10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 10, 2014
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 September 30, 2014
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 |
ý |
(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 November 7, 2014, 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.
Novelis Inc.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||
PART II. OTHER INFORMATION | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in millions)
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Net sales |
$ |
2,831 |
$ |
2,414 |
$ |
5,511 |
$ |
4,815 |
|||||||
Cost of goods sold (exclusive of depreciation and amortization) |
2,483 |
2,074 |
4,812 |
4,172 |
|||||||||||
Selling, general and administrative expenses |
103 |
109 |
211 |
229 |
|||||||||||
Depreciation and amortization |
90 |
79 |
179 |
156 |
|||||||||||
Research and development expenses |
12 |
12 |
24 |
22 |
|||||||||||
Interest expense and amortization of debt issuance costs |
82 |
75 |
163 |
151 |
|||||||||||
Gain on assets held for sale |
— |
— |
(11 |
) |
— |
||||||||||
Restructuring and impairment, net |
7 |
18 |
13 |
27 |
|||||||||||
Equity in net loss of non-consolidated affiliates |
— |
3 |
2 |
7 |
|||||||||||
Other expense (income), net |
18 |
(5 |
) |
23 |
(15 |
) |
|||||||||
2,795 |
2,365 |
5,416 |
4,749 |
||||||||||||
Income before income taxes |
36 |
49 |
95 |
66 |
|||||||||||
Income tax (benefit) provision |
(2 |
) |
26 |
22 |
29 |
||||||||||
Net income |
38 |
23 |
73 |
37 |
|||||||||||
Net income attributable to noncontrolling interests |
— |
— |
— |
— |
|||||||||||
Net income attributable to our common shareholder |
$ |
38 |
$ |
23 |
$ |
73 |
$ |
37 |
See accompanying notes to the condensed consolidated financial statements.
3
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(in millions)
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2013 |
||||||||||||||||||||||
Attributable to
Our Common
Shareholder
|
Attributable to
Noncontrolling
Interests
|
Total |
Attributable to
Our Common
Shareholder
|
Attributable to
Noncontrolling
Interests
|
Total |
||||||||||||||||||
Net income |
$ |
38 |
$ |
— |
$ |
38 |
$ |
23 |
$ |
— |
$ |
23 |
|||||||||||
Other comprehensive (loss) income: |
|||||||||||||||||||||||
Currency translation adjustment |
(131 |
) |
(2 |
) |
(133 |
) |
94 |
(1 |
) |
93 |
|||||||||||||
Net change in fair value of effective portion of cash flow hedges |
(7 |
) |
— |
(7 |
) |
3 |
— |
3 |
|||||||||||||||
Net change in pension and other benefits |
10 |
— |
10 |
97 |
— |
97 |
|||||||||||||||||
Other comprehensive (loss) income before income tax effect |
(128 |
) |
(2 |
) |
(130 |
) |
194 |
(1 |
) |
193 |
|||||||||||||
Income tax provision related to items of other comprehensive (loss) income |
6 |
— |
6 |
32 |
— |
32 |
|||||||||||||||||
Other comprehensive (loss) income, net of tax |
(134 |
) |
(2 |
) |
(136 |
) |
162 |
(1 |
) |
161 |
|||||||||||||
Comprehensive (loss) income |
$ |
(96 |
) |
$ |
(2 |
) |
$ |
(98 |
) |
$ |
185 |
$ |
(1 |
) |
$ |
184 |
Six Months Ended September 30, 2014 |
Six Months Ended September 30, 2013 |
||||||||||||||||||||||
Attributable to
Our Common
Shareholder
|
Attributable to
Noncontrolling
Interests
|
Total |
Attributable to
Our Common
Shareholder
|
Attributable to
Noncontrolling
Interests
|
Total |
||||||||||||||||||
Net income |
$ |
73 |
$ |
— |
$ |
73 |
$ |
37 |
$ |
— |
$ |
37 |
|||||||||||
Other comprehensive (loss) income: |
|||||||||||||||||||||||
Currency translation adjustment |
(105 |
) |
(1 |
) |
(106 |
) |
92 |
(2 |
) |
90 |
|||||||||||||
Net change in fair value of effective portion of cash flow hedges |
6 |
— |
6 |
(43 |
) |
— |
(43 |
) |
|||||||||||||||
Net change in pension and other benefits |
(3 |
) |
— |
(3 |
) |
103 |
— |
103 |
|||||||||||||||
Other comprehensive (loss) income before income tax effect |
(102 |
) |
(1 |
) |
(103 |
) |
152 |
(2 |
) |
150 |
|||||||||||||
Income tax provision related to items of other comprehensive (loss) income |
1 |
— |
1 |
32 |
— |
32 |
|||||||||||||||||
Other comprehensive (loss) income, net of tax |
(103 |
) |
(1 |
) |
(104 |
) |
120 |
(2 |
) |
118 |
|||||||||||||
Comprehensive (loss) income |
$ |
(30 |
) |
$ |
(1 |
) |
$ |
(31 |
) |
$ |
157 |
$ |
(2 |
) |
$ |
155 |
See accompanying notes to the condensed consolidated financial statements.
4
Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
September 30, 2014 |
March 31, 2014 |
||||||
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
326 |
$ |
509 |
|||
Accounts receivable, net |
|||||||
— third parties (net of uncollectible accounts of $4 as of September 30, 2014 and March 31, 2014) |
1,518 |
1,382 |
|||||
— related parties |
60 |
54 |
|||||
Inventories |
1,504 |
1,173 |
|||||
Prepaid expenses and other current assets |
124 |
101 |
|||||
Fair value of derivative instruments |
79 |
51 |
|||||
Deferred income tax assets |
76 |
101 |
|||||
Assets held for sale |
73 |
102 |
|||||
Total current assets |
3,760 |
3,473 |
|||||
Property, plant and equipment, net |
3,535 |
3,513 |
|||||
Goodwill |
608 |
611 |
|||||
Intangible assets, net |
611 |
640 |
|||||
Investment in and advances to non–consolidated affiliates |
560 |
612 |
|||||
Deferred income tax assets |
77 |
80 |
|||||
Other long–term assets |
|||||||
— third parties |
160 |
173 |
|||||
— related parties |
10 |
12 |
|||||
Total assets |
$ |
9,321 |
$ |
9,114 |
|||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|||||||
Current liabilities |
|||||||
Current portion of long–term debt |
$ |
92 |
$ |
92 |
|||
Short–term borrowings |
1,044 |
723 |
|||||
Accounts payable |
|||||||
— third parties |
1,643 |
1,418 |
|||||
— related parties |
53 |
53 |
|||||
Fair value of derivative instruments |
96 |
60 |
|||||
Accrued expenses and other current liabilities |
|||||||
— third parties |
556 |
547 |
|||||
— related party |
— |
250 |
|||||
Deferred income tax liabilities |
48 |
16 |
|||||
Liabilities held for sale |
— |
11 |
|||||
Total current liabilities |
3,532 |
3,170 |
|||||
Long–term debt, net of current portion |
4,340 |
4,359 |
|||||
Deferred income tax liabilities |
344 |
425 |
|||||
Accrued postretirement benefits |
612 |
621 |
|||||
Other long–term liabilities |
256 |
271 |
|||||
Total liabilities |
9,084 |
8,846 |
|||||
Commitments and contingencies |
|||||||
Shareholder’s equity |
|||||||
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of September 30, 2014 and March 31, 2014 |
— |
— |
|||||
Additional paid–in capital |
1,404 |
1,404 |
|||||
Accumulated deficit |
(1,000 |
) |
(1,073 |
) |
|||
Accumulated other comprehensive loss |
(194 |
) |
(91 |
) |
|||
Total equity of our common shareholder |
210 |
240 |
|||||
Noncontrolling interests |
27 |
28 |
|||||
Total equity |
237 |
268 |
|||||
Total liabilities and equity |
$ |
9,321 |
$ |
9,114 |
See accompanying notes to the condensed consolidated financial statements.
5
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in millions)
Six Months Ended September 30, |
|||||||
2014 |
2013 |
||||||
OPERATING ACTIVITIES |
|||||||
Net income |
$ |
73 |
$ |
37 |
|||
Adjustments to determine net cash (used in) provided by operating activities: |
|||||||
Depreciation and amortization |
179 |
156 |
|||||
Loss on unrealized derivatives and other realized derivatives in investing activities, net |
14 |
14 |
|||||
Gain on assets held for sale |
(11 |
) |
— |
||||
Deferred income taxes |
(18 |
) |
(20 |
) |
|||
Amortization of fair value adjustments |
6 |
6 |
|||||
Equity in net loss of non–consolidated affiliates |
2 |
7 |
|||||
(Gain) loss on foreign exchange remeasurement of debt |
(3 |
) |
2 |
||||
Loss on sale of assets |
3 |
2 |
|||||
Impairment charges |
— |
8 |
|||||
Amortization of debt issuance costs and carrying value adjustment |
13 |
13 |
|||||
Other, net |
(1 |
) |
(2 |
) |
|||
Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures): |
|||||||
Accounts receivable |
(187 |
) |
163 |
||||
Inventories |
(369 |
) |
20 |
||||
Accounts payable |
295 |
(213 |
) |
||||
Other current assets |
(29 |
) |
39 |
||||
Other current liabilities |
27 |
10 |
|||||
Other noncurrent assets |
(2 |
) |
(6 |
) |
|||
Other noncurrent liabilities |
(5 |
) |
12 |
||||
Net cash (used in) provided by operating activities |
(13 |
) |
248 |
||||
INVESTING ACTIVITIES |
|||||||
Capital expenditures |
(264 |
) |
(365 |
) |
|||
Proceeds from sales of assets, net of transaction fees |
34 |
— |
|||||
Proceeds from the sale of assets, related party, net of transaction fees |
— |
8 |
|||||
Outflows from investments in and advances to non–consolidated affiliates, net |
(11 |
) |
— |
||||
Proceeds from settlement of other undesignated derivative instruments, net |
3 |
6 |
|||||
Net cash used in investing activities |
(238 |
) |
(351 |
) |
|||
FINANCING ACTIVITIES |
|||||||
Proceeds from issuance of long-term and short-term borrowings |
198 |
76 |
|||||
Principal payments of long-term and short-term borrowings |
(126 |
) |
(59 |
) |
|||
Revolving credit facilities and other, net |
248 |
131 |
|||||
Return of capital to our common shareholder |
(250 |
) |
— |
||||
Dividends, noncontrolling interest |
(1 |
) |
— |
||||
Debt issuance costs |
— |
(8 |
) |
||||
Net cash provided by financing activities |
69 |
140 |
|||||
Net (decrease) increase in cash and cash equivalents |
(182 |
) |
37 |
||||
Effect of exchange rate changes on cash |
(1 |
) |
— |
||||
Cash and cash equivalents — beginning of period |
509 |
301 |
|||||
Cash and cash equivalents — end of period |
$ |
326 |
$ |
338 |
See accompanying notes to the condensed consolidated financial statements.
6
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF 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, 2014 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
(1,073 |
) |
$ |
(91 |
) |
$ |
28 |
$ |
268 |
|||||||||||
Net income attributable to our common shareholder |
— |
— |
— |
73 |
— |
— |
73 |
|||||||||||||||||||
Net income attributable to noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
Currency translation adjustment, net of tax provision of $ — included in AOCI |
— |
— |
— |
— |
(105 |
) |
(1 |
) |
(106 |
) |
||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax provision of $(5) included in AOCI |
— |
— |
— |
— |
1 |
— |
1 |
|||||||||||||||||||
Change in pension and other benefits, net of tax benefit of $4 included in AOCI |
— |
— |
— |
— |
1 |
— |
1 |
|||||||||||||||||||
Balance as of September 30, 2014 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
(1,000 |
) |
$ |
(194 |
) |
$ |
27 |
$ |
237 |
See accompanying notes to the condensed consolidated financial statements.
7
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, our indirect parent company. Hindalco acquired Novelis in May 2007, through its indirect wholly-owned subsidiary, AV Metals Inc., our direct parent company.
Organization and Description of Business
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 automotive, electronics, architectural, transportation and industrial product markets. We also have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans (UBCs) and post-industrial aluminum, such as class scrap. As of September 30, 2014, we had manufacturing operations in eleven countries on four continents: North America, South America, Asia and Europe; through 26 operating facilities, including recycling operations in eleven of these plants. In addition to aluminum rolled products plants, our South American businesses include primary aluminum smelting and power generation facilities. On October 16, 2014, we announced that Novelis will close its remaining smelting facilities by the end of calendar year 2014. Additionally, as of September 30, 2014, the previously announced sales of our power generation assets are pending regulatory approval.
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, 2014 filed with the United States Securities and Exchange Commission (SEC) on May 16, 2014. 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.
Consolidation Policy
Our condensed consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and 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 net income (loss) 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 "Investment in and advances to non–consolidated affiliates" and "Equity in net loss of non-consolidated affiliates."
Use of Estimates and Assumptions
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) impairment of and assessment of consolidation of 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 our estimates.
8
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Recently Adopted Accounting Standards
Effective for the first quarter of fiscal 2015, we adopted Financial Accounting Standards Board ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The adoption of this standard had an insignificant impact on our condensed consolidated financial position.
Recently Issued Accounting Standards
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendments in this update provide clarification regarding the release of a cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The guidance will be effective for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods. We will adopt this standard prospectively in our first quarter ending June 30, 2015 and our current accounting policies comply with this guidance. Therefore, this will not have a material impact to our historical financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the criteria for determining which disposals can be presented as discontinued operations and modify related disclosure requirements. Under the revised standard, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The guidance will be applied prospectively. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. We will adopt this standard prospectively in our first quarter ending June 30, 2015 on future disposals. The accounting treatment and classification of future disposals under this new standard could differ from our current treatment and classification of disposals in our current consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which, when effective, will supersede the guidance in former ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within that year. Early adoption is not permitted. We will adopt this standard in our first quarter ending June 30, 2017. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management of the Company to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. We do not expect this standard to have an impact on the Company's consolidated financial statements upon adoption.
9
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
2. RESTRUCTURING AND IMPAIRMENT
“Restructuring and impairment, net” for the six months ended September 30, 2014 and 2013 was $13 million and $27 million, respectively.
The following table summarizes our restructuring liability activity and other impairment charges (in millions).
Total restructuring
liabilities
|
Other restructuring charges
(A)
|
Total restructuring charges |
Other impairments (B) |
Total
restructuring and impairments, net
|
||||||||||||||||
Balance as of March 31, 2014 |
$ |
47 |
||||||||||||||||||
Expenses |
14 |
$ |
(1 |
) |
$ |
13 |
$ |
— |
$ |
13 |
||||||||||
Cash payments |
(11 |
) |
||||||||||||||||||
Foreign currency translation and other |
(2 |
) |
||||||||||||||||||
Balance as of September 30, 2014 |
$ |
48 |
(A) |
Other restructuring charges include period expenses and reversals that were not recorded through the restructuring liability. |
(B) |
Other impairment charges not related to a restructuring activity. |
As of September 30, 2014, $25 million of restructuring liabilities was classified as short-term and was included in "Accrued expenses and other current liabilities" and $23 million was classified as long-term and was included in "Other long-term liabilities" on our condensed consolidated balance sheet.
10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
North America
The following table summarizes our restructuring activity for the North America segment by plan (in millions).
Six Months Ended September 30, |
Year Ended March 31, |
Prior to April 1, |
|||||||||||
2014 |
2014 |
2013 |
|||||||||||
Restructuring charges - North America |
|||||||||||||
Saguenay Plant Closure: |
|||||||||||||
Severance |
$ |
— |
$ |
— |
$ |
5 |
|||||||
Fixed asset impairment (A) |
— |
— |
28 |
||||||||||
Other exit related costs |
1 |
1 |
— |
||||||||||
Period expenses (A) |
— |
1 |
3 |
||||||||||
Relocation of R&D operations to Kennesaw, Georgia |
|||||||||||||
Severance |
— |
1 |
11 |
||||||||||
Relocation costs |
— |
1 |
— |
||||||||||
Period expenses (A) |
— |
1 |
— |
||||||||||
Total restructuring charges - North America |
$ |
1 |
$ |
5 |
$ |
47 |
|||||||
Restructuring payments - North America |
|||||||||||||
Severance |
$ |
— |
$ |
(4 |
) |
||||||||
Other |
(1 |
) |
(2 |
) |
|||||||||
Total restructuring payments - North America |
$ |
(1 |
) |
$ |
(6 |
) |
(A) These charges were not recorded through the restructuring liability.
In fiscal 2012, we closed our Saguenay Works facility and relocated our North America research and development operations to a new global research and technology facility in Kennesaw, Georgia. As of September 30, 2014, the restructuring liability for the North America segment was $4 million, which relates to $3 million of severance charges and $1 million of other exit related costs.
11
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Europe
The following table summarizes our restructuring activity for the Europe segment by plan (in millions).
Six Months Ended September 30, |
Year Ended March 31, |
Prior to April 1, |
||||||||||
2014 |
2014 |
2013 |
||||||||||
Restructuring charges - Europe |
||||||||||||
Business optimization |
||||||||||||
Severance |
$ |
4 |
$ |
26 |
$ |
16 |
||||||
Pension settlement loss (A) |
— |
1 |
— |
|||||||||
Total restructuring charges - Europe |
$ |
4 |
$ |
27 |
$ |
16 |
||||||
Restructuring payments - Europe |
||||||||||||
Severance |
$ |
(9 |
) |
$ |
(18 |
) |
||||||
Other |
— |
(1 |
) |
|||||||||
Total restructuring payments - Europe |
$ |
(9 |
) |
$ |
(19 |
) |
||||||
Foreign currency translation and other - Europe |
||||||||||||
Severance |
$ |
(1 |
) |
$ |
— |
|||||||
Total foreign currency translation and other - Europe |
$ |
(1 |
) |
$ |
— |
(A) These charges were not recorded through the restructuring liability.
The business optimization actions include the shutdown of facilities, staff rationalization and other activities to optimize our business in Europe. As of September 30, 2014, the restructuring liability for the Europe segment was $12 million and relates to $11 million of severance charges and $1 million of other costs.
12
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
South America
The following table summarizes our restructuring activity for the South America segment by plan (in millions).
Six Months Ended September 30, |
Year Ended March 31, |
Prior to April 1, |
||||||||||
2014 |
2014 |
2013 |
||||||||||
Restructuring charges - South America |
||||||||||||
Non-core assets |
||||||||||||
Severance |
$ |
— |
$ |
2 |
$ |
3 |
||||||
Asset impairments (A) |
— |
— |
1 |
|||||||||
Contract termination and other |
1 |
1 |
5 |
|||||||||
Environmental charges |
6 |
16 |
— |
|||||||||
Aratu plant closure |
||||||||||||
Severance |
— |
— |
7 |
|||||||||
Asset impairments (A) |
— |
— |
7 |
|||||||||
Other exit costs |
1 |
— |
6 |
|||||||||
Total restructuring charges - South America |
$ |
8 |
$ |
19 |
$ |
29 |
||||||
Restructuring payments - South America |
||||||||||||
Severance |
$ |
— |
$ |
(4 |
) |
|||||||
Other |
(1 |
) |
(4 |
) |
||||||||
Total restructuring payments - South America |
$ |
(1 |
) |
$ |
(8 |
) |
||||||
Foreign currency translation and other - South America |
||||||||||||
Other |
$ |
(1 |
) |
$ |
— |
|||||||
Total foreign currency translation and other - South America |
$ |
(1 |
) |
$ |
— |
(A) These charges were not recorded through the restructuring liability.
As of September 30, 2014, the restructuring liability for the South America segment was $31 million and relates to $23 million of environmental charges, $6 million of certain labor related charges and $2 million of other exit related costs.
The non-core asset charges, including the shut down of one of our primary aluminum smelter lines in Ouro Preto, Brazil, were recorded as we take steps in aligning our global strategy on the premium markets of beverage cans, automobiles and specialty products. In fiscal 2011, we closed our primary aluminum smelter in Aratu, Brazil.
On October 16, 2014, we announced the closure of our remaining smelter in Ouro Preto, Brazil, by the end of calendar year 2014. This decision was made in an effort to further align our global sustainability strategy, as we work towards our goal of having a higher recycled content in our products. Certain charges associated with this closure are reflected within the "Environmental charges" line item above. We anticipate additional restructuring charges related to this event to be incurred during the second half of fiscal 2015, primarily in the form of employee severance costs.
For further information on environmental charges see, Note 16 – Commitments and Contingencies.
13
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Corporate
The following table summarizes our restructuring activity for our Corporate operations by plan (in millions).
Six Months Ended September 30, |
Year Ended March 31, |
Prior to April 1, |
||||||||||
2014 |
2014 |
2013 |
||||||||||
Restructuring charges - Corporate |
||||||||||||
Relocation costs of global headquarters |
$ |
— |
$ |
— |
$ |
5 |
||||||
Restructuring payments - Corporate |
||||||||||||
Lease Termination Costs |
$ |
— |
$ |
(1 |
) |
|||||||
Total restructuring payments - Corporate |
$ |
— |
$ |
(1 |
) |
The relocation costs relate to lease termination costs incurred in the relocation of our global headquarters to a new facility in Atlanta, Georgia and contract termination fees. As of September 30, 2014, the restructuring liability for the Corporate segment was $1 million.
14
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
3. INVENTORIES
"Inventories" consist of the following (in millions).
September 30, 2014 |
March 31, 2014 |
||||||
Finished goods |
$ |
352 |
$ |
259 |
|||
Work in process |
556 |
419 |
|||||
Raw materials |
478 |
382 |
|||||
Supplies |
118 |
113 |
|||||
Inventories |
$ |
1,504 |
$ |
1,173 |
4. ASSETS HELD FOR SALE
We are focused on capturing the global growth we see in our premium product markets of beverage can, automotive and specialties. We continually analyze our product portfolio to ensure we are focused on growing in attractive market segments. The following transactions relate to exiting certain non-core operations and are steps to align our growth strategy in the premium product markets.
In March 2014, we made a decision to sell our hydroelectric power generation operations, including our investment in the Consorcio Candonga joint venture, in Brazil. In April 2014, we entered into agreements to sell the hydroelectric generation operations and our share of the Consorcio Candonga joint venture to two separate parties. The sales are expected to take place within the next twelve months and are pending regulatory approval. The related assets of $73 million have been classified as "Assets held for sale" in our condensed consolidated balance sheet as of September 30, 2014. The estimated fair market value of the hydroelectric power assets is in excess of the net book value.
In May 2014, we recognized a $4 million "Gain on assets held for sale" in the condensed consolidated statements of operations upon receipt of a non-refundable milestone payment related to a land and mining rights sale agreement in Brazil. We expect to receive an additional $4 million within this fiscal year.
In June 2014, we sold our consumer foil operations in North America to a third party for $31 million in cash (exclusive of transaction fees). We recognized a $7 million "Gain on assets held for sale" in the condensed consolidated statements of operations in the first quarter of fiscal 2015. As of March 31, 2014, these assets and liabilities were classified as "Assets held for sale" and "Liabilities held for sale" in our condensed consolidated balance sheet.
15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale (in millions).
September 30, 2014 |
March 31, 2014 |
||||||
Assets held for sale |
|||||||
Accounts receivable |
$ |
— |
$ |
10 |
|||
Inventories |
— |
15 |
|||||
Prepaid expenses and other current assets |
— |
1 |
|||||
Property, plant and equipment, net |
33 |
37 |
|||||
Investment in and advances to non-consolidated affiliates |
40 |
39 |
|||||
Total assets held for sale |
$ |
73 |
$ |
102 |
|||
Liabilities held for sale |
|||||||
Accounts payable |
$ |
— |
$ |
4 |
|||
Accrued expenses and other current liabilities |
— |
7 |
|||||
Total liabilities held for sale |
$ |
— |
$ |
11 |
16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
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.
We have a majority voting right on Logan’s board of directors and have 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.
September 30, 2014 |
March 31, 2014 |
||||||
Assets |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
3 |
$ |
1 |
|||
Accounts receivable |
28 |
38 |
|||||
Inventories |
50 |
42 |
|||||
Prepaid expenses and other current assets |
1 |
1 |
|||||
Total current assets |
82 |
82 |
|||||
Property, plant and equipment, net |
13 |
14 |
|||||
Goodwill |
12 |
12 |
|||||
Deferred income taxes |
66 |
63 |
|||||
Other long-term assets |
3 |
3 |
|||||
Total assets |
$ |
176 |
$ |
174 |
|||
Liabilities |
|||||||
Current liabilities |
|||||||
Accounts payable |
$ |
23 |
$ |
26 |
|||
Accrued expenses and other current liabilities |
13 |
13 |
|||||
Total current liabilities |
36 |
39 |
|||||
Accrued postretirement benefits |
146 |
141 |
|||||
Other long-term liabilities |
2 |
2 |
|||||
Total liabilities |
$ |
184 |
$ |
182 |
17
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
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 business we conduct with our non-consolidated affiliates, which we classify as related party transactions and balances.
The following table summarizes the results of operations of our equity method affiliates in aggregate for the three months and six months ended September 30, 2014 and 2013; and the nature and amounts of significant transactions we had with our non-consolidated affiliates (in millions). The amounts in the table below are disclosed at 100% of the operating results of these affiliates.
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Net sales |
$ |
138 |
$ |
130 |
$ |
276 |
$ |
261 |
|||||||
Costs and expenses related to net sales |
141 |
129 |
287 |
256 |
|||||||||||
(Benefit) provision for taxes on income |
(3 |
) |
(2 |
) |
(5 |
) |
2 |
||||||||
Net income (loss) |
$ |
— |
$ |
3 |
$ |
(6 |
) |
$ |
3 |
||||||
Purchase of tolling services from Aluminium Norf GmbH (Norf) |
$ |
69 |
$ |
65 |
$ |
138 |
$ |
131 |
The following table describes the period-end account balances we had with these non-consolidated affiliates and with our indirect parent company, Hindalco, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances with non-consolidated affiliates.
September 30, 2014 |
March 31, 2014 |
||||||
Accounts receivable-related parties |
$ |
60 |
$ |
54 |
|||
Other long-term assets-related parties |
$ |
10 |
$ |
12 |
|||
Accounts payable-related parties |
$ |
53 |
$ |
53 |
We earned less than $1 million of interest income on a loan due from a non-consolidated affiliate, Aluminium Norf GmbH (Alunorf), during the six months ended September 30, 2014 and six months ended September 30, 2013. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was provided for this loan as of September 30, 2014 and March 31, 2014.
We have guaranteed the indebtedness for a credit facility on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of September 30, 2014, there were no amounts outstanding under our guarantee with Alunorf. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of September 30, 2014, this guarantee totaled $4 million (3 million euros).
Transactions with Hindalco and AV Metals Inc.
We occasionally have related party transactions with Hindalco. During the six months ended September 30, 2014 and 2013, “Net sales” were less than $1 million between Novelis and Hindalco. As of September 30, 2014 and March 31, 2014, there was $1 million in "Accounts receivable, net" outstanding related to transactions with Hindalco (included within the related party balances above).
On April 30, 2014, we paid a return of capital to our shareholder, AV Metals Inc., in the amount of $250 million, which was declared in March 2014. The $250 million return of capital was recorded as "Accrued expense and other current liabilities" as of March 31, 2014 in our condensed consolidated balance sheet.
18
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
7. DEBT
Debt consisted of the following (in millions).
September 30, 2014 |
March 31, 2014 |
|||||||||||||||||||||||||||||
Interest
Rates (A)
|
Principal |
Unamortized
Carrying Value
Adjustments
|
Carrying
Value
|
Principal |
Unamortized
Carrying Value
Adjustments
|
Carrying
Value
|
||||||||||||||||||||||||
Third party debt: |
||||||||||||||||||||||||||||||
Short term borrowings |
3.67 |
% |
$ |
1,044 |
$ |
— |
$ |
1,044 |
$ |
723 |
$ |
— |
$ |
723 |
||||||||||||||||
Novelis Inc. |
||||||||||||||||||||||||||||||
Floating rate Term Loan Facility, due March 2017 |
3.75 |
% |
1,740 |
(16 |
) |
(B) |
1,724 |
1,749 |
(20 |
) |
(B) |
1,729 |
||||||||||||||||||
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 |
||||||||||||||||||||||
Capital lease obligations, due through July 2017 |
3.64 |
% |
10 |
— |
10 |
11 |
— |
11 |
||||||||||||||||||||||
Novelis Korea Limited |
||||||||||||||||||||||||||||||
Loans, due December 2014 through December 2015 (KRW 162 billion) |
3.34 |
% |
154 |
— |
154 |
155 |
— |
155 |
||||||||||||||||||||||
Novelis Switzerland S.A. |
||||||||||||||||||||||||||||||
Capital lease obligation, due through December 2019 (Swiss francs (CHF) 30 million) |
7.50 |
% |
31 |
(1 |
) |
(C) |
30 |
36 |
(1 |
) |
(C) |
35 |
||||||||||||||||||
Novelis do Brasil Ltda. |
||||||||||||||||||||||||||||||
BNDES loans, due February 2015 through April 2021 (BRL 25 million) |
5.58 |
% |
10 |
(1 |
) |
(D) |
9 |
13 |
(2 |
) |
(D) |
11 |
||||||||||||||||||
Other |
||||||||||||||||||||||||||||||
Other debt, due through December 2020 |
5.85 |
% |
5 |
— |
5 |
10 |
— |
10 |
||||||||||||||||||||||
Total debt |
5,494 |
(18 |
) |
5,476 |
5,197 |
(23 |
) |
5,174 |
||||||||||||||||||||||
Less: Short-term borrowings |
(1,044 |
) |
— |
(1,044 |
) |
(723 |
) |
— |
(723 |
) |
||||||||||||||||||||
Current portion of long term debt |
(92 |
) |
— |
(92 |
) |
(92 |
) |
— |
(92 |
) |
||||||||||||||||||||
Long-term debt, net of current portion |
$ |
4,358 |
$ |
(18 |
) |
$ |
4,340 |
$ |
4,382 |
$ |
(23 |
) |
$ |
4,359 |
19
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
(A) |
Interest rates are the fixed or variable rates as specified in the debt instruments (not the effective interest rate) as of September 30, 2014, and therefore, exclude the effects of related interest rate swaps, accretion/amortization of fair value adjustments as a result of purchase accounting in connection with Hindalco's purchase of Novelis and accretion/amortization of debt issuance costs related to the debt exchange completed in fiscal 2009 and the series of refinancing transactions and additional borrowings we completed in fiscal 2011, 2012 and 2013. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.
|
(B) |
Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value. In connection with a series of refinancing transactions, a portion of the historical fair value adjustments was allocated to the Term Loan Facility, resulting in carrying value adjustments on this debt obligation. The unamortized carrying value also includes an issuance discount. |
(C) |
Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value resulting in carrying value adjustments to our capital lease obligations in Novelis Switzerland. |
(D) |
The unamortized carrying value includes issuance discounts related to the difference resulting from the contractual rates of interest specified in the instruments that are lower than the market rates of interest upon issuance. |
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 September 30, 2014 for our debt denominated in foreign currencies) are as follows (in millions).
As of September 30, 2014 |
Amount |
||
Short-term borrowings and current portion of long-term debt due within one year |
$ |
1,136 |
|
2 years |
124 |
||
3 years |
1,715 |
||
4 years |
1,109 |
||
5 years |
8 |
||
Thereafter |
1,402 |
||
Total |
$ |
5,494 |
Senior Secured Credit Facilities
As of September 30, 2014, the senior secured credit facilities consisted of (1) a $1.7 billion four year secured term loan credit facility (Term Loan Facility) and (2) a $1.0 billion five-year asset based loan facility (ABL Revolver) which has a provision that allows the facility to be increased by an additional $500 million. The Term Loan Facility interest rate is equal to LIBOR (with a floor of 1%) plus a spread of 2.75%, at all times.
As of September 30, 2014, as noted above, our senior credit facilities included a $1.0 billion, five-year, senior secured ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.75% to 2.25% plus a prime spread of 0.75% to 1.25% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million. The ABL Revolver has various customary covenants, which as of September 30, 2014 included maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 15% of the lesser of (a) the Credit Facility and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL defined EBITDA less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. As of September 30, 2014, the maturity date of the facility was May 13, 2018, or as adjusted given certain events further described in the related amendment to the ABL Revolver. Certain of these covenants and other components of the ABL Revolver agreement changed subsequent to September 30, 2014, upon the execution of the amendment of this facility in October 2014.
20
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
On October 6, 2014, subsequent to the end of the second quarter of fiscal 2015, we amended and extended our ABL Revolver by entering into a $1.2 billion, five-year, senior secured ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.50% to 2.00% plus a prime spread of 0.50% to 1.00% based on excess availability. However, our current Term Loan Facility limits our indebtedness under the ABL Revolver to $1.0 billion. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million. The ABL Revolver has various customary covenants including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 12.5% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL Revolver defined EBITDA less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. The ABL Revolver matures on October 6, 2019; provided that, in the event that any of the Notes, the Term Loan Facility, or certain other indebtedness are outstanding (and not refinanced with a maturity date later than April 6, 2020) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes, the Term Loan Facility or such other indebtedness, as applicable; unless excess availability under the ABL Revolver is at least (i) 25% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base, and a minimum fixed charged ratio test of at least 1.25 to 1 is met.
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 guarantee our obligations. The senior secured credit facilities also include various customary negative 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 or returns of capital and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. Substantially all of our assets are pledged as collateral under the senior secured credit facilities. As of September 30, 2014, we were in compliance with the covenants in the Term Loan Facility and ABL Revolver.
Short-Term Borrowings
As of September 30, 2014, our short-term borrowings were $1,044 million, consisting of $771 million of loans under our ABL Revolver, $205 million in Novelis Brazil loans, $55 million (KRW 58 billion) in Novelis Korea loans, $10 million (VND 221 billion) in Novelis Vietnam loans and $3 million of other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 3.67% as of September 30, 2014 and 3.58% as of March 31, 2014.
As of September 30, 2014, $10 million of the ABL Revolver was utilized for letters of credit, and we had $219 million in remaining availability under the ABL Revolver.
In fiscal years 2014 and 2015, Novelis Korea entered into various short-term facilities, including revolving loan facilities and committed credit lines. As of September 30, 2014, we had $189 million (KRW 199 billion) in remaining availability under these facilities.
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).
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 or return capital 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. 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. As of September 30, 2014, we were in compliance with the covenants in the Notes.
21
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Korean Bank Loans
As of September 30, 2014, Novelis Korea had $154 million (KRW 162 billion) of outstanding long-term loans with various banks, of which $62 million is due within one year. One of the loans has a fixed interest rate of 3.61% and a maturity of December 2015 and all other loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.80% to 1.41% with maturity dates ranging from December 2014 to December 2015. The weighted average interest rate is 3.34% as of September 30, 2014.
Brazil BNDES Loans
Novelis Brazil entered into loan agreements with Brazil’s National Bank for Economic and Social Development (the BNDES loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of September 30, 2014, we had $10 million (BRL 25 million) outstanding under the BNDES loan agreements at a current weighted average rate of 5.58% with maturity dates of February 2015 through April 2021. As of September 30, 2014 there are $3 million of BNDES loans due within one year.
Other Long-term debt
In December 2004, we entered into a 15-year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million, (USD $1.8 million). As of September 30, 2014, we had $31 million (CHF 30 million) outstanding under this capital lease.
During fiscal 2013 and 2014, Novelis Inc. entered into various capital lease arrangements to upgrade and expand our information technology infrastructure. As of September 30, 2014, we had $10 million outstanding under these capital leases.
As of September 30, 2014, we had $5 million of other debt, including certain capital lease obligations, with due dates through December 2020.
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt. See Note 11- Financial Instruments and Commodity Contracts for further information about these interest rate swaps.
22
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
8. SHARE-BASED COMPENSATION
The Company's board of directors has authorized long term incentive plans (LTIPs), under which Hindalco stock appreciation rights (Hindalco SARs), Novelis stock appreciation rights (Novelis SARs), and phantom restricted stock units (RSUs) are granted to certain executive officers and key employees.
The Hindalco SARs and Novelis SARs vest at a rate of 25% per year, subject to the achievement of an annual performance target, and expire 7 years from their original grant date. Each Hindalco 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. Each Novelis SAR is to be settled in cash based on the difference between the fair value of one Novelis phantom share on the original date of grant and the fair value of a phantom share on the date of exercise. The amount of cash paid to settle Hindalco SARs and Novelis SARs are limited to two and a half or three times the target payout depending on the plan year. The Hindalco SARs and Novelis SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant. The Hindalco SARs and Novelis SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.
The performance criterion for vesting of both the Hindalco SARs and Novelis SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.
The RSUs vest in full three years from the grant date, subject to continued employment with the Company, but are not subject to performance criteria. Each RSU is to be settled in cash equal to the market value of one Hindalco share. The payout on the RSUs is limited to three times the market value of one Hindalco share measured on the original date of grant. The RSUs are classified as liability awards and expensed over the requisite service period (three years) based on the Hindalco stock price as of each balance sheet date.
On May 13, 2013, the Company's board of directors amended the long-term incentive plans for fiscal years 2010 - 2013 (FY 2010 Plan), fiscal years 2011- 2014 (FY 2011 Plan), fiscal years 2012 - 2015 (FY 2012 Plan) and fiscal years 2013 - 2016 (FY 2013 Plan). The amendment gave each participant the option to cancel a portion of their outstanding Hindalco SARs for a lump-sum cash payment and/or the issuance of new Novelis SARs. The remaining Hindalco SARs and the new Novelis SARs continue to vest according to the terms and conditions of the original grant.
Total compensation expense related to Hindalco SARs, Novelis SARs, and RSUs under the plans for the respective periods is presented in the table below (in millions). These amounts are included in “Selling, general and administrative expenses” or "Cost of goods sold (exclusive of depreciation and amortization)" in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2016, 2017 and 2018 have not yet been established, measurement periods for Hindalco SARs and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco SARs and Novelis SARs has been recorded.
Three Months Ended September 30, |
Six Months Ended September 30, |
|||||||||||||||
2014 |
2013 |
2014 |
2013 |
|||||||||||||
Total compensation expense |
$ |
3 |
$ |
4 |
$ |
7 |
$ |
17 |
The table below shows the RSUs activity for the six months ended September 30, 2014.
Number of
RSUs
|
Grant Date Fair
Value
(in Indian Rupees)
|
Aggregate
Intrinsic
Value (USD
in millions)
|
||||||||
RSUs outstanding as of March 31, 2014 |
4,490,860 |
120.42 |
$ |
11 |
||||||
Granted |
1,488,960 |
145.50 |
— |
|||||||
Exercised |
(744,386 |
) |
181.59 |
— |
||||||
Forfeited/Cancelled |
(164,212 |
) |
129.38 |
— |
||||||
RSUs outstanding as of September 30, 2014 |
5,071,222 |
118.50 |
$ |
14 |
23
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
The table below shows the Hindalco SARs activity for the six months ended September 30, 2014.
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, 2014 |
21,635,392 |
112.26 |
4.3 |
$ |
13 |
||||||||
Granted |
4,981,611 |
145.50 |
6.6 |
— |
|||||||||
Exercised |
(5,199,644 |
) |
90.56 |
— |
— |
||||||||
Forfeited/Cancelled |
(1,074,951 |
) |
129.04 |
— |
— |
||||||||
SARs outstanding as of September 30, 2014 |
20,342,408 |
125.06 |
4.8 |
$ |
13 |
||||||||
SARs exercisable as of September 30, 2014 |
7,188,545 |
125.66 |
3.1 |
$ |
5 |
The table below shows the Novelis SARs activity for the six months ended September 30, 2014.
Number of SARs |
Weighted Average Exercise Price (in USD) |
Weighted Average Remaining Contractual Term (In years) |
Aggregate Intrinsic Value (USD in millions) |
|||||||||||
SARs outstanding as of March 31, 2014 |
668,402 |
$ |
90.09 |
5.3 |
$ |
2 |
||||||||
Granted |
384,896 |
94.40 |
6.6 |
— |
||||||||||
Exercised |
(20,720 |
) |
72.00 |
— |
— |
|||||||||
Forfeited/Cancelled |
(51,629 |
) |
86.85 |
— |
— |
|||||||||
SARs outstanding as of September 30, 2014 |
980,949 |
$ |
92.33 |
5.6 |
$ |
3 |
||||||||
SARs exercisable as of September 30, 2014 |
211,768 |
$ |
89.31 |
4.6 |
$ |
2 |
The fair value of each unvested Hindalco SAR was estimated using the following assumptions:
Six Months Ended September 30, |
||||||
2014 |
2013 |
|||||
Risk-free interest rate |
8.43% - 8.73% |
8.72% - 9.07% |
||||
Dividend yield |
0.64 |
% |
1.25 |
% |
||
Volatility |
41% - 54% |
36% - 51% |
The fair value of each unvested Novelis SAR was estimated using the following assumptions:
Six Months Ended September 30, |
||||||
2014 |
2013 |
|||||
Risk-free interest rate |
1.29% - 2.13% |
0.89% - 1.90% |
||||
Dividend yield |
— |
% |
— |
% |
||
Volatility |
29% - 43% |
29% - 41% |
The fair value of each unvested Hindalco SAR was 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 risk-free interest rate is based on Indian treasury yields interpolated for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures. The dividend yield is estimated to be the annual dividend of the Hindalco stock over the remaining contractual lives of the Hindalco SARs. The value of each vested Hindalco 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 the plans. The fair value of the Hindalco SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.
24
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
The fair value of each unvested Novelis SAR was 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 the historical volatility of comparable companies to determine expected volatility assumptions. The risk-free interest rate is based on U.S. treasury yields for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures of Hindalco SARs. The value of each vested Novelis SAR is remeasured at fair value each reporting period based on the excess of the current Novelis phantom stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Novelis SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.
The cash payments made to settle SAR liabilities were $7 million and $15 million in the six months ended September 30, 2014, and 2013, respectively. Total cash payments made to settle RSUs were $3 million and $1 million in the six months ended September 30, 2014 and 2013, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $13 million, which is expected to be recognized over a weighted average period of 2.2 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was $15 million, which is expected to be recognized over a weighted average period of 2.3 years. Unrecognized compensation expense related to the RSUs was $8 million, which will be recognized over the remaining weighted average vesting period of 1.5 years.
25
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
9. POSTRETIREMENT BENEFIT PLANS
Our pension obligations relate to: (1) funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; (2) unfunded defined benefit pension plans in Germany; (3) unfunded lump sum indemnities payable upon retirement to employees in France, Malaysia and Italy; and (4) partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded health care and life insurance benefits provided to retired employees in the U.S., Canada and Brazil.
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
Pension Benefit Plans |
Other Benefit Plans |
||||||||||||||
Three Months Ended September 30, |
Three Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Service cost |
$ |
11 |
$ |
12 |
$ |
1 |
$ |
2 |
|||||||
Interest cost |
17 |
16 |
2 |
2 |
|||||||||||
Expected return on assets |
(18 |
) |
(17 |
) |
— |
— |
|||||||||
Amortization — losses, net |
6 |
7 |
2 |
1 |
|||||||||||
Amortization — prior service credit, net |
— |
(1 |
) |
(9 |
) |
(2 |
) |
||||||||
Net periodic benefit cost |
$ |
16 |
$ |
17 |
$ |
(4 |
) |
$ |
3 |
Pension Benefit Plans |
Other Benefits |
||||||||||||||
Six Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Service cost |
$ |
22 |
$ |
25 |
$ |
2 |
$ |
5 |
|||||||
Interest cost |
34 |
32 |
3 |
4 |
|||||||||||
Expected return on assets |
(35 |
) |
(33 |
) |
— |
— |
|||||||||
Amortization — losses |
12 |
12 |
4 |
2 |
|||||||||||
Amortization — prior service credit, net |
(1 |
) |
(1 |
) |
(19 |
) |
(2 |
) |
|||||||
Termination benefits / curtailments |
1 |
— |
(2 |
) |
— |
||||||||||
Net periodic benefit cost |
$ |
33 |
$ |
35 |
$ |
(12 |
) |
$ |
9 |
The average expected long-term rate of return on plan assets is 6.1% in fiscal 2015.
In June 2014, the Company amended its U.S. non-union retiree medical plan to extend retirees' option to participate in a Retiree Health Access Exchange (RHA). For calendar years 2014 through 2017, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The Company will not provide a subsidy beginning in calendar year 2018. The amendment to the plan resulted in a plan remeasurement and recognition of prior service costs of approximately $11 million which will be amortized on a straight-line basis through December 31, 2017.
26
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
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 September 30, |
Six Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Funded pension plans |
$ |
8 |
$ |
4 |
$ |
12 |
$ |
10 |
|||||||
Unfunded pension plans |
3 |
3 |
4 |
5 |
|||||||||||
Savings and defined contribution pension plans |
5 |
4 |
11 |
9 |
|||||||||||
Total contributions |
$ |
16 |
$ |
11 |
$ |
27 |
$ |
24 |
During the remainder of fiscal 2015, we expect to contribute an additional $22 million to our funded pension plans, $10 million to our unfunded pension plans and $11 million to our savings and defined contribution plans.
27
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
10. CURRENCY (GAINS) LOSSES
The following currency (gains) losses are included in “Other expense (income), net” in the accompanying condensed consolidated statements of operations (in millions).
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||||
Gain on remeasurement of monetary assets and liabilities, net |
$ |
(13 |
) |
$ |
(4 |
) |
$ |
(2 |
) |
$ |
(22 |
) |
|||
Loss released from accumulated other comprehensive income |
1 |
— |
1 |
1 |
|||||||||||
Loss recognized on balance sheet remeasurement currency exchange contracts, net |
13 |
4 |
2 |
16 |
|||||||||||
Currency losses (gains), net |
$ |
1 |
$ |
— |
$ |
1 |
$ |
(5 |
) |
The following currency gains (losses) are included in Accumulated other comprehensive loss (“AOCI”), net of tax and “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).
Six Months Ended September 30, 2014 |
Year Ended March 31, 2014 |
||||||
Cumulative currency translation adjustment — beginning of period |
$ |
90 |
$ |
(30 |
) |
||
Effect of changes in exchange rates |
(106 |
) |
120 |
||||
Cumulative currency translation adjustment — end of period |
$ |
(16 |
) |
$ |
90 |
28
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
11. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The following tables summarize the gross fair values of our financial instruments and commodity contracts as of September 30, 2014 and March 31, 2014 (in millions).
September 30, 2014 |
|||||||||||||||||||
Assets |
Liabilities |
Net Fair Value
Assets/(Liabilities)
|
|||||||||||||||||
Current |
Noncurrent (A) |
Current |
Noncurrent (A) |
||||||||||||||||
Derivatives designated as hedging instruments: |
|||||||||||||||||||
Cash flow hedges |
|||||||||||||||||||
Aluminum contracts |
$ |
12 |
$ |
— |
$ |
(10 |
) |
$ |
— |
$ |
2 |
||||||||
Currency exchange contracts |
12 |
2 |
(14 |
) |
(5 |
) |
(5 |
) |
|||||||||||
Energy contracts |
1 |
— |
(1 |
) |
— |
— |
|||||||||||||
Interest rate swaps |
— |
— |
(1 |
) |
— |
(1 |
) |
||||||||||||
Net investment hedges |
|||||||||||||||||||
Currency exchange contracts |
3 |
— |
— |
— |
3 |
||||||||||||||
Total derivatives designated as hedging instruments |
$ |
28 |
$ |
2 |
$ |
(26 |
) |
$ |
(5 |
) |
$ |
(1 |
) |
||||||
Derivatives not designated as hedging instruments |
|||||||||||||||||||
Aluminum contracts |
28 |
— |
(34 |
) |
— |
(6 |
) |
||||||||||||
Currency exchange contracts |
23 |
— |
(30 |
) |
— |
(7 |
) |
||||||||||||
Energy contracts |
— |