10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 2, 2017
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, 2017
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 ¨ No ý
The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant 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.
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”, “smaller reporting company”, and "emerging growth 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 |
¨ |
Emerging growth 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
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
As of November 1, 2017, 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, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Net sales |
$ |
2,794 |
$ |
2,361 |
$ |
5,463 |
$ |
4,657 |
|||||||
Cost of goods sold (exclusive of depreciation and amortization) |
2,361 |
1,980 |
4,622 |
3,910 |
|||||||||||
Selling, general and administrative expenses |
124 |
108 |
230 |
200 |
|||||||||||
Depreciation and amortization |
91 |
90 |
181 |
179 |
|||||||||||
Interest expense and amortization of debt issuance costs |
64 |
81 |
128 |
164 |
|||||||||||
Research and development expenses |
16 |
14 |
31 |
27 |
|||||||||||
Gain on assets held for sale |
— |
(1 |
) |
— |
(2 |
) |
|||||||||
(Gain) loss on sale of a business, net |
(318 |
) |
27 |
(318 |
) |
27 |
|||||||||
Loss on extinguishment of debt |
— |
112 |
— |
112 |
|||||||||||
Restructuring and impairment, net |
7 |
1 |
8 |
3 |
|||||||||||
Equity in net loss of non-consolidated affiliates |
1 |
— |
1 |
— |
|||||||||||
Other expense, net |
25 |
11 |
13 |
39 |
|||||||||||
2,371 |
2,423 |
4,896 |
4,659 |
||||||||||||
Income (loss) before income taxes |
423 |
(62 |
) |
567 |
(2 |
) |
|||||||||
Income tax provision |
116 |
27 |
159 |
63 |
|||||||||||
Net income (loss) |
307 |
(89 |
) |
408 |
(65 |
) |
|||||||||
Net income attributable to noncontrolling interests |
— |
— |
— |
— |
|||||||||||
Net income (loss) attributable to our common shareholder |
$ |
307 |
$ |
(89 |
) |
$ |
408 |
$ |
(65 |
) |
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, |
|||||||
2017 |
2016 |
||||||
Net income (loss) |
$ |
307 |
$ |
(89 |
) |
||
Other comprehensive (loss) income: |
|||||||
Currency translation adjustment |
28 |
64 |
|||||
Net change in fair value of effective portion of cash flow hedges |
(41 |
) |
13 |
||||
Net change in pension and other benefits |
10 |
9 |
|||||
Other comprehensive (loss) income before income tax effect |
(3 |
) |
86 |
||||
Income tax (benefit) provision related to items of other comprehensive income |
(11 |
) |
7 |
||||
Other comprehensive income, net of tax |
8 |
79 |
|||||
Comprehensive income (loss) |
315 |
(10 |
) |
||||
Less: Comprehensive income attributable to noncontrolling interests, net of tax |
1 |
1 |
|||||
Comprehensive income (loss) attributable to our common shareholder |
$ |
314 |
$ |
(11 |
) |
Six Months Ended September 30, |
|||||||
2017 |
2016 |
||||||
Net income (loss) |
$ |
408 |
$ |
(65 |
) |
||
Other comprehensive income: |
|||||||
Currency translation adjustment |
91 |
11 |
|||||
Net change in fair value of effective portion of cash flow hedges |
3 |
2 |
|||||
Net change in pension and other benefits |
5 |
29 |
|||||
Other comprehensive income before income tax effect |
99 |
42 |
|||||
Income tax provision related to items of other comprehensive income |
4 |
8 |
|||||
Other comprehensive income, net of tax |
95 |
34 |
|||||
Comprehensive income (loss) |
503 |
(31 |
) |
||||
Less: Comprehensive income attributable to noncontrolling interests, net of tax |
— |
1 |
|||||
Comprehensive income (loss) attributable to our common shareholder |
$ |
503 |
$ |
(32 |
) |
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, 2017 |
March 31, 2017 |
||||||
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
949 |
$ |
594 |
|||
Accounts receivable, net |
|||||||
— third parties (net of uncollectible accounts of $7 and $6 as of September 30, 2017 and March 31, 2017) |
1,290 |
1,067 |
|||||
— related parties |
180 |
60 |
|||||
Inventories |
1,488 |
1,333 |
|||||
Prepaid expenses and other current assets |
118 |
137 |
|||||
Fair value of derivative instruments |
71 |
113 |
|||||
Assets held for sale |
3 |
3 |
|||||
Total current assets |
4,099 |
3,307 |
|||||
Property, plant and equipment, net |
3,067 |
3,357 |
|||||
Goodwill |
607 |
607 |
|||||
Intangible assets, net |
433 |
457 |
|||||
Investment in and advances to non–consolidated affiliates |
799 |
451 |
|||||
Deferred income tax assets |
80 |
86 |
|||||
Other long–term assets |
|||||||
— third parties |
96 |
94 |
|||||
— related parties |
8 |
15 |
|||||
Total assets |
$ |
9,189 |
$ |
8,374 |
|||
LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT) |
|||||||
Current liabilities |
|||||||
Current portion of long–term debt |
$ |
144 |
$ |
121 |
|||
Short–term borrowings |
342 |
294 |
|||||
Accounts payable |
|||||||
— third parties |
1,957 |
1,722 |
|||||
— related parties |
57 |
51 |
|||||
Fair value of derivative instruments |
125 |
151 |
|||||
Accrued expenses and other current liabilities |
558 |
580 |
|||||
Total current liabilities |
3,183 |
2,919 |
|||||
Long–term debt, net of current portion |
4,403 |
4,437 |
|||||
Deferred income tax liabilities |
142 |
98 |
|||||
Accrued postretirement benefits |
803 |
799 |
|||||
Other long–term liabilities |
232 |
198 |
|||||
Total liabilities |
8,763 |
8,451 |
|||||
Commitments and contingencies |
|||||||
Shareholder’s equity (deficit) |
|||||||
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of September 30, 2017 and March 31, 2017 |
— |
— |
|||||
Additional paid–in capital |
1,404 |
1,404 |
|||||
Accumulated deficit |
(510 |
) |
(918 |
) |
|||
Accumulated other comprehensive loss |
(450 |
) |
(545 |
) |
|||
Total equity (deficit) of our common shareholder |
444 |
(59 |
) |
||||
Noncontrolling interests |
(18 |
) |
(18 |
) |
|||
Total equity (deficit) |
426 |
(77 |
) |
||||
Total liabilities and equity (deficit) |
$ |
9,189 |
$ |
8,374 |
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, |
|||||||
2017 |
2016 |
||||||
OPERATING ACTIVITIES |
|||||||
Net income (loss) |
$ |
408 |
$ |
(65 |
) |
||
Adjustments to determine net cash provided by operating activities: |
|||||||
Depreciation and amortization |
181 |
179 |
|||||
Loss (gain) on unrealized derivatives and other realized derivatives in investing activities, net |
12 |
(1 |
) |
||||
Gain on assets held for sale |
— |
(2 |
) |
||||
(Gain) loss on sale of business |
(318 |
) |
27 |
||||
Loss on sale of assets |
2 |
6 |
|||||
Impairment charges |
6 |
— |
|||||
Loss on extinguishment of debt |
— |
112 |
|||||
Deferred income taxes |
47 |
(4 |
) |
||||
Amortization of fair value adjustments, net |
— |
6 |
|||||
Equity in net loss of non-consolidated affiliates |
1 |
— |
|||||
(Gain) loss on foreign exchange remeasurement of debt |
(2 |
) |
2 |
||||
Amortization of debt issuance costs and carrying value adjustments |
10 |
9 |
|||||
Other, net |
4 |
— |
|||||
Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures): |
|||||||
Accounts receivable |
(310 |
) |
(159 |
) |
|||
Inventories |
(107 |
) |
(115 |
) |
|||
Accounts payable |
163 |
22 |
|||||
Other current assets |
26 |
6 |
|||||
Other current liabilities |
(31 |
) |
(90 |
) |
|||
Other noncurrent assets |
(2 |
) |
(9 |
) |
|||
Other noncurrent liabilities |
4 |
49 |
|||||
Net cash provided by (used in) operating activities |
94 |
(27 |
) |
||||
INVESTING ACTIVITIES |
|||||||
Capital expenditures |
(82 |
) |
(90 |
) |
|||
Proceeds from sales of assets, third party, net of transaction fees and hedging |
1 |
1 |
|||||
Proceeds (outflows) from the sale of a business, net of certain transaction fees |
314 |
(13 |
) |
||||
Proceeds from investment in and advances to non-consolidated affiliates, net |
8 |
9 |
|||||
Proceeds from settlement of other undesignated derivative instruments, net |
1 |
6 |
|||||
Net cash provided by (used in) investing activities |
242 |
(87 |
) |
||||
FINANCING ACTIVITIES |
|||||||
Proceeds from issuance of long-term and short-term borrowings |
— |
2,765 |
|||||
Principal payments of long-term and short-term borrowings |
(64 |
) |
(2,609 |
) |
|||
Revolving credit facilities and other, net |
88 |
(3 |
) |
||||
Debt issuance costs |
(4 |
) |
(134 |
) |
|||
Net cash provided by financing activities |
20 |
19 |
|||||
Net increase (decrease) in cash and cash equivalents |
356 |
(95 |
) |
||||
Effect of exchange rate changes on cash |
(1 |
) |
12 |
||||
Cash and cash equivalents — beginning of period |
594 |
556 |
|||||
Cash and cash equivalents — end of period |
$ |
949 |
$ |
473 |
See accompanying notes to the condensed consolidated financial statements.
6
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT) (unaudited)
(in millions, except number of shares)
Equity (Deficit) of our Common Shareholder |
||||||||||||||||||||||||||
Common Stock |
Additional
Paid-in Capital
|
Retained Earnings/ (Accumulated Deficit) |
Accumulated
Other
Comprehensive
Loss (AOCI)
|
Non-
controlling Interests
|
Total (Deficit)/ Equity |
|||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||
Balance as of March 31, 2017 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
(918 |
) |
$ |
(545 |
) |
$ |
(18 |
) |
$ |
(77 |
) |
|||||||||
Net income attributable to our common shareholder |
— |
— |
— |
408 |
— |
— |
408 |
|||||||||||||||||||
Net income attributable to noncontrolling interests |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
Currency translation adjustment included in AOCI |
— |
— |
— |
— |
91 |
— |
91 |
|||||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax provision of $1 million included in AOCI |
— |
— |
— |
— |
2 |
— |
2 |
|||||||||||||||||||
Change in pension and other benefits, net of tax provision of $3 million included in AOCI |
— |
— |
— |
— |
2 |
— |
2 |
|||||||||||||||||||
Balance as of September 30, 2017 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
(510 |
) |
$ |
(450 |
) |
$ |
(18 |
) |
$ |
426 |
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. Hindalco acquired Novelis in May 2007. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited.
Organization and Description of Business
We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food cans and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We have recycling operations in many of our plants to recycle post-consumer aluminum, such as used beverage cans and post-industrial aluminum, such as class scrap. As of September 30, 2017, we had manufacturing operations in ten countries on four continents: North America, South America, Asia and Europe, through 24 operating facilities, including recycling operations in eleven of these plants.
The March 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). 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, 2017 filed with the United States Securities and Exchange Commission (SEC) on May 10, 2017. 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, 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 (loss) 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 condensed 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 U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, 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 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 may 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.
Revision of Previously Issued Financial Statements
During the preparation of the Form 10-Q for the three months ended June 30, 2017, we identified a misclassification between "Prepaid expenses and other current assets" and “Accrued expenses other current liabilities” accounts that understated these balances for the periods ended March 31, 2017, December 31, 2016, and September 30, 2016 of $26 million, $21 million, and $16 million, respectively. In addition, we identified a misclassification between “Deferred income tax assets” and “Deferred income tax liabilities” of $4 million that understated these balances as of March 31, 2017. We assessed the
8
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
materiality of the misstatements and concluded that these misstatements were not material to the Company's previously issued financial statements and that amendments of previously filed reports were therefore not required. However, we elected to revise the previously reported amounts in both the the March 31, 2017 consolidated balance sheet and September 30, 2016 consolidated statement of cash flow by the amounts above. The referenced prior period above not presented herein include misstatements that impact the consolidated statements of cash flows and will be revised, as applicable, in future filings. These revisions will impact the “Other current assets” and “Other current liabilities” line items within total “Operating Activities.” However, there is no impact to "Net cash provided by (used in) operating activities" within the consolidated statements of cash flows.
Reclassification
A reclassification of a prior period amount has been made to conform to the presentation adopted for the current period.
For the three and six months ended September 30, 2016, we reclassified $27 million from "Other expense, net" to "(Gain) loss on the sale of a business" in the condensed consolidated statement of operations to conform with the current period presentation. This reclassification had no impact on “Income (loss) before income taxes,” “Net income (loss) attributable to our common shareholder,” the condensed consolidated balance sheets or condensed consolidated statements of cash flows during the respective periods. Refer to Note 14 — Other expense, net for further details.
Recently Issued Accounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for public business entities for interim and annual periods beginning after December 15, 2018. Early adoption is permitted and we intend to early adopt. We believe that the impact to Novelis will primarily result from the following changes to the guidance: The entire change in the value of the hedging instrument will be deferred to OCI; and the component excluded from the assessment of hedge effectiveness will be recognized immediately in earnings, in the same line item as the hedged item.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective for public business entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We will adopt this standard in our first quarter ending June 30, 2018. Adoption of this standard is not expected to have an impact on our consolidated results of operations.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires entities to (1) disaggregate the current service cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the results of operations and (2) present the other components elsewhere in the results of operations and outside of income from operations if that subtotal is presented. The guidance is effective for public business entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Currently, all postretirement costs (FAS 87, FAS 106 and FAS 112) fall within the line item “Selling, general and administrative expenses” within the consolidated results of operations. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.
9
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting (“ASU 2017-06”). This update primarily impacted the reporting by an employee benefit plan (a plan) for its interest in a master trust. The amendments in this update require all plans to disclose (1) their master trust’s other asset and liability balances and (2) the dollar amount of the plan’s interest in each of those balances. The amendments in this update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. Adoption of this standard is not expected to have an impact on our consolidated financial position or results of operations.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets. The amendments in this update include (i) clarification that non-financial assets within the scope of ASC 610-20 may include non-financial assets transferred within a legal entity to a counterparty; (ii) clarification that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations; and (iii) a requirement for entities to derecognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810, and transfers control of the asset in accordance with ASC 606. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. Adoption of this standard is expected to have an immaterial impact on our consolidated financial position and results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, accounting guidance, which removes Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. Under the simplified model, a goodwill impairment is calculated as the difference between the carrying amount of the reporting unit and its fair value, but not to exceed the carrying amount of goodwill allocated to that reporting unit. Early adoption is permitted. The guidance is effective for public business entities for interim and annual periods beginning after its annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption of this standard is not expected to have any impact on our consolidated financial position, results of operations and statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805), which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new guidance amends ASC 805 to provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We believe that the adoption of this standard will not have an impact on our consolidated financial position and results of operations.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. Adoption of this standard is not expected to have any impact on our consolidated financial position, results of operations and statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. The guidance will require the tax effects of intercompany transactions to be recognized currently and will likely impact reporting entities’ effective tax rates. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.
10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The new guidance applies to all entities that are required to present a statement of cash flows under Topic 230 and addresses specific cash flow items to provide clarification and reduce the diversity in presentation of these items. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within that year. Early adoption is permitted. Adoption of this standard is not expected to have any impact on our consolidated financial position, results of operations and statement of cash flows as our current policies are aligned with this standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets (e.g., through "leases") to recognize assets and liabilities for the rights and obligations created by the leases on the balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months. The standard will also require disclosures to help investors and financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 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 these 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. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which provides an optional one-year deferral of the effective date. Subsequent to these amendments, further clarifying amendments have been issued. We are currently evaluating the impact of the standard on our consolidated financial position, results of operations and disclosures. We have begun assessing our contracts and drafting policies to implement the new revenue standards and will be implementing this standard during the first quarter of fiscal year 2019.
11
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, 2017 was $8 million, which included impairment charges unrelated to restructuring of $5 million on intangible software assets and $1 million on other long-lived assets. "Restructuring and impairment, net" for the six months ended September 30, 2016 was $3 million.
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, 2017 |
$ |
24 |
||||||||||||||||||
Expenses |
2 |
$ |
— |
$ |
2 |
$ |
6 |
$ |
8 |
|||||||||||
Cash payments |
(3 |
) |
||||||||||||||||||
Foreign currency (C) |
(1 |
) |
||||||||||||||||||
Balance as of September 30, 2017 |
$ |
22 |
_________________________
(A) |
Other restructuring charges include period expenses that were not recorded through the restructuring liability. |
(B) |
Other impairment charges not related to restructuring activities. |
(C) |
This primarily relates to the remeasurement of Brazilian real denominated restructuring liabilities. |
As of September 30, 2017, $16 million of restructuring liabilities was included in "Accrued expenses and other current liabilities" and $6 million was included in "Other long-term liabilities" on our condensed consolidated balance sheet. As of September 30, 2017, there was an $18 million restructuring liability for the South America segment, $2 million for the Europe segment, $1 million for the North America segment and $1 million for the Asia segment. There were also $1 million and $2 million in payments for the Europe and South America segments, respectively, during the six months ended September 30, 2017.
As of March 31, 2017, $16 million of restructuring liabilities was included in "Accrued expenses and other current liabilities" and $8 million was included in "Other long-term liabilities" on our condensed consolidated balance sheet.
For additional information on environmental charges see Note 16 — Commitments and Contingencies.
12
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
3. INVENTORIES
"Inventories" consist of the following (in millions).
September 30, 2017 |
March 31, 2017 |
||||||
Finished goods |
$ |
377 |
$ |
389 |
|||
Work in process |
686 |
576 |
|||||
Raw materials |
270 |
213 |
|||||
Supplies |
155 |
155 |
|||||
Inventories |
$ |
1,488 |
$ |
1,333 |
13
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
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 specialty products. 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 to focus on our growth strategy in the premium product markets.
We made the decision to sell two hydroelectric power generation facilities in South America. During the year ended March 31, 2017, we recorded a $1 million gain from our sale of one hydroelectric power generation facility. The remaining hydroelectric power generation assets have a net book value of $3 million as of September 30, 2017 and March 31, 2017. These assets continue to be reflected as "Assets held for sale" pending regulatory approval.
In March 2016, we made a decision to sell properties in Ouro Preto, Brazil related to the closure of the Ouro Preto smelter facility in South America. "Gain on assets held for sale" during the six months ended September 30, 2016 includes a $1 million gain from our sale of these assets.
14
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
5. CONSOLIDATION
Variable Interest Entities (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 the activities of Logan. As Logan is dependent upon the investors for ongoing capital to support the operations of the entity, Logan is a variable interest entity ("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. 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 the ability to make decisions regarding Logan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify us 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, 2017 |
March 31, 2017 |
||||||
Assets |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
1 |
$ |
2 |
|||
Accounts receivable |
15 |
29 |
|||||
Inventories |
68 |
62 |
|||||
Prepaid expenses and other current assets |
1 |
2 |
|||||
Total current assets |
85 |
95 |
|||||
Property, plant and equipment, net |
23 |
25 |
|||||
Goodwill |
12 |
12 |
|||||
Deferred income taxes |
91 |
89 |
|||||
Other long-term assets |
29 |
30 |
|||||
Total assets |
$ |
240 |
$ |
251 |
|||
Liabilities |
|||||||
Current liabilities |
|||||||
Accounts payable |
$ |
34 |
$ |
32 |
|||
Accrued expenses and other current liabilities |
19 |
21 |
|||||
Total current liabilities |
53 |
53 |
|||||
Accrued postretirement benefits |
213 |
224 |
|||||
Other long-term liabilities |
3 |
3 |
|||||
Total liabilities |
$ |
269 |
$ |
280 |
15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
6. |
INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS |
We have two non-consolidated affiliates, Aluminum Norf GmbH (Alunorf) and Ulsan Aluminum, Ltd. (UAL). Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conducted with these non-consolidated affiliates, which we classify as related party transactions and balances. We account for these affiliates using the equity method.
In May 2017, Novelis Korea Ltd. (Novelis Korea), a subsidiary of Novelis Inc., entered into definitive agreements with Kobe Steel Ltd. (Kobe), an unrelated party, under which Novelis Korea and Kobe will jointly own and operate the Ulsan manufacturing plant owned by Novelis Korea. In April 2017, Novelis Korea formed a new wholly owned subsidiary, UAL. In September 2017, the transaction closed and Novelis Korea sold 49.9% of its shares in UAL to Kobe for the purchase price of $314 million. We recognized a net gain of $318 million on the transaction, pre-tax, consisting of: (1) $168 million gain related to the difference between the fair value of the consideration received and the carrying amount of the former subsidiary's assets and liabilities; (2) $163 million net gain related to the remeasurement of the retained investment by Novelis Korea; (3) $11 million in transaction fees and (4) $2 million in pension settlement losses. The net gain is recognized in "Gain (loss) on sale of a business" within the condensed consolidated statement of operations. The fair value of the retained investment was derived from cash consideration paid by a market participant, Kobe, for its 49.9% interest.
As a result of this transaction, we have shared power in UAL with Kobe. Novelis Korea and Kobe will supply input metal to UAL and UAL will produce flat rolled aluminum products exclusively for Novelis Korea and Kobe. In addition, we hold several variable interests in UAL through the regular funding of costs and expenses by Novelis Korea and Kobe. As UAL is dependent upon the investors for ongoing capital to support the operations of the entity, UAL is a variable interest entity ("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. The entity will be controlled by the Board of Directors. We do not have the sole decision-making ability regarding UAL's production operations and other significant decisions as the Board of Directors has ultimate control over these decisions. In addition, we do not have the ability to take the majority share of production and associated costs over the life of the joint venture. As we share power jointly with Kobe, we determined Novelis is not the primary beneficiary. Our risk of loss with respect to this VIE is limited to the carrying value of our investment in and inventory-related receivables from UAL. UAL's creditors do not have recourse to our general credit. We have no obligation to provide additional funding to this VIE outside of the contractually required reimbursements.
The following table summarizes the results of operations of our equity method affiliates, and the nature and amounts of significant transactions we have 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, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Net sales |
$ |
124 |
$ |
124 |
$ |
241 |
$ |
245 |
|||||||
Costs and expenses related to net sales |
126 |
122 |
242 |
242 |
|||||||||||
Provision for taxes on income |
— |
2 |
— |
1 |
|||||||||||
Net (loss) income |
$ |
(2 |
) |
$ |
— |
$ |
(1 |
) |
$ |
2 |
|||||
Purchases of tolling services from Alunorf |
$ |
63 |
$ |
62 |
$ |
121 |
$ |
123 |
The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances with Alunorf or UAL.
16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
September 30, 2017 |
March 31, 2017 |
||||||
Accounts receivable-related parties |
$ |
180 |
$ |
60 |
|||
Other long-term assets-related parties |
$ |
8 |
$ |
15 |
|||
Accounts payable-related parties |
$ |
57 |
$ |
51 |
We earned less than $1 million of interest income on a loan due from Alunorf during each of the periods presented in "Other long-term assets-related parties" in the table above. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was recorded as of September 30, 2017 and March 31, 2017.
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, 2017, there were no amounts outstanding under our guarantee with Alunorf as there were no outstanding borrowings. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of September 30, 2017, this guarantee totaled $2 million.
Transactions with Hindalco
We occasionally have related party transactions with our indirect parent company, Hindalco. During the six months ended September 30, 2017 and 2016, “Net sales” were less than $1 million between Novelis and Hindalco. As of September 30, 2017 and March 31, 2017, there were less than $1 million in "Accounts receivable, net - related parties" outstanding related to transactions with Hindalco.
During the six months ended September 30, 2017, Novelis did not purchase any raw materials from Hindalco. There were $3 million of raw material purchases from Hindalco that were fully paid for during the six months ended September 30, 2016.
17
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
7. DEBT
Debt consisted of the following (in millions).
September 30, 2017 |
March 31, 2017 |
|||||||||||||||||||||||||||||
Interest
Rates (A)
|
Principal |
Unamortized
Carrying Value
Adjustments
|
Carrying
Value
|
Principal |
Unamortized
Carrying Value
Adjustments
|
Carrying
Value
|
||||||||||||||||||||||||
Third party debt: |
||||||||||||||||||||||||||||||
Short-term borrowings |
2.69 |
% |
$ |
342 |
$ |
— |
$ |
342 |
$ |
294 |
$ |
— |
$ |
294 |
||||||||||||||||
Novelis Inc. |
||||||||||||||||||||||||||||||
Floating rate Term Loan Facility, due June 2022 |
3.18 |
% |
1,787 |
(49 |
) |
(B) |
1,738 |
1,796 |
(53 |
) |
(B) |
1,743 |
||||||||||||||||||
Novelis Corporation |
||||||||||||||||||||||||||||||
5.875% Senior Notes, due September 2026 |
5.875 |
% |
1,500 |
(22 |
) |
(B) |
1,478 |
1,500 |
(23 |
) |
(B) |
1,477 |
||||||||||||||||||
6.25% Senior Notes, due August 2024 |
6.25 |
% |
1,150 |
(18 |
) |
(B) |
1,132 |
1,150 |
(19 |
) |
(B) |
1,131 |
||||||||||||||||||
Novelis Korea Limited |
||||||||||||||||||||||||||||||
Bank loans, due through September 2020 (KRW 205 billion) |
2.52 |
% |
178 |
— |
178 |
184 |
— |
184 |
||||||||||||||||||||||
Novelis Switzerland S.A. |
||||||||||||||||||||||||||||||
Capital lease obligation, due through December 2019 (Swiss francs (CHF) 15 million) |
7.50 |
% |
15 |
— |
15 |
17 |
(1 |
) |
(B) |
16 |
||||||||||||||||||||
Novelis do Brasil Ltda. |
||||||||||||||||||||||||||||||
BNDES loans, due through April 2021 (BRL 9 million) |
6.00 |
% |
4 |
— |
4 |
4 |
— |
4 |
||||||||||||||||||||||
Other |
||||||||||||||||||||||||||||||
Capital Lease Obligations and Other debt, due through December 2020 |
4.68 |
% |
2 |
— |
2 |
3 |
— |
3 |
||||||||||||||||||||||
Total debt |
4,978 |
(89 |
) |
4,889 |
4,948 |
(96 |
) |
4,852 |
||||||||||||||||||||||
Less: Short term borrowings |
(342 |
) |
— |
(342 |
) |
(294 |
) |
— |
(294 |
) |
||||||||||||||||||||
Current portion of long term debt |
(144 |
) |
— |
(144 |
) |
(121 |
) |
— |
(121 |
) |
||||||||||||||||||||
Long-term debt, net of current portion |
$ |
4,492 |
$ |
(89 |
) |
$ |
4,403 |
$ |
4,533 |
$ |
(96 |
) |
$ |
4,437 |
_________________________
(A) |
Interest rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of September 30, 2017, and therefore, exclude the effects of related interest rate swaps and 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 refinancing transactions and additional borrowings. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.
|
(B) |
Amounts include unamortized debt issuance costs, fair value adjustments and debt discounts. |
18
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 using exchange rates as of
September 30, 2017 (for our debt denominated in foreign currencies) are as follows (in millions).
As of September 30, 2017 |
Amount |
||
Short-term borrowings and current portion of long-term debt due within one year |
$ |
486 |
|
2 years |
75 |
||
3 years |
33 |
||
4 years |
20 |
||
5 years |
1,714 |
||
Thereafter |
2,650 |
||
Total |
$ |
4,978 |
Senior Secured Credit Facilities
As of September 30, 2017, the senior secured credit facilities consisted of (i) a 1.8 billion secured term loan credit facility (Term Loan Facility) and (ii) a $1 billion asset based loan facility (ABL Revolver). As of September 30, 2017, $18 million of the Term Loan Facility is due within one year.
The Term Loan Facility matures on June 2, 2022, and is subject to 0.25% quarterly amortization payments. The loans under the Term Loan Facility accrue interest at LIBOR plus 1.85%. The Term Loan Facility also requires customary mandatory
prepayments with excess cash flow, asset sale and casualty event proceeds and proceeds of prohibited indebtedness, all subject
to customary exceptions. The Term Loan may be prepaid, in full or in part, at any time at the Company’s election without
penalty or premium. The Term Loan Facility allows for additional term loans to be issued in an amount not to exceed $300 million (or its equivalent in other currencies) plus an unlimited amount if, after giving effect to such incurrence on a pro forma basis, the senior secured net leverage ratio does not exceed 3.00 to 1.00. The lenders under the Term Loan Facility have not committed to provide any such additional term loans.
In September 2017, we amended and extended the ABL Revolver. The facility is a senior secured revolver bearing an interest rate of LIBOR plus a spread of 1.25% to 1.75% or a prime rate plus a prime spread of 0.25% to 0.75% 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 including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $90 million and (2) 10% 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 Earnings Before Interest, Taxes, Depreciation and Amortization ("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 September 14, 2022; provided that, in the event that the Term Loan Facility, or certain other indebtedness matures on or prior to March 14, 2023 and is outstanding 90 days prior to its maturity (and not refinanced with a maturity date later than March 14, 2023, then the ABL Revolver will mature 90 days prior to the maturity date for such other indebtedness, as applicable; unless excess availability under the ABL Revolver is at least (i) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 15% 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.
In September 2017, we amended our Term Loan Credit Agreement (the "Term Loan Amendment") to our $1.8 billion Credit Agreement (the "Term Loan Facility") dated as of January 10, 2017. The amendment modifies certain provisions of the Term Loan Facility to facilitate the closing of the previously announced transaction with Kobe Steel Ltd.
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 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
19
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. The Term Loan Credit Agreement also contains a financial maintenance covenant, prohibiting the Company's senior secured net leverage ratio as of the last day of each fiscal quarter period and measured on a rolling four quarter basis from exceeding 3.50 to 1.00, subject to customary equity cure rights. The senior secured credit facilities include a cross-default provision under which lenders could accelerate repayment of the loans if a payment or non-payment default arises under any other indebtedness with an aggregate principal amount of more than $100 million (or, in the case of the Term Loan Facility, under the ABL Revolver regardless of the amount outstanding). Substantially all of our assets are pledged as collateral under the senior secured credit facilities. As of September 30, 2017, we were in compliance with the covenants in the Term Loan Facility and ABL Revolver.
Short-Term Borrowings
As of September 30, 2017, our short-term borrowings were $342 million, consisting of $290 million of short-term loans under our ABL Revolver, $51 million in Novelis China loans (CNY 340 million), and $1 million of other short-term borrowings.
As of September 30, 2017, $19 million of the ABL Revolver was utilized for letters of credit, and we had $486 million in remaining availability under the ABL Revolver.
As of September 30, 2017, we had availability under our Novelis Korea, Novelis Middle East and Africa, and Novelis China revolving credit facilities and credit lines of $188 million (KRW 216 billion), $20 million, and $6 million (CNY 39 million), respectively.
Senior Notes
On August 29, 2016, Novelis Corporation, an indirect wholly owned subsidiary of Novelis Inc., issued $1.15 billion in aggregate principal amount of 6.25% Senior Notes Due 2024 (the 2024 Notes). The 2024 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.
Additionally, on September 14, 2016, Novelis Corporation issued $1.5 billion in aggregate principal amount of 5.875% Senior Notes Due 2026 (the 2026 Notes, and together with the 2024 Notes, the Notes). The 2026 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.
The proceeds from the issuance of the 2024 Notes and the 2026 Notes were used to extinguish our 8.375% 2017 Senior Notes and our 8.75% 2020 Senior Notes, respectively. In addition, we paid combined tender offer premiums and issuance costs of $139 million associated with the refinancing transactions, including fees paid to lenders, arrangers, and outside professionals such as attorneys and rating agencies. We recorded a "Loss on extinguishment of debt" of $112 million in the second quarter of fiscal 2017 related to refinancing transactions. We incurred debt issuance costs of $45 million on the Notes which were capitalized and amortized as an increase to "Interest expense and amortization of debt issuance costs" over the term of these instruments.
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 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. The Notes include a cross-acceleration event of default triggered if any other indebtedness with an aggregate principal amount of more than $100 million is (1) accelerated prior to its maturity or (2) not repaid at its maturity. As of September 30, 2017, we were in compliance with the covenants in the Notes. The Notes also contain customary call protection provisions for our bond holders that extend through August 2022 for the 2024 Notes and through September 2024 for the 2026 Notes.
20
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Korea Bank Loans
As of September 30, 2017, Novelis Korea had $116 million (KRW 133 billion) of outstanding long-term loans with various banks due within one year. The loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.91% to 1.58%.
Brazil BNDES Loans
Novelis Brazil entered into loan agreements with Brazil’s National Bank for Economic and Social Development (the BNDES long-term loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of September 30, 2017 there are $2 million of BNDES loans due within one year.
Other Long-term debt
In December 2004, we entered into a fifteen-year capital lease obligation with Alcan Inc. for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million, (USD $1.7 million).
During fiscal 2013 and 2014, Novelis Inc. entered into five-year capital lease arrangements to upgrade and expand our information technology infrastructure.
As of September 30, 2017, we had $1 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.
21
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), phantom restricted stock units (RSUs), and Novelis Performance Units (Novelis PUs) are granted to certain executive officers and key employees.
The Hindalco SARs vest at the rate of 25% or 33% per year, subject to the achievement of an annual performance target, and expire seven years from their original grant date. The performance criterion for vesting of the Hindalco SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The RSUs are based on Hindalco's stock price. The RSUs vest either in full three years from the grant date or 33% per year over three years, subject to continued employment with the Company, but are not subject to performance criteria. In May 2016, the Company's board of directors approved the issuance of Novelis PUs which have a fixed $100 value per unit and will vest in full three years from the grant date, subject to specific performance criteria compared to the established target. The Company made a voluntary offer to the participants with outstanding Novelis SARs granted for fiscal years 2012 through 2016 to exchange their Novelis SARs for an equivalently valued number of Novelis PUs. The voluntary exchange resulted in 1,054,662 Novelis SARs being modified into PUs which are not based on Novelis' or Hindalco's fair values and are accounted for outside the scope of ASC 718, Compensation - Stock Compensation. This exchange was accounted for as a modification.
During the six months ended September 30, 2017, we granted 2,567,050 RSUs, 2,317,529 Hindalco SARs, and no Novelis SARs. Total compensation expense related to these plans for the respective periods was $9 million and $10 million for the three months ended September 30, 2017 and 2016, respectively. These amounts are included in “Selling, general and administrative expenses” in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2019, 2020 and 2021 have not yet been established, measurement periods for Hindalco 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. As of September 30, 2017, the outstanding liability related to share-based compensation was $20 million.
The cash payments made to settle SAR liabilities were $7 million and $1 million in the six months ended September 30, 2017 and 2016. Total cash payments made to settle Hindalco RSUs were $8 million and $2 million in the six months ended September 30, 2017 and 2016, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $9 million, which is expected to be recognized over a weighted average period of 1.3 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was less than $1 million, which is expected to be recognized over a weighted average period of 1.1 years. Unrecognized compensation expense related to the RSUs was $16 million, which will be recognized over the remaining weighted average vesting period of 1.1 years.
22
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 and Italy; and (4) partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefit Plans, 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 postretirement benefit plans are shown in the table below (in millions).
Pension Benefit Plans |
Other Benefit Plans |
||||||||||||||
Three Months Ended September 30, |
Three Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Service cost |
$ |
11 |
$ |
12 |
$ |
1 |
$ |
1 |
|||||||
Interest cost |
15 |
16 |
3 |
2 |
|||||||||||
Expected return on assets |
(16 |
) |
(15 |
) |
— |
— |
|||||||||
Amortization — losses, net |
9 |
9 |
— |
1 |
|||||||||||
Amortization — prior service credit, net |
— |
(1 |
) |
— |
1 |
||||||||||
Termination benefits / curtailments |
2 |
— |
— |
— |
|||||||||||
Net periodic benefit cost |
$ |
21 |
$ |
21 |
$ |
4 |
$ |
5 |
Pension Benefit Plans |
Other Benefits |
||||||||||||||
Six Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Service cost |
$ |
22 |
$ |
23 |
$ |
3 |
$ |
3 |
|||||||
Interest cost |
30 |
31 |
4 |
3 |
|||||||||||
Expected return on assets |
(32 |
) |
(31 |
) |
— |
— |
|||||||||
Amortization — losses |
18 |
20 |
1 |
2 |
|||||||||||
Amortization — prior service credit, net |
— |
(1 |
) |
— |
1 |
||||||||||
Termination benefits / (curtailments) |
2 |
— |
— |
— |
|||||||||||
Net periodic benefit cost |
$ |
40 |
$ |
42 |
$ |
8 |
$ |
9 |
The average expected long-term rate of return on plan assets is 5.2% in fiscal 2018.
Employer Contributions to Plans
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland and Brazil. We contributed the following amounts to all plans (in millions).
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Funded pension plans |
$ |
31 |
$ |
4 |
$ |
34 |
$ |
7 |
|||||||
Unfunded pension plans |
4 |
3 |
7 |
6 |
|||||||||||
Savings and defined contribution pension plans |
6 |
7 |
14 |
13 |
|||||||||||
Total contributions |
$ |
41 |
$ |
14 |
$ |
55 |
$ |
26 |
During the remainder of fiscal 2018, we expect to contribute an additional $8 million to our funded pension plans, $9 million to our unfunded pension plans and $11 million to our savings and defined contribution plans.
23
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, net” in the accompanying condensed consolidated statements of operations (in millions).
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
(Gain) loss on remeasurement of monetary assets and liabilities, net |
$ |
(10 |
) |
$ |
4 |
$ |
(39 |
) |
$ |
15 |
|||||
Loss (gain) recognized on balance sheet remeasurement currency exchange contracts, net |
9 |
(6 |
) |
39 |
(14 |
) |
|||||||||
Currency (gains) losses, net |
$ |
(1 |
) |
$ |
(2 |
) |
$ |
— |
$ |
1 |
The following currency (losses) gains are included in “Accumulated other comprehensive loss, net of tax” and “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).
Six Months Ended September 30, 2017 |
Year Ended March 31, 2017 |
||||||
Cumulative currency translation adjustment — beginning of period |
$ |
(256 |
) |
$ |
(197 |
) |
|
Effect of changes in exchange rates |
91 |
(75 |
) |
||||
Sale of investment in foreign entities (A) |
— |
16 |
|||||
Cumulative currency translation adjustment — end of period |
$ |
(165 |
) |
$ |
(256 |
) |
_________________________
(A) |
We reclassified $16 million of cumulative currency losses from AOCI to "Other expense, net"in the twelve months ended March 31, 2017 due to the sale of our equity interest in Aluminum Company of Malaysia Berhad (ALCOM) in fiscal 2017.
|
24
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, 2017 and March 31, 2017 (in millions).
September 30, 2017 |
|||||||||||||||||||
Assets |
Liabilities |
Net Fair Value
|
|||||||||||||||||
Current |
Noncurrent (A) |
Current |
Noncurrent (A) |
Assets / (Liabilities) |
|||||||||||||||
Derivatives designated as hedging instruments: |
|||||||||||||||||||
Cash flow hedges |
|||||||||||||||||||
Aluminum contracts |
$ |
1 |
$ |
— |
$ |
(48 |
) |
$ |
— |
$ |
(47 |
) |
|||||||
Currency exchange contracts |
16 |
1 |
(5 |
) |
(3 |
) |
9 |
||||||||||||
Energy contracts |
— |
1 |
(2 |
) |
(7 |
) |
(8 |
) |
|||||||||||
Total derivatives designated as hedging instruments |
17 |
2 |
(55 |
) |
(10 |
) |
(46 |
) |
|||||||||||
Derivatives not designated as hedging instruments |
|||||||||||||||||||
Aluminum contracts |
33 |
1 |
(45 |
) |
— |
(11 |
) |
||||||||||||
Currency exchange contracts |
20 |
— |
(25 |
) |
— |
(5 |
) |
||||||||||||
Energy contracts |
1 |
— |
— |
— |
1 |
||||||||||||||
Total derivatives not designated as hedging instruments |
54 |
1 |
(70 |
) |
— |
(15 |
) |
||||||||||||
Total derivative fair value |
$ |
71 |
$ |
3 |
$ |
(125 |
) |
$ |
(10 |
) |
$ |
(61 |
) |
March 31, 2017 |
|||||||||||||||||||
Assets |
Liabilities |
Net Fair Value
|
|||||||||||||||||
Current |
Noncurrent (A) |
Current |
Noncurrent(A) |
Assets / (Liabilities) |
|||||||||||||||
Derivatives designated as hedging instruments: |
|||||||||||||||||||
Cash flow hedges |
|||||||||||||||||||
Aluminum contracts |
$ |
— |
$ |
— |
$ |
(69 |
) |
$ |
— |
$ |
(69 |
) |
|||||||
Currency exchange contracts |
26 |
1 |
(1 |
) |
(3 |
) |
23 |
||||||||||||
Energy contracts |
1 |
— |
— |
(9 |
) |
(8 |
) |
||||||||||||
Total derivatives designated as hedging instruments |
27 |
1 |
(70 |
) |
(12 |
) |
(54 |
) |
|||||||||||
Derivatives not designated as hedging instruments: |
|||||||||||||||||||
Aluminum contracts |
57 |
1 |
(68 |
) |
(1 |
) |
(11 |
) |
|||||||||||
Currency exchange contracts |
29 |
— |
(13 |
) |
— |
16 |
|||||||||||||
Total derivatives not designated as hedging instruments |
86 |
1 |
(81 |
) |
(1 |
) |
5 |
||||||||||||
Total derivative fair value |
$ |
113 |
$ |
2 |
$ |
(151 |
) |
$ |
(13 |
) |
$ |
(49 |
) |
_________________________
(A) |
The noncurrent portions of derivative assets and liabilities are included in “Other long-term assets-third parties” and in “Other long-term liabilities”, respectively, in the accompanying condensed consolidated balance sheets. |
25
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Aluminum
We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative forward contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers, which is known as "metal price lag." We also purchase forward LME aluminum contracts simultaneously with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the selling price of the metal with the purchase price of the metal. The volatility in local market premiums also results in metal price lag.
Price risk exposure arises from commitments to sell aluminum in future periods at fixed prices. We identify and designate certain LME aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. We did not have any outstanding aluminum forward purchase contracts designated as fair value hedges as of September 30, 2017 and March 31, 2017. One kilotonne (kt) is 1,000 metric tonnes.
Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain LME 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. We did not have any outstanding aluminum forward purchase contracts designated as cash flow hedges as of September 30, 2017 and March 31, 2017.
Price risk exposure arises due to the timing lag between the LME based pricing of raw material aluminum purchases and the LME based pricing of finished product sales. We identify and designate certain LME 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. Generally, such exposures do not extend beyond two years in length. The average duration of undesignated contracts is less than one year.
The following table summarizes our notional amount (in kt).
September 30, 2017 |
March 31, 2017 |
||||
Hedge type |
|||||
Purchase (Sale) |
|||||
Cash flow sales |
(432 |
) |
(391 |
) |
|
Not designated |
(100 |
) |
(89 |
) |
|
Total, net |
(532 |
) |
(480 |
) |
Foreign Currency
We use foreign exchange forward contracts, cross-currency swaps and options 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 total notional amounts of $432 million and $465 million in outstanding foreign currency forwards designated as cash flow hedges as of September 30, 2017 and March 31, 2017, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to our net investment in foreign subsidiaries. We had $290 million outstanding foreign currency forwards designated as net investment hedges as of September 30, 2017. There were no foreign currency forwards designated as net investment hedges as of March 31, 2017.
As of September 30, 2017 and March 31, 2017, we had outstanding foreign currency exchange contracts with a total notional amount of $1,420 million and $683 million, respectively, to primarily hedge balance sheet remeasurement risk, which were not designated as hedges. Contracts representing the majority of this notional amount will mature during the third quarter of fiscal 2018 and offset the remeasurement impact.
26
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
Energy
We own an interest in an electricity swap contract to hedge our exposure to fluctuating electricity prices. As of September 30, 2017 and March 31, 2017, there were 1 million of notional megawatt hours outstanding, and the fair value of the swap was a liability of $8 million and $9 million, respectively. The electricity swap, which matures on January 5, 2022, is designated as a cash flow hedge.
We use natural gas forward purchase contracts ("forward contracts") to manage our exposure to fluctuating natural gas prices in North America. We had a notional of 19 million MMBTUs designated as cash flow hedges as of September 30, 2017, and the fair value was a liability of less than $1 million. There was a notional of 6 million MMBTU forward contracts designated as cash flow hedges as of March 31, 2017 and the fair value was an asset of $1 million. As of September 30, 2017 and March 31, 2017, we had notionals of 1 million and less than 1 million MMBTU forward contracts that were not designated as hedges, respectively. The fair value as of September 30, 2017 and March 31, 2017 was a liability of less than $1 million for the forward contracts not designated as hedges. The average duration of undesignated contracts is less than 2 years in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
We use diesel fuel forward contracts to manage our exposure to fluctuating fuel prices in North America, which were not designated as hedges as of September 30, 2017. As of September 30, 2017 and March 31, 2017, we had 6 million and 8 million gallons of diesel fuel forward purchase contracts outstanding, and the fair values were an asset of less than $1 million. The average duration of undesignated contracts is less than 2 years in length.
Interest Rate
As of September 30, 2017, we swapped $116 million (KRW 133 billion) floating rate loans to a weighted average fixed rate of 2.92%. All swaps expire concurrent with the maturity of the related loans. As of September 30, 2017 and March 31, 2017, $116 million (KRW 133 billion) and $119 million (KRW 133 billion), respectively, were designated as cash flow hedges.
Gain (Loss) Recognition
The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments not designated as hedges and the ineffectiveness of designated derivatives recognized in “Other 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 September 30, |
Six Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
||||||||||||
Derivative instruments not designated as hedges |
|||||||||||||||
Aluminum contracts |
$ |
(12 |
) |
$ |
(5 |
) |
$ |
2 |
$ |
(17 |
) |
||||
Currency exchange contracts |
(11 |
) |
5 |
(49 |
) |
13 |
|||||||||
Energy contracts (A) |
2 |
2 |
3 |
5 |
|||||||||||
(Loss) gain recognized in "Other expense, net" |
(21 |
) |
2 |
(44 |
) |
1 |
|||||||||
Derivative instruments designated as hedges |
|||||||||||||||
Losses recognized in "Other expense, net" (B) |
(12 |
) |
(5 |
) |
(7 |
) |
(13 |
) |
|||||||
Total loss recognized in "Other expense, net" |
$ |
(33 |
) |
$ |
(3 |
) |
$ |
(51 |
) |
$ |
(12 |
) |
|||
Balance sheet remeasurement currency exchange contract (losses) gains |
$ |
(9 |
) |
$ |
6 |
$ |
(39 |
) |
$ |
14 |
|||||
Realized losses, net |
(6 |
) |
(13 |
) |
(10 |
) |
(23 |
) |
|||||||
Unrealized (losses) gains on other derivative instruments, net |
(18 |
) |
4 |
(2 |
) |
(3 |
) |
||||||||
Total loss recognized in "Other expense, net" |
$ |
(33 |
) |
$ |
(3 |
) |
$ |
(51 |
) |
$ |
(12 |
) |
_________________________
(A) |
Includes amounts related to de-designated electricity swap and natural gas swaps not designated as hedges. |
(B) |
Amount includes: forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capital expenditure contracts; releases to income from AOCI on balance sheet remeasurement contracts; and ineffectiveness of fair value hedges involving aluminum derivatives. |
27
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow and net investment hedges (in millions). Within the next twelve months, we expect to reclassify $41 million of losses from AOCI to earnings, before taxes.
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
|
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
|
Amount of Gain (Loss)
Recognized in “Other Expense, net” (Ineffective and
Excluded Portion) |
Amount of Gain (Loss)
Recognized in “Other Expense, net” (Ineffective and
Excluded Portion) |
||||||||||||||||||||||||||||
Three Months Ended September 30, |
Six Months Ended September 30, |
Three Months Ended September 30, |
Six Months Ended September 30, |
||||||||||||||||||||||||||||
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||||||||
Cash flow hedging derivatives |
|||||||||||||||||||||||||||||||
Aluminum contracts |
$ |
(52 |
) |
$ |
1 |
$ |
(23 |
) |
$ |
(30 |
) |
$ |
(14 |
) |
$ |
(4 |
) |
$ |
(9 |
) |
$ |
(13 |
) |
||||||||
Currency exchange contracts |
4 |
14 |
(7 |
) |
32 |
1 |
1 |
1 |
1 |
||||||||||||||||||||||
Energy contracts |
— |
(3 |
) |
(2 |
) |
(4 |
) |
1 |
(1 |
) |
1 |
(1 |
) |
||||||||||||||||||
Total cash flow hedging derivatives |
$ |
(48 |
) |
$ |
12 |
$ |
(32 |
) |
$ |
(2 |
) |
$ |
(12 |
) |
$ |
(4 |
) |
$ |
(7 |
) |
$ |
(13 |
) |
||||||||
Net investment derivatives |
|||||||||||||||||||||||||||||||
Currency exchange contracts |
— |
(1 |
) |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Total |
$ |
(48 |
) |
$ |
11 |
$ |
(32 |
) |
$ |
(2 |
) |
$ |
(12 |
) |
$ |
(4 |
) |
$ |
(7 |
) |
$ |
(13 |
) |
Gain (Loss) Reclassification
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Three Months Ended September 30, |
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion)
Six Months Ended September 30,
|
Location of Gain (Loss) Reclassified from AOCI into Earnings |
|||||||||||||||
Cash flow hedging derivatives |
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Energy contracts (A) |
$ |
— |
$ |
(2 |
) |
$ |
— |
$ |
(3 |
) |
Other expense, net |
||||||
Energy contracts (C) |
— |
(1 |
) |
(1 |
) |
(3 |
) |
Cost of goods sold (B) |
|||||||||
Aluminum contracts |
(11 |
) |
(7 |
) |
(43 |
) |
(6 |
) |
Cost of goods sold (B) |
||||||||
Aluminum contracts |
— |
(1 |
) |
— |
(2 |
) |
Net sales |
||||||||||
Currency exchange contracts |
4 |
5 |
7 |
5 |
Cost of goods sold (B) |
||||||||||||
Currency exchange contracts |
1 |
1 |
1 |
1 |
Selling, general and administrative expenses |
||||||||||||
Currency exchange contracts |
— |
3 |
2 |
3 |
Net sales |
||||||||||||
Currency exchange contracts |
— |
— |
— |
1 |
Other expense, net |
||||||||||||
Currency exchange contracts |
(1 |
) |
(1 |
) |
(1 |
) |
(1 |
) |
Depreciation and amortization |
||||||||
Total |
$ |
(7 |
) |
$ |
(3 |
) |
$ |
(35 |
) |
$ |
(5 |
) |
Loss before taxes |
||||
2 |
2 |
12 |
1 |
Income tax benefit |
|||||||||||||
$ |
(5 |
) |
$ |
(1 |
) |
$ |
(23 |
) |
$ |
(4 |
) |
Net loss |
_________________________
(A) |
Includes amounts related to de-designated electricity swap. AOCI related to this swap was amortized to income over the remaining term of the hedged item. |
(B) |
"Cost of goods sold" is exclusive of depreciation and amortization. |
(C) |
Includes amounts related to electricity and natural gas swaps. |
28
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the change in the components of accumulated other comprehensive loss net of tax and excluding "Noncontrolling interests", for the periods presented (in millions).
Currency Translation |
(A) Cash Flow Hedges |
(B) Postretirement Benefit Plans |
Total |
|||||||||||||
Balance as of June 30, 2017 |
$ |
(193 |
) |
$ |
(18 |
) |
$ |
(246 |
) |
$ |
(457 |
) |
||||
Other comprehensive income (loss) before reclassifications |
28 |
(31 |
) |
6 |
3 |
|||||||||||
Amounts reclassified from AOCI, net |
— |
5 |
(1 |
) |
4 |
|||||||||||
Net current-period other comprehensive income (loss) |
28 |
(26 |
) |
5 |
7 |
|||||||||||
Balance as of September 30, 2017 |
$ |
(165 |
) |
$ |
(44 |
) |
$ |
(241 |
) |
$ |
(450 |
) |
Currency Translation |
(A) Cash Flow Hedges |
(B) Postretirement Benefit Plans |
Total |
|||||||||||||
Balance as of June 30, 2016 |
$ |
(248 |
) |
$ |
(18 |
) |
$ |
(279 |
) |
$ |
(545 |
) |
||||
Other comprehensive income before reclassifications |
47 |
9 |
11 |
67 |
||||||||||||
Amounts reclassified from AOCI, net (C) |
16 |
1 |
(6 |
) |
11 |
|||||||||||
Net current-period other comprehensive income |
63 |
10 |
5 |
78 |
||||||||||||
Balance as of September 30, 2016 |
$ |
(185 |
) |
$ |
(8 |
) |
$ |
(274 |
) |
$ |
(467 |
) |
Currency Translation |
(A) Cash Flow Hedges |
(B) Postretirement Benefit Plans |
Total |
|||||||||||||
Balance as of March 31, 2017 |
$ |
(256 |
) |
$ |
(46 |
) |
$ |
(243 |
) |
$ |
(545 |
) |
||||
Other comprehensive income before reclassifications |
91 |
(21 |
) |
(4 |
) |
66 |
||||||||||
Amounts reclassified from AOCI, net |
— |
23 |
6 |
29 |
||||||||||||