Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 6, 2019



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, 2019
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) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
N/A
 
N/A
 
N/A
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 every Interactive Data File required to be submitted 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 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
 
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 5, 2019, 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,
 
2019
 
2018
Net sales
$
2,925

 
$
3,097

Cost of goods sold (exclusive of depreciation and amortization)
2,414

 
2,591

Selling, general and administrative expenses
127

 
117

Depreciation and amortization
88

 
86

Interest expense and amortization of debt issuance costs
65

 
66

Research and development expenses
19

 
15

Restructuring and impairment, net
1

 
1

Other (income) expenses, net
4

 
29

Business acquisition and other integration related costs
17

 
2


$
2,735

 
$
2,907

Income before income taxes
190

 
190

Income tax provision
63

 
53

Net income
$
127

 
$
137

Net income attributable to noncontrolling interest

 

Net income attributable to our common shareholder
$
127

 
$
137

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 June 30,
 
2019
 
2018
Net income
$
127

 
$
137

Other comprehensive income (loss):
 
 
 
Currency translation adjustment
5

 
(117
)
Net change in fair value of effective portion of cash flow hedges
20

 
(68
)
Net change in pension and other benefits
8

 
18

Other comprehensive income (loss) before income tax effect
$
33

 
$
(167
)
Income tax provision (benefit) related to items of other comprehensive income (loss)
8

 
(14
)
Other comprehensive income (loss), net of tax
25

 
(153
)
Comprehensive income (loss)
$
152

 
$
(16
)
Less: Comprehensive income (loss) attributable to noncontrolling interest, net of tax
2

 

Comprehensive income (loss) attributable to our common shareholder
$
150

 
$
(16
)
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,
2019
 
March 31,
2019
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
859

 
$
950

Accounts receivable, net


 


— third parties (net of uncollectible accounts of $7 as of June 30, 2019 and March 31, 2019)
1,485

 
1,417

— related parties
172

 
164

Inventories
1,499

 
1,460

Prepaid expenses and other current assets
128

 
121

Fair value of derivative instruments
94

 
70

Assets held for sale
5

 
3

Total current assets
$
4,242

 
$
4,185

Property, plant and equipment, net
3,423

 
3,385

Goodwill
607

 
607

Intangible assets, net
340

 
351

Investment in and advances to non–consolidated affiliates
796

 
792

Deferred income tax assets
137

 
142

Other long–term assets — third parties
197

 
101

Total assets
$
9,742

 
$
9,563

LIABILITIES AND SHAREHOLDER’S EQUITY


 


Current liabilities


 


Current portion of long–term debt
$
19

 
$
19

Short–term borrowings
53

 
39

Accounts payable


 


— third parties
1,972

 
1,986

— related parties
192

 
175

Fair value of derivative instruments
76

 
87

Accrued expenses and other current liabilities
537

 
616

Total current liabilities
$
2,849

 
$
2,922

Long–term debt, net of current portion
4,327

 
4,328

Deferred income tax liabilities
254

 
223

Accrued postretirement benefits
852

 
844

Other long–term liabilities
242

 
180

Total liabilities
$
8,524

 
$
8,497

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, 2019 and March 31, 2019

 

Additional paid–in capital
1,404

 
1,404

Retained earnings
330

 
203

Accumulated other comprehensive income (loss)
(483
)
 
(506
)
Total equity of our common shareholder
$
1,251

 
$
1,101

Noncontrolling interest
(33
)
 
(35
)
Total equity
$
1,218

 
$
1,066

Total liabilities and equity
$
9,742

 
$
9,563


See Note 5 — Consolidation for information about our consolidated variable interest entity (VIE).

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,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
127

 
$
137

Adjustments to determine net cash provided by operating activities:

 

Depreciation and amortization
88

 
86

(Gain) loss on unrealized derivatives and other realized derivatives in investing activities, net
(14
)
 
24

(Gain) loss on sale of assets
(1
)
 
3

Deferred income taxes, net
28

 
(14
)
Amortization of debt issuance costs and carrying value adjustments
5

 
5

Changes in operating assets and liabilities:

 

Accounts receivable
(81
)
 
(201
)
Inventories
(36
)
 
(205
)
Accounts payable
43

 
283

Other current assets
(5
)
 
(29
)
Other current liabilities
(80
)
 
(58
)
Other noncurrent assets
3

 

Other noncurrent liabilities
(20
)
 
17

Net cash provided by (used in) operating activities
$
57

 
$
48

INVESTING ACTIVITIES

 

Capital expenditures
(162
)
 
(54
)
Proceeds from sales of assets, third party, net of transaction fees and hedging
2

 

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

 
6

Proceeds (outflows) from the settlement of derivative instruments, net
1

 
(7
)
Other
4

 
3

Net cash provided by (used in) investing activities
$
(149
)
 
$
(52
)
FINANCING ACTIVITIES

 

Principal payments of long-term and short-term borrowings
(6
)
 
(34
)
Revolving credit facilities and other, net
12

 
(9
)
Debt issuance costs
(1
)
 

Net cash provided by (used in) financing activities
$
5

 
$
(43
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(87
)
 
(47
)
Effect of exchange rate changes on cash
(3
)
 
(19
)
Cash, cash equivalents and restricted cash — beginning of period
960

 
932

Cash, cash equivalents and restricted cash — end of period
$
870

 
$
866


See accompanying notes to the condensed consolidated financial statements.

6



Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (unaudited)
(in millions, except number of shares)

 
 
Equity of our Common Shareholder
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive Income (Loss)

 
Non-
controlling Interest
 
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


 
 
Equity of our Common Shareholder
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non-
controlling Interest
 
Total Equity
 
 
Shares
 
Amount
Balance as of March 31, 2019
 
1,000

 
$

 
$
1,404

 
$
203

 
$
(506
)
 
$
(35
)
 
$
1,066

Net income attributable to our common shareholder
 

 

 

 
127

 

 

 
127

Currency translation adjustment included in AOCI
 

 

 

 

 
5

 

 
5

Change in fair value of effective portion of cash flow hedges, net of tax provision of $6 million included in AOCI
 

 

 

 

 
14

 

 
14

Change in pension and other benefits, net of tax provision of $2 million included in AOCI
 

 

 

 

 
4

 
2

 
6

Balance as of June 30, 2019
 
1,000

 
$

 
$
1,404

 
$
330

 
$
(483
)
 
$
(33
)
 
$
1,218


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.
Organization and Description of Business
We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, 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 June 30, 2019, we had manufacturing operations in nine countries on four continents: North America, South America, Asia and Europe, through 23 operating facilities, including recycling operations in twelve of these plants.
The March 31, 2019 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 Form 10-K for the year-ended March 31, 2019 filed with the United States Securities and Exchange Commission (SEC) on May 8, 2019. 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 (loss) of these entities.
Restricted Cash Policy
The difference between "Cash and cash equivalents" as reported on the condensed consolidated balance sheet and "Cash, cash equivalents and restricted cash" as reported on the condensed consolidated statement of cash flows relates to cash amounts considered restricted. This restricted cash is comprised of cash deposits for employee benefits. 
Use of Estimates and Assumptions
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (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 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.

8

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

Reclassification
Management reclassified $2 million for the three months ended June 30, 2018 from "Selling, general and administrative expenses" to "Business acquisition and other integration related costs" in order to conform to the presentation adopted for the current period. This reclassification had no impact on the condensed consolidated statement of operations, condensed consolidated balance sheets or condensed consolidated statements of cash flow during the respective period. See Note 17 — Segment, Major Customer and Major Supplier Information for this reclassification's impact on Segment Income.    
Recently Adopted Accounting Standards
Standard
 
Date of Adoption
 
Description
 
Disclosure Impact
ASU 2016-02, Leases (Topic 842) along with additional technical improvements, practical expedients, and clarifications since issued. (Issued February 2016)
 
April 1, 2019
 
The standard requires organizations that lease assets to recognize assets and liabilities for the rights and obligations created by the leases on balance sheet. The standard requires qualitative and quantitative disclosures to help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
 
We recognized right-of-use assets and lease liabilities on our consolidated balance sheets with no impact to the opening balance of retained earnings. The adoption of this standard did not have a material effect on the condensed consolidated statement of operations or the condensed consolidated statement of cash flows. See Note 4 - Leases for further details on the adoption of this standard.
ASU 2018-09, Codification Improvements (Issued July 2018)
 
April 1, 2019
 
The standard provides various codification updates and improvements to address comments received.
 
The adoption of this standard did not have an impact on the condensed consolidated financial statements and disclosures.

ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Issued October 2018)
 
April 1, 2019
 
The standard permits the use of the OIS based on the SOFR as a U.S. benchmark interest rate for purposes of hedge accounting under Topic 815 as requested by the Federal Reserve Board during deliberations leading to the issuance of ASU 2017-12. The FASB recognized that although the OIS rate based on SOFR is not yet widely recognized and quoted within the U.S. financial market, the attributes of the repo rates underlying the calculation of SOFR are recognized.
 
The adoption of this standard did not have an impact on the condensed consolidated financial statements and disclosures. The Company does not currently have any interest rate derivative instruments, but is currently evaluating the potential future impact of this standard.

ASU 2018-02, Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. (Issued February 2018)
 
April 1, 2018
 
This standard provides an option to reclassify stranded tax effects within Accumulated other comprehensive income (loss) (AOCI) 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”).
 
We reclassified $16 million into retained earnings of our common shareholder from AOCI. This reclassification consisted of deferred taxes originally recorded in AOCI at rates that exceeded the newly enacted U.S. federal corporate tax rate. There was no impact to net income. Certain prior period amounts have been adjusted as a result of the adoption of this standard.
ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Asset Transfers of Assets Other than Inventory (Issued October 2016)
 
April 1, 2018
 
This 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 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. Certain prior period amounts have been adjusted as a result of the adoption of this standard.
    

9

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

Recently Issued Accounting Standards (Not yet adopted)
Standard
 
Date of Adoption
 
Description
 
Disclosure Impact
ASU 2019-04, Codification Improvements: Topic 326: Financial Instruments - Credit Losses, Topic 815: Derivatives and Hedging, and Topic 825: Financial Instruments along with additional technical improvements and clarifications since issued.
 
Various
 
The standard provides various codification updates and improvements to address comments received.
 
The Company is currently evaluating the impact of this standard.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (Issued October 2018)
 
April 1, 2020
 
This standard eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity must consider such indirect interests on a proportionate basis.
 
The Company is currently evaluating the impact of this standard.
ASU 2018-15, Intangibles-Goodwill and Other Internal-Use Software (Topic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract (Issued August 2018)
 
April 1, 2020
 
This standard requires capitalization of implementation costs incurred in a hosting arrangement that is a service contract. This change will better align with requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected.
 
The Company is currently evaluating the impact of this standard.
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (Issued August 2018)
 
April 1, 2020
 
This standard added requirements for new disclosures such as requiring a narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period and also an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in the other disclosures required by ASC 715. Further, the standard removes some currently required disclosures such as (a) the requirement (for public entities) to disclose the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits and (b) the amounts in accumulated other comprehensive income "OCI" expected to be recognized in net periodic benefit costs over the next fiscal year.
 
The Company is currently evaluating the impact of this standard.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Issued January 2017)
 
April 1, 2020
 
This standard 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. This standard will need to be considered each time Novelis performs an assessment of goodwill for impairment under the quantitative test.
 
The Company is currently evaluating the impact of this standard.
ASU 2016-13, Financial Instrument-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments along with additional technical improvements and clarifications since issued. (Issued June 2016)
 
April 1, 2020
 
The standard provides financial statement users with more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The “current expected credit loss” (CECL) model requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts.
 
The Company is currently evaluating the impact of this standard and does not expect the adoption of this standard will have an impact on the condensed consolidated financial statements.

10

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 17 — Segment, Major Customer and Major Supplier Information for further information about our segment revenue.






11

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

3.    INVENTORIES
"Inventories" consist of the following (in millions). 
 
June 30,
2019
 
March 31,
2019
Finished goods
$
345

 
$
354

Work in process
730

 
684

Raw materials
249

 
254

Supplies
175

 
168

Inventories
$
1,499

 
$
1,460



12

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

4.    LEASES

We lease certain land, buildings and equipment under noncancelable operating lease arrangements and certain office space under finance (capital) lease arrangements. Upon adoption of ASC 842, we elected the following practical expedients:

Non-lease components: Leases that contain non-lease components (primarily equipment maintenance) are accounted for as a single component and recorded on the condensed consolidated balance sheet for certain asset classes including real estate and certain equipment. Non-lease components include, but are not limited to, common area maintenance, service arrangements, and supply agreements.
Package of practical expedients: We will not reassess whether any expired or existing contracts are leases or contain leases, the lease classification for any expired or existing leases or any initial direct costs for any expired or existing leases as of the transition date.
Additional transition method: We adopted the standard using a modified retrospective approach, applying the standard's transition provisions at the beginning of the period of adoption and maintain previous disclosure requirements for comparative periods.

We used the following policies and/or assumptions in evaluating our lease population:

Lease determination: Novelis considers a contract to be or to contain a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
Discount rate: When our lease contracts do not provide a readily determinable implicit rate, we use the estimated incremental borrowing rate based on information available at the inception of the lease. The discount rate is determined by region and asset class.
Variable payments: Novelis includes payments that are based on an index or rate within the calculation of right of use leased assets and lease liabilities, initially measured at the lease commencement date.
Purchase options: Certain leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Renewal options: Most leases include one or more options to renew, with renewal terms that can extend the lease term from one or more years. The exercise of lease renewal options is at our sole discretion.
Residual value guarantees, restrictions, or covenants: Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Short-term leases: Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term and expense the associated operating lease costs to "Selling, general, and administrative expenses" on the condensed consolidated statement of operations.




13

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

The table below presents the classification of leasing assets and liabilities as reported on the condensed consolidated balance sheet as of June 30, 2019.
Leases
 
Balance Sheet Classification
 
June 30, 2019
Assets
 
 
 
 
Operating lease right-of-use assets
 
Other long-term assets
 
$
95

Finance lease assets (A)
 
Property, plant and equipment, net
 
2

Total lease assets
 
 
 
$
97

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating lease liabilities
 
Accrued expenses and other current liabilities
 
$
24

Finance lease liabilities
 
Current portion of long-term debt
 

Long term
 
 
 
 
Operating lease liabilities
 
Other long-term liabilities
 
77

Finance lease liabilities
 
Long-term debt, net of current portion
 
1

Total lease liabilities
 
 
 
$
102

________________________
(A)
Finance lease assets are recorded net of accumulated depreciation of $6 million as of June 30, 2019.

The table below presents the classification of lease related expenses or income as reported on the condensed consolidated statements of operations. Amortization of and interest on liabilities related to finance leases were less than $1 million during the three months ended June 30, 2019. Sublease income was less than $1 million during the three months ended June 30, 2019.
Expense Type
 
Income Statement Classification
 
Three Months Ended June 30, 2019
Operating lease costs (A)
 
Selling, general and administrative expenses
 
$
10

________________________
(A)
Operating lease costs include short-term leases and variable lease costs, which are immaterial.
Future minimum lease payments as of June 30, 2019, for our operating and finance leases having an initial or remaining non-cancelable lease term in excess of one year are as follows (in millions).
Period Ending June 30,
 
Operating leases (A)
 
Finance leases (B)
 
Total
2020
 
$
23

 
$

 
$
23

2021
 
24

 

 
24

2022
 
19

 

 
19

2023
 
13

 

 
13

2024
 
12

 

 
12

Thereafter
 
25

 
1

 
26

Total minimum lease payments
 
$
116

 
$
1

 
$
117

Less: interest
 
15

 

 
15

Present value of lease liabilities
 
$
101

 
$
1

 
$
102

________________________
(A)
Operating lease payments related to options to extend lease terms that are reasonably certain of being exercised are immaterial and we do not have leases signed but not yet commenced as of June 30, 2019.
(B)
Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are immaterial and we do not have leases signed but not yet commenced as of June 30, 2019.


14

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

The following table presents the weighted-average remaining lease term and discount rates as of June 30, 2019.
Weighted-average remaining lease term (years)
 
 
Operating leases
 
6.6
Finance leases
 
8.4
Weighted-average discount rate
 
 
Operating leases
 
3.63%
Finance leases
 
2.72%

The following table presents supplemental information on our operating leases for the three months ended June 30, 2019 (in millions). Operating and financing cash flows from finance leases were less than $1 million for the three months ended June 30, 2019. Leased assets obtained in exchange for new operating and financing lease liabilities were less than $1 million for the three months ended June 30, 2019, individually and in the aggregate.
Supplemental information
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
10


Disclosure related to periods prior to adoption of the new lease standard

The following table sets forth the aggregate minimum lease payments under finance and operating leases (in millions) as of March 31, 2019.
Year Ending March 31,
 
Operating leases
 
Finance lease obligations
2020
 
$
29

 
$

2021
 
22

 

2022
 
16

 

2023
 
12

 

2024
 
10

 

Thereafter
 
17

 
1

Total minimum lease payments
 
$
106

 
$
1

Less: interest portion on finance leases
 
 
 

Principal obligation on finance leases
 
 
 
$
1



15

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

5.    CONSOLIDATION

Variable Interest Entities (VIE)
    
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
    
Logan Aluminum Inc. (Logan) is a consolidated joint venture in which we hold 40% ownership. Our joint venture partner is 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 a thinly capitalized VIE that relies on the regular reimbursement of costs and expenses from its investors, Novelis and Tri-Arrows, to fund its operations. Novelis is considered the primary beneficiary and consolidates Logan since it has the power to direct activities that most significantly impact Logan's economic performance, an obligation to absorb expected losses and the right to receive benefits that could potentially be significant.

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 condensed consolidated balance sheets (in millions).

 
June 30,
2019
 
March 31,
2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1

 
$
1

Accounts receivable
39

 
40

Inventories
76

 
72

Prepaid expenses and other current assets
2

 
1

Total current assets
$
118

 
$
114

Property, plant and equipment, net
25

 
29

Goodwill
12

 
12

Deferred income taxes
65

 
64

Other long-term assets
30

 
27

Total assets
$
250

 
$
246

Liabilities
 
 
 
Current liabilities
 
 
 
Accounts payable
$
45

 
$
43

Accrued expenses and other current liabilities
16

 
21

Total current liabilities
$
61

 
$
64

Accrued postretirement benefits
250

 
245

Other long-term liabilities
1

 
1

Total liabilities
$
312

 
$
310

 

16

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

6.    INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conducted with our equity method non-consolidated affiliates. See Note 17 — Segment, Major Customer and Major Supplier Information for the respective carrying values by segment as reported in our condensed consolidated balance sheets (in millions).

Alunorf

Aluminium Norf GmbH (Alunorf) is a joint venture investment between Novelis Deutschland GmbH, a subsidiary of Novelis, and Hydro Aluminum Deutschland GmbH (Hydro). Each of the parties to the joint venture holds a 50% interest in the equity, profits and losses, shareholder voting, management control and rights to use the production capacity of the facility. Alunorf tolls aluminum and charges the respective partner a fee to cover the associated expense.

UAL

Ulsan Aluminum, Ltd. (UAL) is a joint venture investment between Novelis Korea Ltd., a subsidiary of Novelis, and Kobe Steel Ltd (Kobe). UAL is a thinly capitalized VIE that relies on the regular reimbursement of costs and expenses from its investors, Novelis and Kobe. UAL is controlled by an equally represented Board of Directors in which neither entity has sole decision-making ability regarding production operations or other significant decisions. Furthermore, neither entity has the ability to take the majority share of production or associated costs over the life of the joint venture. Our risk of loss 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. Therefore, UAL is accounted for as an equity method investment and Novelis is not considered the primary beneficiary. UAL currently produces flat rolled aluminum products exclusively for Novelis and Kobe. As of June 30, 2019, Novelis and Kobe both hold 50% interests in UAL.

AluInfra

AluInfra Services (AluInfra) is a joint venture investment between Novelis Switzerland SA (Novelis Switzerland), a subsidiary of Novelis, and Constellium N.V. (Constellium). Each of the parties to the joint venture holds a 50% interest in the equity, profits and losses, shareholder voting, management control and rights to use the facility.

The following table summarizes the results of operations of our equity method affiliates in the aggregate, 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,
 
2019
 
2018
Net sales
$
300

 
$
318

Costs and expenses related to net sales
292

 
315

Provision (benefit) for taxes on income
2

 
1

Net income
$
6

 
$
2

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

 
$
64


The following table describes the period-end account balances, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances with non-consolidated affiliates.
 
June 30,
2019
 
March 31,
2019
Accounts receivable-related parties
$
172

 
$
164

Accounts payable-related parties
$
192

 
$
175



17

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

Transactions with Hindalco
We occasionally have related party transactions with Hindalco. During the three months ended June 30, 2019 and 2018, we recorded “Net sales” of less than $1 million between Novelis and Hindalco related primarily to sales of equipment and other services. As of June 30, 2019 and March 31, 2019, there were $1 million and less than $1 million of "Accounts receivable, net - related parties" outstanding related to transactions with Hindalco, respectively. During the three months ended June 30, 2019 and 2018, Novelis purchased less than $1 million in raw materials from Hindalco.



18

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

7.    DEBT
Debt consisted of the following (in millions).
 
June 30, 2019
 
March 31, 2019
 
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
2.93
%
 
$
53

 
$

 
$
53

 
$
39

 
$

 
$
39

Novelis Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate Term Loan Facility, due June 2022
4.18
%
 
1,755

 
(30
)
 
1,725

 
1,760

 
(33
)
 
1,727

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

 
(18
)
 
1,482

 
1,500

 
(19
)
 
1,481

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

 
(13
)
 
1,137

 
1,150

 
(14
)
 
1,136

Novelis Korea Limited
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, due through September 2020 (KRW 850 million)
1.75
%
 
1

 

 
1

 
1

 

 
1

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance lease obligations and other debt, due through December 2026
6.42
%
 
1

 

 
1

 
2

 

 
2

Total debt
 
 
$
4,460

 
$
(61
)
 
$
4,399

 
$
4,452

 
$
(66
)
 
$
4,386

Less: Short-term borrowings
 
 
(53
)
 

 
(53
)
 
(39
)
 

 
(39
)
Less: Current portion of long-term debt
 
 
(19
)
 

 
(19
)
 
(19
)
 

 
(19
)
Long-term debt, net of current portion
 
 
$
4,388

 
$
(61
)
 
$
4,327

 
$
4,394

 
$
(66
)
 
$
4,328

_________________________
(A)
Interest rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of June 30, 2019, 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.
Principal repayment requirements for our total debt over the next five years and thereafter using exchange rates as of June 30, 2019 (for our debt denominated in foreign currencies) are as follows (in millions).
As of June 30, 2019
Amount
Short-term borrowings and current portion of long-term debt due within one year
$
72

2 years
18

3 years
1,719

4 years

5 years

Thereafter
2,651

Total
$
4,460



19

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

Short Term Credit Facility
    
Our credit agreement (the “Short Term Credit Agreement”) governs the commitments of certain financial institutions to provide, subject to customary closing conditions (including the concurrent closing of our previously announced proposed acquisition of Aleris Corporation (Aleris) and the amendment of our ABL Revolver described below) to, among other things, provide up to $1.5 billion of short term loans for purposes of funding a portion of the consideration payable in connection with the proposed acquisition of Aleris or repaying certain indebtedness of Aleris and its subsidiaries.  The short term loans, once borrowed, will be unsecured, will mature one year from the borrowing date of the loans, will not be subject to any amortization payments and will accrue interest at LIBOR (as defined in the Term Loan Facility described below) plus 0.95%.  The short term loans will be guaranteed by the same entities that have provided guarantees under the Term Loan Facility and ABL Revolver.
 
             Senior Notes
As of June 30, 2019, we were in compliance with the covenants for our Senior Notes.
Term Loan Facility

As of June 30, 2019, the Term Loan Facility (excluding the incremental term loans) consisted of a $1.8 billion five-year secured term loan with $18 million due within one year. As of June 30, 2019, we were in compliance with the covenants of our Term Loan Facility.
    
ABL Revolver
In April 2019, we entered into an amendment (the "Amendment") to our existing ABL Revolver facility. The commitments under the pre-existing $1 billion facility will increase by $500 million upon the earlier of the closing of our proposed acquisition of Aleris and October 15, 2019. Aleris and certain of its subsidiaries will become borrowers under the ABL Revolver Facility upon closing of the pending acquisition, and the Amendment includes additional changes to facilitate the proposed acquisition of Aleris (including permitting the borrowing of the Short Term Credit Agreement) and the inclusion of Aleris’s assets in the borrowing base following the acquisition, if consummated. The Amendment also includes additional changes to increase our operating flexibility.
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 $750 million (in addition to the $1.5 billion facility above), subject to lenders providing commitments for the increase. The ABL Revolver has various customary covenants including maintaining a specified 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. After the commitments under the facility increase to $1.5 billion, a specified minimum fixed charge coverage ratio of 1.25 to 1 will be required if excess availability is less than the greater of (1) $115 million and (2) 10% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The ABL Revolver matures on April 15, 2024; provided that, (1) in the event that the Short Term Credit Agreement is outstanding (and not refinanced with a maturity date later than October 15, 2024) 60 days prior to its maturity then the ABL Revolver will mature 60 days prior to the maturity date of the Short Term Credit Agreement (provided further that if we have commenced a refinancing of the Short Term Credit Agreement that is continuing on and after the date that is 60 days prior to the maturity date of the Short Term Credit Agreement and that is scheduled to be and is capable of being completed prior to the date that is 45 days prior to the maturity date of the Short Term Credit Agreement, then the ABL Revolver will mature 45 days prior to the maturity date of the Short Term Credit Agreement); and (2) in the event that the Term Loan Facility or certain other indebtedness is outstanding 90 days prior to its maturity (and not refinanced with a maturity date later than October 15, 2024, then the ABL Revolver will mature 90 days prior to the maturity date for such other indebtedness, as applicable; unless excess availability (after giving effect to an availability reserve in the amount of such indebtedness) 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 charge ratio test of at least 1.25 to 1.00 is met.
As of June 30, 2019, the ABL Revolver facility consisted of a $1 billion asset based loan. As of June 30, 2019, there were $23 million in borrowings. $8 million was utilized for letters of credit, and we had $761 million in remaining availability and were in compliance with the covenants of our ABL Revolver.     
    

20

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

Other Short-Term Borrowings
As of June 30, 2019, our short-term borrowings totaled $53 million consisting of $23 million in balances under the ABL Revolver, $29 million in China loans (CNY 198 million) and $1 million in other short-term borrowings. We had $104 million in availability under our Novelis Korea revolving facilities and $5 million in availability under our Novelis China revolving facilities.
Refer to our Form 10-K for the year-ended March 31, 2019 for details on the issuances and respective covenants of our senior notes, short term credit facility, and senior secured credit facilities, which includes the Term Loan Facility and ABL Revolver facility.

21

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

8.    SHARE-BASED COMPENSATION
During the three months ended June 30, 2019, we granted 2,681,386 Hindalco phantom restricted stock units (RSUs) and 3,046,684 Hindalco Stock Appreciation Rights (Hindalco SARs). Total compensation expense related to all plans for the respective periods was $4 million and $7 million for the three months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the outstanding liability related to share-based compensation was $15 million.    
The cash payments made to settle all SAR liabilities were $2 million and $3 million in the three months ended June 30, 2019 and 2018, respectively. Total cash payments made to settle RSUs were $9 million and $14 million in the three months ended June 30, 2019 and 2018, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $5 million, which is expected to be recognized over a weighted average period of 1.6 years. Unrecognized compensation expense related to the RSUs was $10 million, which will be recognized over the remaining weighted average vesting period of 1.7 years.
For a further description of authorized long term incentive plans (LTIPs), including Hindalco SARs, RSUs, and Novelis Performance Units, please refer to our Form 10-K for the year ended March 31, 2019.






22

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

9.    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,
 
2019
 
2018
 
2019
 
2018
Service cost
$
10

 
$
10

 
$
3

 
$
2

Interest cost
15

 
15

 
2

 
2

Expected return on assets
(18
)
 
(16
)
 

 

Amortization — losses, net
8

 
8

 

 
1

Net periodic benefit cost (A)
$
15

 
$
17

 
$
5

 
$
5

_________________________
(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 (income) expenses, net".

The average expected long-term rate of return on plan assets is 5.5% in fiscal 2020.
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,
 
2019
 
2018
Funded pension plans
$
5

 
$
2

Unfunded pension plans
2

 
3

Savings and defined contribution pension plans
10

 
9

Total contributions
$
17

 
$
14

During the remainder of fiscal 2020, we expect to contribute an additional $46 million to our funded pension plans, $10 million to our unfunded pension plans and $24 million to our savings and defined contribution pension 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 (income) expenses, net” in the accompanying condensed consolidated statements of operations (in millions).
 
Three Months Ended June 30,
 
2019
 
2018
(Gain) loss on remeasurement of monetary assets and liabilities, net
$
(5
)
 
$
(6
)
(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net
6

 
6

Currency (gains) losses, net
$
1

 
$

The following currency gains (losses) are included in “Accumulated other comprehensive income (loss)," net of tax and “Noncontrolling interest” in the accompanying condensed consolidated balance sheets (in millions).
 
Three Months Ended June 30, 2019
 
Year Ended March 31, 2019
 
Cumulative currency translation adjustment — beginning of period
$
(236
)
 
$
(65
)
Effect of changes in exchange rates
5

 
(171
)
Cumulative currency translation adjustment — end of period
$
(231
)
 
$
(236
)


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 June 30, 2019 and March 31, 2019 (in millions).
 
June 30, 2019
 
Assets
 
Liabilities
 
Net Fair Value

 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent (A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Metal contracts
$
21

 
$

 
$
(5
)
 
$
(1
)
 
$
15

Currency exchange contracts
7

 
1

 
(12
)
 

 
(4
)
Energy contracts

 

 
(4
)
 
(4
)
 
(8
)
Total derivatives designated as hedging instruments
$
28

 
$
1

 
$
(21
)
 
$
(5
)
 
$
3

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Metal contracts
46

 

 
(40
)
 

 
6

Currency exchange contracts
20

 

 
(15
)
 
(1
)
 
4

Total derivatives not designated as hedging instruments
$
66

 
$

 
$
(55
)
 
$
(1
)
 
$
10

Total derivative fair value
$
94

 
$
1

 
$
(76
)
 
$
(6
)
 
$
13

 

 
March 31, 2019
 
Assets
 
Liabilities
 
Net Fair Value

 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent (A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Metal contracts
$
6

 
$

 
$
(10
)
 
$

 
$
(4
)
Currency exchange contracts
4

 

 
(15
)
 
(1
)
 
(12
)
Energy contracts

 

 
(1
)
 
(4
)
 
(5
)
Total derivatives designated as hedging instruments
$
10

 
$

 
$
(26
)
 
$
(5
)
 
$
(21
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Metal contracts
38

 
1

 
(34
)
 
(1
)
 
4

Currency exchange contracts
22

 
1

 
(27
)
 
(1
)
 
(5
)
Total derivatives not designated as hedging instruments
$
60

 
$
2

 
$
(61
)
 
$
(2
)
 
$
(1
)
Total derivative fair value
$
70

 
$
2

 
$
(87
)
 
$
(7
)
 
$
(22
)
 
_________________________
(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)

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, 2019 and March 31, 2019.

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. Generally, such exposures do not extend beyond two years in length. The average duration of undesignated contracts is less than one year.
    
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 addition to aluminum, we entered into LME copper and LMP forward contracts. As of June 30, 2019 and March 31, 2019, the fair value of these contracts was an asset of less than $1 million. These contracts are undesignated with an average duration of less than two years.
The following table summarizes our metal notional amounts in kilotonnes (kt). One kt is 1,000 metric tonnes.
 
June 30,
2019
 
March 31,
2019
Hedge type
 
 
 
Purchase (sale)
 
 
 
Cash flow purchases
44

 

Cash flow sales
(373
)
 
(353
)
Not designated
(33
)
 
15

Total, net
(362
)
 
(338
)
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 $750 million and $703 million in outstanding foreign currency forwards designated as cash flow hedges as of June 30, 2019 and March 31, 2019, 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, 2019 and March 31, 2019.

26

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

As of June 30, 2019 and March 31, 2019, we had outstanding foreign currency exchange contracts with a total notional amount of $708 million and $737 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 2020 and offset the remeasurement impact.
Energy
We own an interest in an electricity swap contract to hedge our exposure to fluctuating electricity prices, which matures on January 5, 2022. As of June 30, 2019 and March 31, 2019, 1 million of notional megawatt hours was outstanding and the fair value of this swap was a liability of $3 million. The electricity swap is designated as a cash flow hedge.
We use natural gas forward purchase contracts to manage our exposure to fluctuating energy prices in North America. We had a notional of 14 million MMBTUs designated as cash flow hedges as of June 30, 2019, and the fair value was a liability of $4 million. There was a notional of 15 million MMBTU forward contracts designated as cash flow hedges as of March 31, 2019 and the fair value was a liability of $2 million. As of June 30, 2019 and March 31, 2019, we had notionals of less than 1 million MMBTU forward contracts that were not designated as hedges. The fair value of forward contracts not designated as hedges as of June 30, 2019 and March 31, 2019 was a liability of less than $1 million. The average duration of undesignated contracts is less than three 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. We had a notional of 6 million gallons designated as cash flow hedges as of June 30, 2019, and the fair value was a liability of less than $1 million. There was a notional of 8 million gallons designated as cash flow hedges as of March 31, 2019, and the fair value was a liability of less than $1 million.
Interest Rate
As of June 30, 2019 and March 31, 2019, we had no outstanding interest rate swaps.














27

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 excluded portion of designated derivatives recognized in “Other (income) expenses, 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,
 
2019
 
2018
Derivative instruments not designated as hedges
 
 
 
Metal contracts
$
(2
)
 
$
(16
)
Currency exchange contracts
(6
)
 
(10
)
Energy contracts (A)
1

 
2

Gain (loss) recognized in "Other (income) expenses, net"
$
(7
)
 
$
(24
)
Derivative instruments designated as hedges
 
 
 
Gain (loss) recognized in "Other (income) expenses, net" (B)

 

Total gain (loss) recognized in "Other (income) expenses, net"
$
(7
)
 
$
(24
)
Balance sheet remeasurement currency exchange contract losses
$
(6
)
 
$
(6
)
Realized gains (losses), net
(7
)
 
(14
)
Unrealized gains (losses) on other derivative instruments, net
6

 
(4
)
Total gain (loss) recognized in "Other (income) expenses, net"
$
(7
)
 
$
(24
)
 _________________________
(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 on designated foreign currency capital expenditure contracts; releases to income from AOCI on balance sheet remeasurement contracts.

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions). For the three months ended June 30, 2019 and June 30, 2018, the amount of gain (loss) recognized in "Other (Income) Expenses, net" from the portion excluded from the assessment of effectiveness was less than $1 million. Within the next twelve months, we expect to reclassify $18 million of gains from AOCI to earnings, before taxes.
 
 
Amount of Gain (Loss) Recognized in OCI (Effective Portion)
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Cash flow hedging derivatives
 
 
 
 
Metal contracts
 
$
48

 
$
(65
)
Currency exchange contracts
 
1

 
(35
)
Energy contracts
 
(4
)
 

Total
 
$
45

 
$
(100
)

28

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
 
2019
 
2018
 
 
Energy contracts (A)
 
$
(1
)
 
$
(1
)
 
Cost of goods sold (B)
Metal contracts
 
30

 
(27
)
 
Net sales
Currency exchange contracts
 
(1
)
 
(2
)
 
Cost of goods sold (B)
Currency exchange contracts
 
(3
)
 
(1
)
 
Net sales
Total
 
$
25

 
$
(31
)
 
Income (loss) before taxes
 
 
(6
)
 
6

 
Income tax (provision) benefit
 
 
$
19

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

The following tables summarize the location and amount of gains (losses) that were reclassified from "Accumulated other comprehensive income (loss)" into earnings and the amount excluded from the assessment of effectiveness for the three months ended June 30, 2019 and June 30, 2018 (in millions).
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Net Sales
 
Cost of Goods Sold
 
Selling, General & Administrative
Expenses
 
Depreciation and
Amortization
 
Other (Income) Expenses, Net
 
Net Sales
 
Cost of Goods Sold
 
Selling, General & Administrative
Expenses
 
Depreciation and
Amortization
 
Other (Income) Expenses, Net
Gain (loss) on cash flow hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Metal commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain reclassified from AOCI into income
$
30

 
$

 
$

 
$

 
$

 
$
(27
)
 
$

 
$

 
$

 
$

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

 
$
(1
)
 
$

 
$

 
$

 
$

 
$
(1
)
 
$

 
$

 
$

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from AOCI into income
$
(3
)
 
$
(1
)
 
$

 
$

 
$

 
$
(1
)
 
$
(2
)
 
$

 
$

 
$



29

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 income (loss), net of tax and excluding "Noncontrolling interest", for the periods presented (in millions).

 
 
Currency Translation
 
(A) Cash Flow Hedges
 
(B) Postretirement Benefit Plans
 
Total
Balance as of March 31, 2019
 
$
(236
)
 
$
(22
)
 
$
(248
)
 
$
(506
)
Other comprehensive (loss) income before reclassifications
 
5

 
33

 
(2
)
 
36

Amounts reclassified from AOCI, net
 

 
(19
)
 
6

 
(13
)
Net current-period other comprehensive (loss) income
 
5

 
14

 
4

 
23

Balance as of June 30, 2019
 
$
(231
)
 
$
(8
)
 
$
(244
)
 
$
(483
)

 
 
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 income (loss) before reclassifications
 
(117
)
 
(74
)
 
6

 
(185
)
Amounts reclassified from AOCI, net
 

 
25

 
7

 
32

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

 
(153
)
Balance as of June 30, 2018
 
$
(182
)
 
$
(21
)
 
$
(227
)
 
$
(430
)
 _________________________
(A)
For additional information on our cash flow hedges, see Note 11 — Financial Instruments and Commodity Contracts.
(B)
For additional information on our postretirement benefit plans, see Note 9 — Postretirement Benefit Plans.


    


30

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

13.    FAIR VALUE MEASUREMENTS
We record certain assets and liabilities, primarily derivative instruments, on our consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent 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, 2019, estimated using the method described above, was $42 per megawatt hour, which represented an approximately $2 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $29 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, 2019 and March 31, 2019, 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.



31

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, 2019 and March 31, 2019 (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, 2019
 
March 31, 2019
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Level 2 instruments:
 
 
 
 
 
 
 
Metal contracts
$
67

 
$
(46
)
 
$
45

 
$
(45
)
Currency exchange contracts
28

 
(28
)
 
27

 
(44
)
Energy contracts

 
(5
)
 

 
(2
)
Total level 2 instruments
$
95

 
$
(79
)
 
$
72

 
$
(91
)
Level 3 instruments:
 
 
 
 
 
 
 
Energy contracts

 
(3
)
 

 
(3
)
Total level 3 instruments
$

 
$
(3
)
 
$

 
$
(3
)
Total gross
$
95

 
$
(82
)
 
$
72

 
$
(94
)
Netting adjustment (A)
$
(39
)
 
$
39

 
$
(36
)
 
$
36

Total net
$
56

 
$
(43
)
 
$
36

 
$
(58
)
 _________________________
(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.
There were no unrealized gains (losses) recognized in "Other expense (income), net" for the three months ended June 30, 2019 related to Level 3 financial instrument.
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, 2019
$
(3
)
Unrealized/realized gain (loss) included in earnings (B)
1

Unrealized/realized gain (loss) included in AOCI (C)
(1
)
Settlements (B)

Balance as of June 30, 2019
$
(3
)
_________________________
(A)
Represents net derivative liabilities.
(B)
Included in “Other (income) expenses, net.”
(C)
Included in "Net change in fair value of effective portion of cash flow hedges."
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 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, 2019
 
March 31, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Liabilities
 
 
 
 
 
 
 
Total debt — third parties (excluding short-term borrowings)
$
4,346

 
$
4,512

 
$
4,347

 
$
4,472


32

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

14.    OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net” is comprised of the following (in millions).
 
Three Months Ended June 30,
 
2019
 
2018
Currency (gains) losses, net (A)
$
1

 
$

Unrealized (gains) losses on change in fair value of derivative instruments, net (B)
(6
)
 
4

Realized (gains) losses on change in fair value of derivative instruments, net (B)
7

 
14

(Gain) loss on sale of assets, net
(1
)
 
3

Interest income
(3
)
 
(3
)
Non-operating net periodic benefit cost
7

 
8

Other (income) expense, net
(1
)
 
3

Other (income) expenses, net
$
4

 
$
29

 _________________________
(A)
See Note 10 — Currency (Gains) Losses for further details.
(B)
See Note 11 — Financial Instruments and Commodity Contracts for further details.








 

33

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

15.    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,
 
2019
 
2018
Pre-tax income before equity in net loss of non-consolidated affiliates and noncontrolling interest
$
190

 
$
189

Canadian statutory tax rate
25
%
 
25
%
Provision at the Canadian statutory rate
$
48

 
$
47

Increase (decrease) for taxes on income (loss) resulting from: