. As of June 30, 2012, we had $48 million of outstanding letters of credit in Korea which are not related to the ABL Facility.
BNDES Loans
From February 2011 through May 2012, Novelis Brazil entered into 22 new loan agreements (the BNDES loans) with Brazil’s National Bank for Economic and Social Development (BNDES) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). The agreements provided for a commitment of Brazilian Real (R$) borrowings at a current weighted average rate of 5.8% up to an aggregate of $17 million (R$34 million). As of June 30, 2012, we had $15 million (R$31 million) outstanding under the BNDES loan agreements with maturity dates of December 2015 through April 2021.
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt.
In January 2012, we entered into interest rate swap contracts to manage our exposure to changes in the benchmark KRW 3M-CD interest rate. We swapped our (1) $26 million (KRW 30 billion) floating rate loan to a fixed rate of 4.485% and our (2) $17 million (KRW 20 billion) floating rate loan to a fixed rate of 4.815%. Both swaps expire December 2014, concurrent with the maturity of the loans. As of June 30, 2012 and March 31, 2012, these swaps were designated as cash flow hedges.
As of March 31, 2012, we had $220 million of outstanding USD LIBOR based interest rate swaps that matured in April 2012 that were not designated as hedges. As of June 30, 2012, there were no interest rate swaps outstanding that were not designated as hedges.

16

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)


8.    SHARE-BASED COMPENSATION
The board of directors has authorized five 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.
The Novelis Long-Term Incentive Plan FY 2013— FY 2016 (2013 LTIP) was authorized in May 2012. The 2013 LTIP provides for SARs and RSUs.
Under all five plans, SARs vest at the rate of 25% per year, subject to performance criteria and expire 7 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, 2012 LTIP and 2013 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 2014, 2015 and 2016 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 months ended June 30, 2012 and 2011.
 
 
Three Months Ended June 30,
 
2012
 
2011
2009 LTIP
$

 
$
3

2010 LTIP
(1
)
 
2

2011 LTIP
(1
)
 
(1
)
2012 LTIP
(1
)
 

2013 LTIP
1

 

Total compensation (income) expense
$
(2
)
 
$
4

 
The tables below show the RSUs activity under our 2013 LTIP, 2012 LTIP and 2011 LTIP and the SARs activity under our 2013 LTIP, 2012 LTIP, 2011 LTIP, 2010 LTIP and 2009 LTIP.
 
2013 LTIP - RSUs
Number of
RSUs
 
Grant Date Fair
Value
(in Indian Rupees)
 
Aggregate
Intrinsic
Value (USD
in millions)
RSUs outstanding as of March 31, 2012

 

 
$

Granted
1,936,970

 
109.57

 

Forfeited/Cancelled

 

 
 
RSUs outstanding as of June 30, 2012
1,936,970

 
109.57

 
$



17

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

2013 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, 2012

 

 

 
$

Granted
16,394,306

 
109.57

 

 

Forfeited/Cancelled

 

 

 
 
SARs outstanding as of June 30, 2012
16,394,306

 
109.57

 
6.9

 
$


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, 2012
878,675

 
186.02

 
$
2

Granted

 

 

Forfeited/Cancelled
(12,066
)
 
188.26

 
 
RSUs outstanding as of June 30, 2012
866,609

 
186.24

 
$
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, 2012
6,688,717

 
186.05

 
6.1

 
$

Granted

 

 

 

Forfeited/Cancelled
(267,337
)
 
188.68

 

 
 
SARs outstanding as of June 30, 2012
6,421,380

 
186.22

 
5.9

 
$

 
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, 2012
802,149

 
149.01

 
$
2

Forfeited/Cancelled
(37,166
)
 
147.10

 
 
RSUs outstanding as of June 30, 2012
764,983

 
149.04

 
$
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, 2012
6,303,848

 
149.01

 
5.1
 
$

Exercised

 

 
 
 
 
Forfeited/Cancelled
(263,383
)
 
147.40

 
 
 
 
SARs outstanding as of June 30, 2012
6,040,465

 
149.03

 
4.9
 
$

 

18

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

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, 2012
8,171,586

 
88.37

 
4.2
 
$
7

Exercised
(122,546
)
 
172.95

 
 
 
 
Forfeited/Cancelled
(323,609
)
 
86.95

 
 
 
 
SARs outstanding as of June 30, 2012
7,725,431

 
87.72

 
4.0
 
$
4

 
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, 2012
4,845,652

 
60.50

 
3.2
 
$
7

Exercised
(314,542
)
 
133.72

 
 
 
 
Forfeited/Cancelled
(341,265
)
 
60.50

 
 
 
 
SARs outstanding as of June 30, 2012
4,189,845

 
60.50

 
3.0
 
$
4

The fair value of each unvested 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 vested SAR is remeasured at fair value each reporting period based on the excess of the current stock price over the exercise price, not to exceed the maximum payout as defined by each plan. The fair value of each unvested SAR under the 2013 LTIP, 2012 LTIP, 2011 LTIP, and 2010 LTIP was estimated as of June 30, 2012 using the following assumptions:
 
 
2013 LTIP
 
2012 LTIP
 
2011 LTIP
 
2010 LTIP
Risk-free interest rate
8.24
%
 
8.24
%
 
8.17
%
 
8.08
%
Dividend yield
1.29
%
 
1.29
%
 
1.29
%
 
1.29
%
Volatility
51
%
 
52
%
 
55
%
 
55
%
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 2014, 2015 and 2016 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 three months ended June 30, 2012. As of June 30, 2012, 13,507,031 SARs were exercisable.
Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $19 million which is expected to be realized over a weighted average period of 2.23 years. Unrecognized compensation expense is $1 million related to 2011 RSUs, $1 million related to 2012 RSUs, and $4 million related to 2013 RSUs which will be recognized over the remaining vesting period of 1, 2 and 3 years, respectively.
 
9.    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.
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
 

19

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

 
Pension Benefit Plans
 
Other Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Service cost
$
11

 
$
10

 
$
3

 
$
2

Interest cost
16

 
17

 
2

 
3

Expected return on assets
(16
)
 
(16
)
 

 

Amortization — losses
6

 
3

 
1

 

Net periodic benefit cost
$
17

 
$
14

 
$
6

 
$
5

 
 
 
 
 
 
 
 
The expected long-term rate of return on plan assets is 6.40% in fiscal 2013.

On June 28, 2012, the Company adopted and communicated an amendment to a U.S. nonunion benefit plan which reduced postretirement life insurance benefits to retirees and eliminated the postretirement life insurance benefits for active employees. The plan remeasurement resulted in the Company recognizing a negative plan amendment and a curtailment gain of $14 million which was recorded as a reduction in “Accumulated other comprehensive loss” during the three months ended June 30, 2012. There was no impact to our condensed consolidated statement of operations for the three months ended June 30, 2012. The plan amendment will reduce other post-retirement benefit expense in future years.
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, Korea, Malaysia and Brazil. We contributed the following amounts to all plans (in millions).
 
 
Three Months Ended June 30,
 
2012
 
2011
Funded pension plans
$
9

 
$
11

Unfunded pension plans
3

 
3

Savings and defined contribution pension plans
5

 
5

Total contributions
$
17

 
$
19

During the remainder of fiscal 2013, we expect to contribute an additional $38 million to our funded pension plans, $11 million to our unfunded pension plans and $17 million to our savings and defined contribution plans.

10.    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 June 30,
 
2012
 
2011
Gain on remeasurement of monetary assets and liabilities, net
$
(3
)
 
$
(1
)
Loss released from accumulated other comprehensive income
1

 

(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net
(3
)
 
11

Currency (gains) losses, net
$
(5
)
 
$
10





20

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

The following currency gains (losses) are included in “AOCI,” net of tax and “Noncontrolling interests” (in millions).
 
 
Three Months Ended June 30, 2012
 
Year Ended March 31, 2012
Cumulative currency translation adjustment — beginning of period
$
23

 
$
114

Effect of changes in exchange rates
(71
)
 
(79
)
Sale of investment in foreign entities
$
(11
)
 
$
(12
)
Cumulative currency translation adjustment — end of period
$
(59
)
 
$
23

 

11.    FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The fair values of our financial instruments and commodity contracts as of June 30, 2012 and March 31, 2012 are as follows (in millions).
 
June 30, 2012
 
Assets
 
Liabilities
 
Net Fair  Value
Assets/(Liabilities)
 
Current
 
Noncurrent
 
Current
 
Noncurrent(A)
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
23

 
$

 
$
(6
)
 
$

 
$
17

Currency exchange contracts
1

 
1

 
(24
)
 
(10
)
 
(32
)
Net Investment hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
11

 

 

 

 
11

Fair value hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts

 

 
(10
)
 
(1
)
 
(11
)
Total derivatives designated as hedging instruments
35

 
1

 
(40
)
 
(11
)
 
(15
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Aluminum contracts
47

 

 
(40
)
 
(1
)
 
6

Currency exchange contracts
17

 
1

 
(11
)
 
(1
)
 
6

Energy contracts

 

 
(16
)
 
(27
)
 
(43
)
Total derivatives not designated as hedging instruments
64

 
1

 
(67
)
 
(29
)
 
(31
)
Total derivative fair value
$
99

 
$
2

 
$
(107
)
 
$
(40
)
 
$
(46
)
 

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

 
March 31, 2012
 
Assets
 
Liabilities
 
Net Fair  Value
Assets/(Liabilities)
 
Current
 
Noncurrent
 
Current
 
Noncurrent(A)
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
17

 
$

 
$
(5
)
 
$

 
$
12

Currency exchange contracts
12

 
1

 
(6
)
 
(6
)
 
1

Net Investment hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
2

 

 

 

 
2

Fair value hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
1

 

 
(6
)
 

 
(5
)
Total derivatives designated as hedging instruments
32

 
1

 
(17
)
 
(6
)
 
10

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Aluminum contracts
51

 

 
(47
)
 

 
4

Currency exchange contracts
16

 
1

 
(10
)
 
(1
)
 
6

Energy contracts

 

 
(21
)
 
(30
)
 
(51
)
Total derivatives not designated as hedging instruments
67

 
1

 
(78
)
 
(31
)
 
(41
)
Total derivative fair value
$
99

 
$
2

 
$
(95
)
 
$
(37
)
 
$
(31
)
 
(A)
The noncurrent portions of derivative liabilities are included in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets.
 
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 primarily 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 $8 million and gains on changes in the fair value of designated hedged items of $7 million in sales revenue for the three months ended June 30, 2012. We recognized ineffectiveness of $1 million in "Other (income) expense, net." We had 59 kt and 32 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of June 30, 2012 and March 31, 2012, 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 prices. Such exposures do not extend beyond two years in length. We had 16 kt and 16 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of June 30, 2012 and March 31, 2012, 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 152 kt and 144 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of June 30, 2012 and March 31, 2012, respectively.
The remaining balance of our aluminum derivative contracts are not designated as accounting hedges. As of June 30, 2012

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

and March 31, 2012, we had 99 kt and 42 kt, respectively, of outstanding aluminum sales 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).
 
 
June 30,
2012
 
March 31,
2012
Hedge Type
 
 
 
Purchase (Sale)
 
 
 
Cash flow purchases
16

 
16

Cash flow sales
(152
)
 
(144
)
Fair value
59

 
32

Not designated
(99
)
 
(42
)
Total
(176
)
 
(138
)
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 $860 million and $976 million of outstanding foreign currency forwards designated as cash flow hedges as of June 30, 2012 and March 31, 2012, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to net investment in foreign subsidiaries. We had $113 million and $123 million of outstanding foreign currency forwards designated as net investment hedges as of June 30, 2012 and March 31, 2012, respectively. We recorded gains of $6 million and losses of less than $1 million related to net investment hedges in OCI for the 3 months ended June 30, 2012 and June 30, 2011, respectively. There was no ineffectiveness on net investment hedges recorded for the three months ended June 30, 2012 and June 30, 2011.
As of June 30, 2012 and March 31, 2012, we had outstanding currency exchange contracts with a total notional amount of $1.4 billion, which were not designated as hedges. Contracts that represent the majority of notional amounts will mature during the second quarter of fiscal 2013.
Energy
We own an interest in an electricity swap which we formerly 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 June 30, 2012.
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of June 30, 2012 and March 31, 2012, we had 5.7 million MMBTUs and 6.6 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. Such exposures do not extend beyond 2 years in length. 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 benchmark interest rates which impact our variable-rate debt.
In January 2012, we entered into interest rate swap contracts to manage our exposure to changes in the benchmark KRW 3M-CD interest rate. We swapped our (1) $26 million (KRW 30 billion) floating rate loan to a fixed rate of 4.485% and our (2) $17 million (KRW 20 billion) floating rate loan to a fixed rate of 4.815%. Both swaps expire December 2014, concurrent with the maturity of the loans. As of June 30, 2012 and March 31, 2012, these swaps were designated as cash flow hedges.
As of March 31, 2012, we had $220 million of outstanding USD LIBOR based interest rate swaps that matured in April

23

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

2012 that were not designated as hedges. As of June 30, 2012, there were no interest rate swaps outstanding that were not designated as hedges.
 
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). Gains (losses) recognized in other line items in the condensed consolidated statement of operations are separately disclosed within this footnote.
 
 
Three Months Ended June 30,
 
2012
 
2011
Derivative Instruments Not Designated as Hedges
 
 
 
Aluminum contracts
$
6

 
$
28

Currency exchange contracts
7

 
(2
)
Energy contracts (A)
4

 
(3
)
Gain recognized in "Other (income) expense, net"
17

 
23

Derivative Instruments Designated as Hedges
 
 
 
Gain recognized in "Other (income) expense, net" (B)
10

 
1

Total gain recognized in "Other (income) expense, net"
$
27

 
$
24

Balance sheet remeasurement currency exchange contracts
$
2

 
$
(11
)
Realized gains, net
12

 
10

Unrealized gains on other derivative instruments, net
13

 
25

Total gain recognized in "Other (income) expense, net"
$
27

 
$
24

 
(A)
Includes amounts related to de-designated electricity swap.
(B)
Amount includes: excluded forward market premium/discount excluded and hedging relationship ineffectiveness on designated aluminum contracts; releases to income from AOCI on balance sheet remeasurement contracts; and ineffectiveness on fair value hedges involving aluminum derivatives.

 
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 $8 million of losses from “AOCI” to earnings.
 
 
Amount of Gain  (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain  (Loss)
Recognized in “Other (Income)
Expense, net” (Ineffective and
Excluded Portion)
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Aluminum contracts
$
21

 
$
(25
)
 
$
11

 
$
(3
)
Currency exchange contracts
(36
)
 
33

 
1

 
4

Total
$
(15
)
 
$
8

 
$
12

 
$
1

 

24

Table of Contents
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

 
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense)(Effective Portion) Three Months Ended June 30,
 
Location of Gain  (Loss)
Reclassified from AOCI into
Earnings
 
2012
 
2011
 
 
Electricity swap (A)
$
(1
)
 
$
(1
)
 
Other (income) expense, net
Aluminum contracts
18

 
19

 
Cost of goods sold
Aluminum contracts
2

 

 
Sales
Currency exchange contracts
(3
)
 
3

 
Cost of goods sold and SG&A
Currency exchange contracts
(2
)
 

 
Sales
Currency exchange contracts
(1
)
 

 
Other (income) expense, net and
Interest Expense
Total
$
13

 
$
21

 
 
 
(A)
AOCI related to de-designated electricity swap is amortized to income over the remaining term of the hedged item.

12.    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.
 
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. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts and certain energy-related forward contracts (e.g., natural gas).
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include certain of our energy-related forward contracts (e.g., electricity swap). Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.
Our electricity swap represents an agreement to buy electricity at a fixed price at our Oswego, New York facility. Forward

25

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

prices are not observable for this market, so we must make certain assumptions based on available information that we believe to be relevant to market participants. We use observable forward prices for a geographically nearby market. We adjust these prices for 1) historical spreads between the cash prices of the two markets, and 2) historical spreads between retail and wholesale prices.
The average forward price at June 30, 2012, estimated using the method described above was $50 per megawatt hour, which represents a $7 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $45 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by approximately $1 million.
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 June 30, 2012 and March 31, 2012, we did not have any Level 1 derivative contracts. No amounts were transferred from Level 1 to Level 2 or to Level 3. Additionally, no amounts were transferred from Level 2 to Level 1 or to Level 3.
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 June 30, 2012 and March 31, 2012 (in millions).
 
 
June 30, 2012
 
March 31, 2012
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Level 2 Instruments
 
 
 
 
 
 
 
Aluminum contracts
$
70

 
$
(58
)
 
$
69

 
$
(58
)
Currency exchange contracts
31

 
(46
)
 
32

 
(23
)
Energy contracts

 
(6
)
 

 
(10
)
Total Level 2 Instruments
101

 
(110
)
 
101

 
(91
)
Level 3 Instruments
 
 
 
 
 
 
 
Energy contracts

 
(37
)
 

 
(41
)
Total Level 3 Instruments

 
(37
)
 

 
(41
)
Total
$
101

 
$
(147
)
 
$
101

 
$
(132
)
 
We recognized unrealized gains of $2 million for the three months ended June 30, 2012 related to Level 3 financial instruments that were still held as of June 30, 2012. These unrealized gains 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  –
Derivative Instruments (A)
Balance as of March 31, 2012
$
(41
)
Realized/unrealized gain included in earnings(B)
5

Settlements
(1
)
Balance as of June 30, 2012
$
(37
)
 
(A)
Represents net derivative liabilities.
(B)
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. The fair value of long-term receivables is based on anticipated cash flows, which approximates carrying value and is classified as Level 2. We value long-term debt using Level 2 inputs. Valuations are based on either market

26

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -
(Continued)

and/or broker ask prices when available or on a standard credit adjusted discounted cash flow model.
 
 
June 30, 2012
 
March 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets
 
 
 
 
 
 
 
Long-term receivables from related parties
$
15

 
$
15

 
$
16

 
$
16

Liabilities
 
 
 
 
 
 
 
Total debt — third parties (excluding short term borrowings)
$
4,338

 
$
4,448

 
$
4,344

 
$
4,605

 
13.    OTHER (INCOME) EXPENSE, NET
“Other (income) expense, net” is comprised of the following (in millions).
 
 
Three Months Ended June 30,
 
2012
 
2011
Foreign currency remeasurement (gains) losses, net (A)
$
(5
)
 
$
10

(Gain) on change in fair value of other unrealized derivative instruments, net