Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 7, 2018



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
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, a smaller reporting company or an emerging growth 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 August 6, 2018, 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 June 30,
 
2018
 
2017
Net sales
$
3,097

 
$
2,669

Cost of goods sold (exclusive of depreciation and amortization)
2,591

 
2,256

Selling, general and administrative expenses
119

 
101

Depreciation and amortization
86

 
90

Interest expense and amortization of debt issuance costs
66

 
64

Research and development expenses
15

 
15

Restructuring and impairment, net
1

 
1

Other expense (income), net
29

 
(2
)

2,907

 
2,525

Income before income taxes
190

 
144

Income tax provision
53

 
43

Net income
137

 
101

Net income attributable to noncontrolling interests

 

Net income attributable to our common shareholder
$
137

 
$
101

See accompanying notes to the condensed consolidated financial statements.


3



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
(in millions)
 
 
Three Months Ended June 30,
 
2018
 
2017
Net income
$
137

 
$
101

Other comprehensive (loss) income:
 
 
 
Currency translation adjustment
(117
)
 
63

Net change in fair value of effective portion of cash flow hedges
(68
)
 
44

Net change in pension and other benefits
18

 
(5
)
Other comprehensive (loss) income before income tax effect
(167
)
 
102

Income tax (benefit) provision related to items of other comprehensive (loss) income
(14
)
 
15

Other comprehensive (loss) income, net of tax
(153
)
 
87

Comprehensive (loss) income
(16
)
 
188

Less: Comprehensive loss attributable to noncontrolling interests, net of tax

 
(1
)
Comprehensive (loss) income attributable to our common shareholder
$
(16
)
 
$
189

See accompanying notes to the condensed consolidated financial statements.

4



Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
 
June 30,
2018
 
March 31,
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
853

 
$
920

Accounts receivable, net


 


— third parties (net of uncollectible accounts of $6 and $7 as of June 30, 2018 and March 31, 2018, respectively)
1,537

 
1,353

— related parties
213

 
242

Inventories
1,723

 
1,560

Prepaid expenses and other current assets
149

 
125

Fair value of derivative instruments
119

 
159

Assets held for sale
5

 
5

Total current assets
4,599

 
4,364

Property, plant and equipment, net
3,020

 
3,110

Goodwill
607

 
607

Intangible assets, net
397

 
410

Investment in and advances to non–consolidated affiliates
810

 
849

Deferred income tax assets
90

 
63

Other long–term assets


 


— third parties
95

 
97

— related parties
3

 
3

Total assets
$
9,621

 
$
9,503

LIABILITIES AND SHAREHOLDER’S EQUITY


 


Current liabilities


 


Current portion of long–term debt
$
89

 
$
121

Short–term borrowings
39

 
49

Accounts payable


 


— third parties
2,255

 
2,051

— related parties
214

 
205

Fair value of derivative instruments
148

 
106

Accrued expenses and other current liabilities
524

 
591

Total current liabilities
3,269

 
3,123

Long–term debt, net of current portion
4,334

 
4,336

Deferred income tax liabilities
125

 
164

Accrued postretirement benefits
815

 
825

Other long–term liabilities
235

 
232

Total liabilities
8,778

 
8,680

Commitments and contingencies


 


Shareholder’s equity


 


Common stock, no par value; unlimited number of shares authorized;
1,000 shares issued and outstanding as of June 30, 2018 and March 31, 2018

 

Additional paid–in capital
1,404

 
1,404

Accumulated deficit
(94
)
 
(283
)
Accumulated other comprehensive loss
(430
)
 
(261
)
Total equity of our common shareholder
880

 
860

Noncontrolling interests
(37
)
 
(37
)
Total equity
843

 
823

Total liabilities and equity
$
9,621

 
$
9,503

See accompanying notes to the condensed consolidated financial statements.

5



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in millions)
 
Three Months Ended June 30,
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
137

 
$
101

Adjustments to determine net cash used in operating activities:

 

Depreciation and amortization
86

 
90

Loss (gain) on unrealized derivatives and other realized derivatives in investing activities, net
24

 
(2
)
Loss on sale of assets
3

 
1

Deferred income taxes
(14
)
 
9

Loss on foreign exchange remeasurement of debt

 
1

Amortization of debt issuance costs and carrying value adjustments
5

 
5

Other, net

 
(1
)
Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures):

 

Accounts receivable
(201
)
 
(99
)
Inventories
(205
)
 
(137
)
Accounts payable
283

 
72

Other current assets
(29
)
 
8

Other current liabilities
(58
)
 
(105
)
Other noncurrent assets

 
(6
)
Other noncurrent liabilities
17

 
15

Net cash provided by (used in) operating activities
48

 
(48
)
INVESTING ACTIVITIES

 

Capital expenditures
(54
)
 
(39
)
Proceeds from sales of assets, third party, net of transaction fees and hedging

 
1

Proceeds from investment in and advances to non-consolidated affiliates, net
6

 
6

(Outflows) proceeds from the settlement of derivative instruments, net
(7
)
 
1

Other
3


3

Net cash used in investing activities
(52
)
 
(28
)
FINANCING ACTIVITIES

 

Principal payments of long-term and short-term borrowings
(34
)
 
(57
)
Revolving credit facilities and other, net
(9
)
 
113

Debt issuance costs

 
(2
)
Net cash (used in) provided by financing activities
(43
)
 
54

Net decrease in cash, cash equivalents and restricted cash
(47
)
 
(22
)
Effect of exchange rate changes on cash
(19
)
 
(7
)
Cash, cash equivalents and restricted cash — beginning of period
932

 
604

Cash, cash equivalents and restricted cash — end of period
$
866

 
$
575


See accompanying notes to the condensed consolidated financial statements.

6



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S (DEFICIT) EQUITY (unaudited)
(in millions, except number of shares)
 
 
(Deficit) Equity of our Common Shareholder
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(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
 

 

 

 
101

 

 

 
101

Currency translation adjustment included in AOCI
 

 

 

 

 
63

 

 
63

Change in fair value of effective portion of cash flow hedges, net of tax provision of $16 million included in AOCI
 

 

 

 

 
28

 

 
28

Change in pension and other benefits, net of tax benefit of $1 million included in AOCI
 

 

 

 

 
(3
)
 
(1
)
 
(4
)
Balance as of June 30, 2017
 
1,000

 
$

 
$
1,404

 
$
(817
)
 
$
(457
)
 
$
(19
)
 
$
111

 
 
Equity of our Common Shareholder
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Loss (AOCI)
 
Non-
controlling Interests
 
Total Equity
 
 
Shares
 
Amount
Balance as of March 31, 2018
 
1,000

 
$

 
$
1,404

 
$
(283
)
 
$
(261
)
 
$
(37
)
 
$
823

Adoption of accounting standards updates
 

 

 

 
52

 
(16
)
 

 
36

Balance as of April 1, 2018
 
1,000

 

 
1,404

 
(231
)
 
(277
)
 
(37
)
 
859

Net income attributable to our common shareholder
 

 

 

 
137

 

 

 
137

Currency translation adjustment included in AOCI
 

 

 

 

 
(117
)
 

 
(117
)
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $19 million included in AOCI
 

 

 

 

 
(49
)
 

 
(49
)
Change in pension and other benefits, net of tax provision of $5 million included in AOCI
 

 

 

 

 
13

 

 
13

Balance as of June 30, 2018
 
1,000

 
$

 
$
1,404

 
$
(94
)
 
$
(430
)
 
$
(37
)
 
$
843


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
Novelis is the leading producer of flat-rolled aluminum products and the world's largest recycler of aluminum. We work alongside our customers to provide innovative solutions to the beverage can, automotive and high-end specialty markets. Operating an integrated network of technically advanced rolling and recycling facilities across North America, South America, Europe and Asia, Novelis leverages its global manufacturing and recycling footprint to deliver consistent, high-quality products around the world. As of June 30, 2018, 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, 2018 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, 2018 filed with the United States Securities and Exchange Commission (SEC) on May 8, 2018. 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 attributable to our common shareholder" includes our share of net income 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 income (loss) of non-consolidated affiliates."
Use of Estimates and Assumptions
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. 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 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 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.
Reclassification
Certain prior period amounts have been adjusted as a result of the adoption of new accounting standards.
    

8

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






Recently Adopted Accounting Standards
Effective for the first quarter of fiscal 2019, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all the related amendments which supersedes the standard in former ASC 605, Revenue Recognition. The new standard 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. We adopted Topic 606 using the modified retrospective transition approach. We determined that our existing revenue recognition practices were in compliance with Topic 606. Accordingly, there was no cumulative effect adjustment to the opening balance of retained earnings in the consolidated balance sheet in the first quarter of 2018, as the adoption did not result in a change to our timing of revenue recognition. See Note 2 — Revenue from Contracts with Customers for additional disclosures related to the adoption of this standard. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
Effective for the first quarter of fiscal 2019, we adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) to retained earnings due to the U.S. federal corporate income tax rate change in the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”). This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted.  Additionally, the ASU requires new disclosures by all companies. Other than those effects related to the Act, the company releases the income tax effect from accumulated other comprehensive income (loss) ("AOCI") in the period when the underlying transaction impacts earnings. We early adopted this accounting standard in the first quarter of fiscal 2019 and reclassified $16 million into retained earnings of our common shareholder from AOCI. This reclassification consists of deferred taxes originally recorded in AOCI at rates that exceed the newly enacted U.S. federal corporate tax rate. There was no impact to net income.
Effective for the first quarter of fiscal 2019, we adopted 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 standard 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 standard, 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 adoption of this standard did not have an impact on the condensed consolidated financial statements. This standard will need to be considered if Novelis initiates a modification that is determined to be a substantive change to an outstanding stock-based award.
Effective for the first quarter of fiscal 2019, we adopted 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 standard requires entities to (1) disaggregate the current service cost component from the other components of net benefit cost (the “other components”) and present the other components within non-operating income and (2) present the other components elsewhere in the results of operations and outside of income from operations if that subtotal is presented. In addition, the new standard requires entities to disclose the results of operations line items that contain the other components if they are not presented on appropriately described separate lines. We adopted this standard on a retrospective basis and utilized the practical expedient. As a result, we reclassified the net periodic benefit cost, exclusive of service cost, to other expense (income) for the comparative periods. For the three months ended June 30, 2017, we reclassified, with no impact to net income, net periodic benefit cost totaling $10 million ($5 million from cost of goods sold (exclusive of depreciation and amortization) and $5 million from selling, general and administrative ("SG&A") expenses).

9

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






Effective for the first quarter of fiscal 2019, we adopted 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 standard 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 adoption of this standard did not have an impact on the condensed consolidated financial statements.
Effective for the first quarter of fiscal 2019, we adopted 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. In addition, the amendments provide more consistency in applying the standard, reduce the costs of application, and make the definition of a business more operable. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset group of similar assets, the assets acquired (or disposed of) are not considered a business. There was no impact upon adoption.
Effective for the first quarter of fiscal 2019, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230) - Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires 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. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statement of cash flows. Transfers between restricted cash and cash and cash equivalents will no longer be presented in the operating section of the consolidated Statement of Cash Flows. We adopted this standard on a retrospective basis and will disclose the nature of the restrictions for material balances of restricted cash.

Amounts included in restricted cash represent those required to be set aside for employee benefits. The following table reconciles cash and cash equivalents as reported on the condensed consolidated balance sheet to cash, cash equivalents and restricted cash as reported on the condensed consolidated statement of cash flows. Prior period amounts have been adjusted to conform to the current period presentation.

 
June 30, 2018
 
March 31, 2018
Cash and cash equivalents
$
853

 
$
920

Restricted cash (included in prepaid expenses and other current assets)
1

 

Restricted cash (included in other long-term assets)
12

 
12

Total cash, cash equivalents, and restricted cash
$
866

 
$
932

Effective for the first quarter of fiscal 2019, we adopted ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The new standard eliminates the exception for all intra-entity sales of assets other than inventory. It requires the tax effect of intra-entity sales of assets other than inventory to be recognized currently which will impact Novelis’ effective tax rate.  The changes require the current and deferred income tax consequences of the intra-entity transfer to be recorded when the transaction occurs. We have adopted this standard on a modified retrospective basis and the cumulative effect of the change on retained earnings is $36 million with a corresponding impact to deferred tax balances.
Effective for the first quarter of fiscal 2019, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The new standard applies to all entities that are required to present a statement of cash flows under Topic 230 and addresses eight specific cash flow items to provide clarification and reduce the diversity in presentation of these items. We adopted this standard on a retrospective basis and we reclassified the cash received related to beneficial interest in certain factored accounts receivables from operating activities to investing activities.  For the three months ended June 30, 2017, we reclassified $3 million from accounts receivable within operating activities into the line item "Other" within investing activities on the condensed consolidated statement of cash flows.


10

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






Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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. These changes become effective for Novelis on April 1, 2020. This standard will need to be considered each time Novelis performs an assessment of goodwill for impairment under the quantitative test. We are currently evaluating the impact of this standard and we do not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective, will require organizations that lease assets to recognize assets and liabilities for the rights and obligations created by the leases on 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 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. These changes become effective for Novelis on April 1, 2019 for the annual reporting period (including interim periods therein). Novelis has established a cross-functional project team to lead the implementation effort. The Company is currently evaluating the impact of the new standard.

11

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







2.    REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company's contracts with customers are comprised of purchase orders along with standard terms and conditions. These contracts with customers typically consist of the manufacture of products which represent single performance obligations that are satisfied upon transfer of control of the product to the customer at a point in time. Transfer of control is assessed based on alternative use of the products we produce and our enforceable right to payment for performance to date under the contract terms. Transfer of control and revenue recognition generally occur upon shipment or delivery of the product, which is when title, ownership and risk of loss pass to the customer and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel). The length of payment terms can vary per contract but none extend beyond one year. Revenue is recognized net of any volume rebates or other incentives.
We disaggregate revenue from contracts with customers on a geographic basis based on our segment view. This disaggregation also achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. We manage our activities on the basis of geographical regions and are organized under four operating segments; North America, South America, Asia and Europe. See Note 16 — Segment, Major Customer and Major Supplier Information for further information about our segment revenue.






12

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






3.    INVENTORIES
"Inventories" consist of the following (in millions). 
 
June 30,
2018
 
March 31,
2018
Finished goods
$
439

 
$
416

Work in process
809

 
730

Raw materials
311

 
248

Supplies
164

 
166

Inventories
$
1,723

 
$
1,560



13

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






4.    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. We have the ability to make decisions regarding Logan’s production operations and the obligation to absorb Logan's expected losses. These facts qualify us as Logan’s primary beneficiary and this entity is consolidated for all periods presented.

Other than the contractually required reimbursements, we do not provide other material support to Logan. Logan's creditors do not have recourse to our general credit. 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.

The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our consolidated balance sheets (in millions).
 
June 30,
2018
 
March 31,
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
2

 
$

Accounts receivable
20

 
39

Inventories
68

 
67

Prepaid expenses and other current assets
1

 
1

Total current assets
91

 
107

Property, plant and equipment, net
25

 
27

Goodwill
12

 
12

Deferred income taxes
67

 
67

Other long-term assets
30

 
26

Total assets
$
225

 
$
239

Liabilities
 
 
 
Current liabilities
 
 
 
Accounts payable
$
31

 
$
43

Accrued expenses and other current liabilities
14

 
22

Total current liabilities
45

 
65

Accrued postretirement benefits
249

 
245

Other long-term liabilities
1

 
1

Total liabilities
$
295

 
$
311

 

14

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






5.
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.

Alunorf is a joint venture between Novelis Deutschland GmbH (Novelis), a subsidiary of Novelis Inc., and Hydro Aluminum Deutschland GmbH (Hydro). Each of the parties to the joint venture hold a 50% interest in the equity, profits and losses, shareholder voting, management control and rights to use the production capacity of the facility. Alunorf takes aluminum from Novelis and Hydro, tolls the aluminum and returns the aluminum to Novelis and/or Hydro. We do not consolidate Alunorf and account for it as an equity method investment.

UAL is a joint venture between Novelis Korea Ltd. (Novelis Korea), a subsidiary of Novelis Inc., and Kobe Steel Ltd. (Kobe), an unrelated party. UAL is also a 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 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. The entity is controlled by the Board of Directors and we share power jointly with Kobe. 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 such, we determined Novelis is not the primary beneficiary.

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 June 30,
 
2018
 
2017
Net sales
$
318

 
$
117

Costs, expenses
315

 
116

Provision for taxes on income
1

 

Net income
$
2

 
$
1

Purchases of tolling services from Alunorf (Novelis' share)
$
64

 
$
58


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.
 
June 30,
2018
 
March 31,
2018
Accounts receivable-related parties
$
213

 
$
242

Other long-term assets-related parties
$
3

 
$
3

Accounts payable-related parties
$
214

 
$
205


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 June 30, 2018 and March 31, 2018.

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 June 30, 2018, 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 June 30, 2018, this guarantee totaled $2 million.

15

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






Transactions with Hindalco
We occasionally have related party transactions with our indirect parent company, Hindalco. During the three months ended June 30, 2018 and 2017, “Net sales” were less than $1 million, respectively, between Novelis and Hindalco. As of June 30, 2018 and March 31, 2018, there were less than $1 million in "Accounts receivable, net - related parties", respectively, outstanding related to transactions with Hindalco. During the three months ended June 30, 2018 and 2017, Novelis did not purchase any raw materials from Hindalco.


16

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






6.    DEBT
Debt consisted of the following (in millions).
 
June 30, 2018
 
March 31, 2018
 
Interest
Rates (A)
 
Principal
 
Unamortized
Carrying  Value
Adjustments (B)
 
Carrying
Value
 
Principal
 
Unamortized
Carrying  Value
Adjustments (B)
 
Carrying
Value
Third party debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
4.23
%
 
$
39

 
$

 
$
39

 
$
49

 
$

 
$
49

Novelis Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate Term Loan Facility, due June 2022
4.18
%
 
1,773

 
(40
)
 
1,733

 
1,778

 
(43
)
 
1,735

Novelis Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
5.875% Senior Notes, due September 2026
5.875
%
 
1,500

 
(20
)
 
1,480

 
1,500

 
(21
)
 
1,479

6.25% Senior Notes, due August 2024
6.25
%
 
1,150

 
(16
)
 
1,134

 
1,150

 
(17
)
 
1,133

Novelis Korea Limited
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, due through September 2020 (KRW 72 billion)
2.74
%
 
64

 

 
64

 
95

 

 
95

Novelis Switzerland S.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital lease obligations, due through December 2019 (Swiss francs (CHF) 10 million)
7.50
%
 
10

 

 
10

 
12

 

 
12

Novelis do Brasil Ltda.
 
 
 
 
 
 
 
 
 
 
 
 
 
BNDES loans, due through April 2021 (BRL 4 million)
6.12
%
 
1

 

 
1

 
2

 

 
2

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Lease Obligations and Other debt, due through December 2020
5.74
%
 
1

 

 
1

 
1

 

 
1

Total debt
 
 
4,538

 
(76
)
 
4,462

 
4,587

 
(81
)
 
4,506

Less: Short term borrowings
 
 
(39
)
 

 
(39
)
 
(49
)
 

 
(49
)
Less: Current portion of long term debt
 
 
(89
)
 

 
(89
)
 
(121
)
 

 
(121
)
Long-term debt, net of current portion
 
 
$
4,410

 
$
(76
)
 
$
4,334

 
$
4,417

 
$
(81
)
 
$
4,336

_________________________
(A)
Interest rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of June 30, 2018, 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.






17

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 June 30, 2018 (for our debt denominated in foreign currencies) are as follows (in millions).
As of June 30, 2018
Amount
Short-term borrowings and current portion of long-term debt due within one year
$
128

2 years
21

3 years
20

4 years
1,719

5 years

Thereafter
2,650

Total
$
4,538

Senior Secured Credit Facilities
Term Loan Facility

In September 2017, we amended our Term Loan Credit Agreement (the "Term Loan Amendment"). The facility (Term Loan Facility) consists of a $1.8 billion five-year secured term loan. As of June 30, 2018, $18 million of the Term Loan Facility is due within one year. Refer to our Form 10-K for the year-ended March 31, 2018 for details on the issuance of the term loan facility and its respective covenants. As of June 30, 2018, we were in compliance with the covenants for our term loan.

ABL Revolver

In September 2017, we amended and extended the ABL Revolver. The facility (ABL Revolver) consists of a $1 billion asset based loan. As of June 30, 2018, $8 million of the ABL Revolver was utilized for letters of credit, and we had $945 million in remaining availability under the ABL Revolver. Refer to our Form 10-K for the year-ended March 31, 2018 for details on the ABL credit facility and its respective covenants. As of June 30, 2018, we were in compliance with the covenants for our ABL revolver.     
    
Short-Term Borrowings
As of June 30, 2018, our short-term borrowings were $39 million consisting of $38 million in Novelis China loans (CNY 249 million), and $1 million in other short-term borrowings.
As of June 30, 2018, we had availability under our Novelis Korea and Novelis China revolving credit facilities and credit lines of $108 million (KRW 120 billion) and $6 million (CNY 41 million), respectively.

Korean Bank Loans
All of the Korean Bank 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 1.21%.
Senior Notes
Refer to our Form 10-K for the year-ended March 31, 2018 for details on the issuances of the senior notes and their respective covenants. As of June 30, 2018, we were in compliance with the covenants for our Senior Notes.
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 10 — Financial Instruments and Commodity Contracts for further information about these interest rate swaps.


18

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






7.    SHARE-BASED COMPENSATION
The Company's board of directors has authorized long term incentive plans (LTIPs), under which Hindalco stock appreciation rights (Hindalco 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. Fiscal 2012 through fiscal 2016 SARs expire seven years from the original date, while fiscal 2017 and onwards SARs expire seven years from their original grant date. The performance criterion for vesting the Hindalco 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 EBIDTA. The RSUs are based on Hindalco's stock price. The RSUs vest 33% per year over three years, subject to continued employment with the Company, but are not subject to performance criteria.
During the three months ended June 30, 2018, we granted 2,240,125 RSUs, and 2,359,595 Hindalco SARs. Total compensation expense related to these plans for the respective periods was $7 million and $5 million for the three months ended June 30, 2018 and 2017, 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 2020, 2021 and 2022 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 June 30, 2018, the outstanding liability related to share-based compensation was $15 million.    
The cash payments made to settle SAR liabilities were $3 million in both the three months ended June 30, 2018 and 2017 periods. Total cash payments made to settle Hindalco RSUs were $14 million and $8 million in the three months ended June 30, 2018 and 2017, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $7 million, which is expected to be recognized over a weighted average period of 1.4 years. Unrecognized compensation expense related to the RSUs was $11 million, which will be recognized over the remaining weighted average vesting period of 1.6 years.






19

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






8.    POSTRETIREMENT BENEFIT PLANS
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 June 30,
 
Three Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
10

 
$
11

 
$
2

 
$
2

Interest cost
15

 
15

 
2

 
1

Expected return on assets
(16
)
 
(16
)
 

 

Amortization — losses, net
8

 
9

 
1

 
1

Net periodic benefit cost (A)
$
17

 
$
19

 
$
5

 
$
4

_________________________
(A) Service cost is included within Cost of goods sold (exclusive of depreciation and amortization) and Selling, general and administrative expenses and all other cost components are recorded within Other Expense (Income).

The average expected long-term rate of return on plan assets is 5.2% in fiscal 2019.
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 (in millions) to all plans.
 
Three Months Ended June 30,
 
2018
 
2017
Funded pension plans
$
2

 
$
3

Unfunded pension plans
3

 
3

Savings and defined contribution pension plans
9

 
8

Total contributions
$
14

 
$
14

During the remainder of fiscal 2019, we expect to contribute an additional $24 million to our funded pension plans, $11 million to our unfunded pension plans and $19 million to our savings and defined contribution pension plans.


20

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






9.    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 June 30,
 
2018
 
2017
Gain on remeasurement of monetary assets and liabilities, net
$
(6
)
 
$
(29
)
Loss recognized on balance sheet remeasurement currency exchange contracts, net
6

 
30

Currency losses, net
$

 
$
1

The following currency gains (losses) are included in “Accumulated other comprehensive loss", net of tax and “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).
 
Three Months Ended June 30, 2018
 
Year Ended March 31, 2018
 
Cumulative currency translation adjustment — beginning of period
$
(65
)
 
$
(256
)
Effect of changes in exchange rates
(117
)
 
191

Cumulative currency translation adjustment — end of period
$
(182
)
 
$
(65
)


21

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






10.    FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The following tables summarize the gross fair values of our financial instruments and commodity contracts as of June 30, 2018 and March 31, 2018 (in millions).
 
June 30, 2018
 
Assets
 
Liabilities
 
Net Fair Value

 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent (A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Metal contracts
$
42

 
$

 
$
(8
)
 
$

 
$
34

Currency exchange contracts
1

 

 
(29
)
 
(4
)
 
(32
)
Energy contracts

 

 
(1
)
 
(7
)
 
(8
)
Total derivatives designated as hedging instruments
43

 

 
(38
)
 
(11
)
 
(6
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Metal contracts
55

 

 
(54
)
 

 
1

Currency exchange contracts
19

 
2

 
(56
)
 
(1
)
 
(36
)
Energy contracts
2

 

 

 

 
2

Total derivatives not designated as hedging instruments
76

 
2

 
(110
)
 
(1
)
 
(33
)
Total derivative fair value
$
119

 
$
2

 
$
(148
)
 
$
(12
)
 
$
(39
)
 

 
March 31, 2018
 
Assets
 
Liabilities
 
Net Fair Value

 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent(A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Metal contracts
$
63

 
$
1

 
$
(1
)
 
$

 
$
63

Currency exchange contracts
5

 

 
(7
)
 

 
(2
)
Energy contracts

 
1

 
(2
)
 
(7
)
 
(8
)
Total derivatives designated as hedging instruments
68

 
2

 
(10
)
 
(7
)
 
53

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Metal contracts
75

 

 
(64
)
 

 
11

Currency exchange contracts
15

 

 
(32
)
 
(1
)
 
(18
)
Energy contracts
1

 

 

 

 
1

Total derivatives not designated as hedging instruments
91

 

 
(96
)
 
(1
)
 
(6
)
Total derivative fair value
$
159

 
$
2

 
$
(106
)
 
$
(8
)
 
$
47

 
_________________________
(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.

22

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






Metal
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 June 30, 2018 and March 31, 2018.

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 June 30, 2018 and March 31, 2018.
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.
In the first quarter of fiscal year 2019, we entered into LME copper forward contracts. As of June 30, 2018, we had contracts with a notional amount of 300 MT and the fair value was a liability of less than $1 million. These contracts are undesignated with an average duration of less than 1 year.
The following table summarizes our notional amounts (in kt).
 
June 30,
2018
 
March 31,
2018
Hedge type
 
 
 
Purchase (sale)
 
 
 
Cash flow sales
(470
)
 
(423
)
Not designated
(74
)
 
(74
)
Total, net
(544
)
 
(497
)
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 $583 million and $499 million in outstanding foreign currency forwards designated as cash flow hedges as of June 30, 2018 and March 31, 2018, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to our net investment in foreign subsidiaries. We did not have any outstanding foreign currency forwards designated as net investment hedges as of June 30, 2018 and March 31, 2018.

23

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






As of June 30, 2018 and March 31, 2018, we had outstanding foreign currency exchange contracts with a total notional amount of $1,112 million and $1,024 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 second quarter of fiscal 2019 and offset the remeasurement impact.
Energy
We own an interest in an electricity swap contract to hedge our exposure to fluctuating electricity prices. As of June 30, 2018 and March 31, 2018, there was 1 million of notional megawatt hours outstanding, and the fair value of the swap was a liability of $6 million and $7 million, respectively. The electricity swap was designated as a cash flow hedge in the first quarter of fiscal year 2017.
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 June 30, 2018, and the fair value was a liability of $2 million. There was a notional of 20 million MMBTU forward contracts designated as cash flow hedges as of March 31, 2018 and the fair value was a liability of $1 million. The average duration of designated contracts is less than three years. As of June 30, 2018 and March 31, 2018, we had notionals of less than 1 million MMBTU forward contracts that were not designated as hedges. The fair value for the forward contracts not designated as hedges as of June 30, 2018 was an asset of less than $1 million, and as of March 31, 2018 was a liability of less than $1 million. 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 June 30, 2018. As of June 30, 2018 and March 31, 2018, we had 4 million and 5 million gallons of diesel fuel forward purchase contracts outstanding. The fair value as of June 30, 2018 and March 31, 2018 was an asset of $2 million. The average duration of undesignated contracts is less than two years in length.
Interest Rate
As of June 30, 2018, we had no outstanding swaps, as all swaps expired concurrent with the maturity of the related loans. As of March 31, 2018, $28 million (KRW 30 billion) were designated as cash flow hedges.
















24

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







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 (income), net” (in millions). Gains (losses) recognized in other line items in the condensed consolidated statement of operations are separately disclosed within this footnote.  
 
Three Months Ended June 30,
 
2018
 
2017
Derivative instruments not designated as hedges
 
 
 
Metal contracts
$
(16
)
 
$
14

Currency exchange contracts
(10
)
 
(38
)
Energy contracts (A)
2

 
1

Loss recognized in "Other expense (income), net"
(24
)
 
(23
)
Derivative instruments designated as hedges
 
 
 
Gain recognized in "Other expense (income), net" (B)

 
5

Total loss recognized in "Other expense (income), net"
$
(24
)
 
$
(18
)
Balance sheet remeasurement currency exchange contract losses
$
(6
)
 
$
(30
)
Realized losses, net
(14
)
 
(4
)
Unrealized gains on other derivative instruments, net
(4
)
 
16

Total loss recognized in "Other expense (income), net"
$
(24
)
 
$
(18
)
 _________________________
(A)
Includes amounts related to diesel 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.
    
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 $1 million of gains from AOCI to earnings, before taxes.
 
 
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain (Loss)
Recognized in “Other  Expense, net” 
(Ineffective and
Excluded Portion)
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
Cash flow hedging derivatives
 
2018
 
2017
 
2018
 
2017
Metal contracts
 
$
(65
)
 
$
29

 
$

 
$
5

Currency exchange contracts
 
(35
)
 
(11
)
 

 

Energy contracts
 

 
(2
)
 

 

Total cash flow hedging derivatives
 
$
(100
)
 
$
16

 
$

 
$
5


25

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






Gain (Loss) Reclassification
 
 
Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Three Months Ended June 30,
 
Location of Gain (Loss)
Reclassified from AOCI into
Earnings
Cash flow hedging derivatives
 
2018
 
2017
 
 
Energy contracts (A)
 
$
(1
)
 
$
(1
)
 
Cost of goods sold (B)
Metal contracts
 

 
(32
)
 
Cost of goods sold (B)
Metal contracts
 
(27
)
 

 
Net sales
Currency exchange contracts
 
(2
)
 
3

 
Cost of goods sold (B)
Currency exchange contracts
 
(1
)
 
2

 
Net sales
Total
 
$
(31
)
 
$
(28
)
 
Loss before taxes
 
 
6

 
10

 
Income tax benefit
 
 
$
(25
)
 
$
(18
)
 
Net loss
_________________________
(A)
Includes amounts related to electricity and natural gas swaps.
(B)
"Cost of goods sold" is exclusive of depreciation and amortization.


The following table summarizes the location and amount of gain (loss) that was reclassified from accumulated other comprehensive (loss) income into earnings and the amount excluded from the assessment of effectiveness for the three months ended June 30, 2018.
 
Net Sales
 
Cost of Goods Sold
 
Selling, General and Administrative Expenses
 
Depreciation and Amortization
 
Interest Expense
 
Other Expense (Income), Net
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Metal commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from AOCI into income
$
(27
)
 

 

 

 

 

Energy commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from AOCI into income

 
$
(1
)
 

 

 

 

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from AOCI into income
$
(1
)
 
$
(2
)
 

 

 

 



26

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






11.    ACCUMULATED OTHER COMPREHENSIVE 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 March 31, 2018
 
$
(65
)
 
$
31

 
$
(227
)
 
$
(261
)
Amounts reclassified from AOCI, net - due to adoption of accounting standard updates
 

 
(3
)
 
(13
)
 
(16
)
Balance as of April 1, 2018
 
(65
)
 
28

 
(240
)
 
(277
)
Other comprehensive (loss) income before reclassifications
 
(117
)
 
(74
)
 
6

 
(185
)
Amounts reclassified from AOCI, net
 

 
25

 
7

 
32

Net current-period other comprehensive (loss) income
 
(117
)
 
(49
)
 
13

 
(153
)
Balance as of June 30, 2018
 
$
(182
)
 
$
(21
)
 
$
(227
)
 
$
(430
)
 
 
Currency Translation
 
(A) Cash Flow Hedges
 
(B)
Postretirement Benefit Plans
 
Total
Balance as of March 31, 2017
 
$
(256
)
 
$
(46
)
 
$
(243
)
 
$
(545
)
Other comprehensive income (loss) before reclassifications
 
63

 
10

 
(10
)
 
63

Amounts reclassified from AOCI, net
 

 
18

 
7

 
25

Net current-period other comprehensive income (loss)
 
63

 
28

 
(3
)
 
88

Balance as of June 30, 2017
 
$
(193
)
 
$
(18
)
 
$
(246
)
 
$
(457
)
 _________________________
(A)
For additional information on our cash flow hedges, see Note 10 — Financial Instruments and Commodity Contracts.
(B)
For additional information on our postretirement benefit plans, see Note 8 — Postretirement Benefit Plans.


    




27

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






12.    FAIR VALUE MEASUREMENTS
We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair value of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities we have the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.
The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.
Derivative Contracts
For certain derivative contracts with fair values based upon trades in liquid markets, such as aluminum, foreign exchange, natural gas and diesel fuel forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
The majority of our derivative contracts are valued using industry-standard models with observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency contracts, aluminum and copper forward contracts, natural gas and diesel fuel forward contracts.
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. Our electricity swap, which is our only Level 3 derivative contract, represents an agreement to buy electricity at a fixed price at our Oswego, New York facility. Forward prices are not observable for this market, so we must make certain assumptions based on available information we believe to be relevant to market participants. We use observable forward prices for a geographically nearby market and adjust for 1) historical spreads between the cash prices of the two markets, and 2) historical spreads between retail and wholesale prices.
For the electricity swap, the average forward price at June 30, 2018, estimated using the method described above, was $41 per megawatt hour, which represented a $3 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $39 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by $1 million.
For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk). We regularly monitor these factors along with significant market inputs and assumptions used in our fair value measurements and evaluate the level of the valuation input according to the fair value hierarchy.  This may result in a transfer between levels in the hierarchy from period to period. As of June 30, 2018 and March 31, 2018, we did not have any Level 1 derivative contracts. No amounts were transferred between levels in the fair value hierarchy.
All of the Company's derivative instruments are carried at fair value in the statements of financial position prior to considering master netting agreements.



28

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






The following table presents our derivative assets and liabilities which were measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as of June 30, 2018 and March 31, 2018 (in millions). The table below also discloses the net fair value of the derivative instruments after considering the impact of master netting agreements.
 
June 30, 2018
 
March 31, 2018
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Level 2 instruments
 
 
 
 
 
 
 
Metal contracts
$
97

 
$
(62
)
 
$
139

 
$
(65
)
Currency exchange contracts
22

 
(90
)
 
20

 
(40
)
Energy contracts
2

 
(2
)
 
2

 
(2
)
Total level 2 instruments
121

 
(154
)
 
161

 
(107
)
Level 3 instruments
 
 
 
 
 
 
 
Energy contracts

 
(6
)
 

 
(7
)
Total level 3 instruments

 
(6
)
 

 
(7
)
Total gross
$
121

 
$
(160
)
 
$
161

 
$
(114
)
Netting adjustment (A)
$
(53
)
 
$
53

 
$
(57
)
 
$
57

Total net
$
68

 
$
(107
)
 
$
104

 
$
(57
)
 _________________________
(A)
Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions with the same counterparties.
We recognized unrealized gains of $1 million for the three months ended June 30, 2018 related to Level 3 financial instruments that were still held as of June 30, 2018. These unrealized gains were included in “Other expense (income), net.”
The following table presents a reconciliation of fair value activity for Level 3 derivative contracts (in millions).
 
Level 3  –
Derivative Instruments (A)
Balance as of March 31, 2018
$
(7
)
Unrealized/realized gain included in earnings (B)
1

Unrealized gain included in AOCI (C)
1

Settlements (B)
(1
)
Balance as of June 30, 2018
$
(6
)
_________________________
(A)
Represents net derivative liabilities.
(B)
Included in “Other expense (income), net.”
(C)
Included in "Change in fair value of effective portion of cash flow hedges, net"

29

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






Financial Instruments Not Recorded at Fair Value
The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term receivables and long-term debt using Level 2 inputs. Valuations are based on either market and/or broker ask prices when available or on a standard credit adjusted discounted cash flow model using market observable inputs.
 
June 30, 2018
 
March 31, 2018
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets
 
 
 
 
 
 
 
Long-term receivables from related parties
$
3

 
$
3

 
$
3

 
$
3

Liabilities
 
 
 
 
 
 
 
Total debt — third parties (excluding short-term borrowings)
$
4,423

 
$
4,468

 
$
4,457

 
$
4,569


30

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






13.    OTHER EXPENSE (INCOME), NET
Other expense (income), net” is comprised of the following (in millions).
 
Three Months Ended June 30,
 
2018
 
2017
Currency losses, net (A)
$

 
$
1

Unrealized losses (gains) on change in fair value of derivative instruments, net (B)
4

 
(16
)
Realized losses on change in fair value of derivative instruments, net (B)
14

 
4

Loss on sale of assets, net
3

 
1

Loss on Brazilian tax litigation, net (C)

 
1

Interest income
(3
)
 
(2
)
Non-operating net periodic benefit cost (D)
8

 
10

Other, net
3

 
(1
)
Other expense (income), net
$
29

 
$
(2
)
 _________________________
(A)
See Note 9 — Currency Losses (Gains) for further details.
(B)
See Note 10 — Financial Instruments and Commodity Contracts for further details.
(C)
See Note 15 — Commitments and Contingencies – Brazil Tax and Legal Matters for further details.
(D)
Represents non-operating net periodic benefit cost, exclusive of service cost for the Company's pension and other Post-retirement plans. For further details, refer to Note 1 — Business and Summary of Significant Accounting Policies.






 

31

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






14.    INCOME TAXES
A reconciliation of the Canadian statutory tax rate to our effective tax rate was as follows (in millions, except percentages).
 
Three Months Ended June 30,
 
2018
 
2017
Pre-tax income before equity in net loss of non-consolidated affiliates and noncontrolling interests
$
189

 
$
144

Canadian statutory tax rate
25
%
 
25
%
Provision at the Canadian statutory rate
$
47

 
$
36

Increase (decrease) for taxes on income (loss) resulting from:
 
 
 
Exchange translation items
2

 
3

Exchange remeasurement of deferred income taxes
(8
)
 
(3
)
Change in valuation allowances
4

 
2

Tax credits
(5
)
 
(3
)
Tax rate differences on foreign earnings
8

 
6

Uncertain tax positions
2

 
2

Non-deductible expenses and other
3

 

Income tax provision
$
53

 
$
43

Effective tax rate
28
%
 
30
%
Our effective tax rate differs from the Canadian statutory rate due primarily to the following factors: (1) pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, which are shown above as exchange translation items; (2) the remeasurement of deferred income taxes due to foreign currency changes, which is shown above as exchange remeasurement of deferred income taxes; (3) changes in valuation allowances; (4) differences between Canadian and foreign statutory tax rates applied to earnings in foreign jurisdictions and foreign withholding tax expense shown above as tax rate differences on foreign earnings.
As of June 30, 2018, we had a net deferred tax liability of $35 million. This amount included gross deferred tax assets of approximately $1.2 billion and a valuation allowance of $733 million. It is reasonably possible that our estimates of future taxable income may change within the next 12 months, resulting in a change to the valuation allowance in one or more jurisdictions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the "Act"). The Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and (2) bonus depreciation that allows for full expensing of qualified property. The Company recorded a $19 million discrete benefit for the remeasurement of deferred tax assets and liabilities to reflect the anticipated rate at which the deferred items was realized during the fiscal year ended March 31, 2018. The amount is provisional and is subject to change as the Company obtains information necessary to complete the calculations. The Company continues to review the technical interpretations of the Tax Act and other applicable laws, monitor legislative changes, and review U.S. state guidance as it is issued. No additional impact was recorded in the period ended June 30, 2018. The Company expects to complete the analysis of the provisional items within the one-year measurement period during fiscal year ending March 31, 2019. The following information is needed to complete the accounting for the remeasurement of deferred tax assets and liabilities:

Determination of state conformity
Actual reversals of temporary differences based on tax return filing positions

Based on an initial assessment of the Act, the Company believes that the most significant impact on the Company’s consolidated financial statements is the remeasurement of deferred tax assets and liabilities. Other provisions of the Act are not expected to have a material impact on the fiscal year 2019 consolidated financial statements.


32

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






Tax authorities continue to examine certain of our tax filings for fiscal years 2005 through 2017. As a result of audit settlements, judicial decisions, the filing of amended tax returns or the expiration of statutes of limitations, our reserves for unrecognized tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months by an amount up to approximately $25 million.

33

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






15.    COMMITMENTS AND CONTINGENCIES
We are party to, and may in the future be involved in, or subject to, disputes, claims and proceedings arising in the ordinary course of our business, including some we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. For certain matters in which the Company is involved for which a loss is reasonably possible, we are unable to estimate a loss.  For certain other matters for which a loss is reasonably possible and the loss is estimable, we have estimated the aggregated range of loss as $0 to $75 million.  This estimated aggregate range of reasonably possible losses is based upon currently available information.  The Company’s estimates involve significant judgment, and therefore, the estimate will change from time to time and actual losses may differ from the current estimate. We review the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The evaluation model includes all asserted and unasserted claims that can be reasonably identified, including claims relating to our responsibility for compliance with environmental, health and safety laws and regulations in the jurisdictions in which we operate or formerly operated. The estimated costs in respect of such reported liabilities are not offset by amounts related to insurance or indemnification arrangements unless otherwise noted.
Environmental Matters
We have established liabilities based on our estimates for currently anticipated costs associated with environmental matters. We estimate that the costs related to our environmental liabilities as of June 30, 2018 and March 31, 2018 were approximately $12 million and $14 million, respectively. Of the total $12 million, $8 million was associated with restructuring actions and the remaining $4 million is associated with undiscounted environmental clean-up costs. The short-term and long-term settlement liabilities are included in "Accrued expenses and other current liabilities" and "Other long-term liabilities", respectively, in our accompanying condensed consolidated balance sheets.

Brazilian Tax Litigation

Under a federal tax dispute settlement program established by the Brazilian government, we have settled several disputes with Brazil’s tax authorities regarding various forms of manufacturing taxes and social security contributions. The short-term and long-term settlement liabilities are included in "Accrued expenses and other current liabilities" and "Other long-term liabilities", respectively, in our accompanying condensed consolidated balance sheets. Total settlement liabilities were $48 million and $58 million for the periods ended June 30, 2018 and March 31, 2018, respectively.

In addition to the disputes we have settled under the federal tax dispute settlement program, we are involved in several other unresolved tax and other legal claims in Brazil. Total liabilities for other disputes and claims were $23 million and $29 million for the periods ended June 30, 2018 and March 31, 2018, respectively. The related liabilities are included in "Other long-term liabilities" in our accompanying condensed consolidated balance sheets. Additionally, we have included in the range of reasonably possible losses disclosed above, any unresolved tax disputes or other contingencies for which a loss is reasonably possible and estimable.
For additional information, please refer to our Annual Report on Form 10-K for the year ended March 31, 2018.



34

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






16.    SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION
Segment Information
Due in part to the regional nature of supply and demand of aluminum rolled products and to best serve our customers, we manage our activities based on geographical areas and are organized under four operating segments: North America, Europe, Asia and South America. All of our segments manufacture aluminum sheet and light gauge products.
The following is a description of our operating segments:
North America. Headquartered in Atlanta, Georgia, this segment operates eight plants, including two fully dedicated recycling facilities and one facility with recycling operations, in two countries.
Europe. Headquartered in Küsnacht, Switzerland, this segment operates ten plants, including two fully dedicated recycling facilities and two facilities with recycling operations, in four countries.
Asia. Headquartered in Seoul, South Korea, this segment operates four plants, including three facilities with recycling operations, in three countries.
South America. Headquartered in Sao Paulo, Brazil, this segment comprises power generation operations, and operates two plants, including a facility with recycling operations, in Brazil.
Net sales and expenses are measured in accordance with the policies and procedures described in Note 1 — Business and Summary of Significant Accounting Policies shown in our Annual Report on Form 10-K for the year ended March 31, 2018.
We measure the profitability and financial performance of our operating segments based on “Segment income.” “Segment income” provides a measure of our underlying segment results that is in line with our approach to risk management. We define “Segment income” as earnings before (a) “depreciation and amortization”; (b) “interest expense and amortization of debt issuance costs”; (c) “interest income”; (d) unrealized gains (losses) on change in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests' share; (h) adjustments to reconcile our proportional share of “Segment income” from non-consolidated affiliates to income as determined on the equity method of accounting; (i) “restructuring and impairment, net”; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss); (o) cumulative effect of accounting change, net of tax; and (p) metal price lag.
The tables below show selected segment financial information (in millions). The “Eliminations and Other” column in the table below includes eliminations and functions that are managed directly from our corporate office that have not been allocated to our operating segments, as well as the adjustments for proportional consolidation, and eliminations of intersegment “Net sales.” The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, we must adjust proportional consolidation of each line item. The “Eliminations and Other” in “Net sales – third party” includes the net sales attributable to our joint venture party, Tri-Arrows, for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP, but we manage our Logan affiliate on a proportionately consolidated basis. See Note 4 — Consolidation for further information about this affiliate. Additionally, we eliminate intersegment sales and intersegment income for reporting on a consolidated basis.






35

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






Selected Segment Financial Information
June 30, 2018
North
America
 
Europe
 
Asia
 
South
America
 
Eliminations and Other
 
Total
Investment in and advances to non–consolidated affiliates
$

 
$
497

 
$
313

 
$

 
$

 
$
810

Total assets
$
2,691

 
$
3,051

 
$
1,843

 
$
1,839

 
$
197

 
$
9,621

March 31, 2018
North
America
 
Europe
 
Asia
 
South
America
 
Eliminations and Other
 
Total
Investment in and advances to non–consolidated affiliates
$

 
$
522

 
$
327

 
$

 
$

 
$
849

Total assets
$
2,569

 
$
3,151

 
$
1,796

 
$
1,781

 
$
206

 
$
9,503

Selected Operating Results Three Months Ended June 30, 2018
North
America
 
Europe
 
Asia
 
South
America
 
Eliminations and Other
 
Total
Net sales-third party
$
1,121

 
$
853

 
$
542

 
$
518

 
$
63

 
$
3,097

Net sales-intersegment

 
15

 
8

 
10

 
(33
)
 

Net sales
$
1,121

 
$
868

 
$
550