10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 11, 2020
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 December 31, 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) |
(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 (§232.405 of this chapter) 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.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
|
Non-accelerated filer |
ý |
Smaller reporting company |
¨ |
|
Emerging growth company |
¨ |
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of February 10, 2020, 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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net sales |
$ |
2,715 |
$ |
3,009 |
$ |
8,491 |
$ |
9,242 |
|||||||
Cost of goods sold (exclusive of depreciation and amortization) |
2,239 |
2,568 |
7,001 |
7,816 |
|||||||||||
Selling, general and administrative expenses |
131 |
129 |
380 |
373 |
|||||||||||
Depreciation and amortization |
91 |
88 |
267 |
260 |
|||||||||||
Interest expense and amortization of debt issuance costs |
59 |
67 |
185 |
201 |
|||||||||||
Research and development expenses |
21 |
18 |
58 |
50 |
|||||||||||
Restructuring and impairment, net |
3 |
1 |
36 |
2 |
|||||||||||
Equity in net (income) loss of non-consolidated affiliates |
1 |
(1 |
) |
1 |
(2 |
) |
|||||||||
Other (income) expenses, net |
(3 |
) |
10 |
3 |
33 |
||||||||||
Business acquisition and other integration related costs |
17 |
14 |
46 |
24 |
|||||||||||
$ |
2,559 |
$ |
2,894 |
$ |
7,977 |
$ |
8,757 |
||||||||
Income before income taxes |
156 |
115 |
514 |
485 |
|||||||||||
Income tax provision |
49 |
37 |
157 |
154 |
|||||||||||
Net income |
$ |
107 |
$ |
78 |
$ |
357 |
$ |
331 |
|||||||
Net income attributable to noncontrolling interest |
— |
— |
— |
— |
|||||||||||
Net income attributable to our common shareholder |
$ |
107 |
$ |
78 |
$ |
357 |
$ |
331 |
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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net income |
$ |
107 |
$ |
78 |
$ |
357 |
$ |
331 |
|||||||
Other comprehensive income (loss): |
|||||||||||||||
Currency translation adjustment |
79 |
(26 |
) |
(2 |
) |
(144 |
) |
||||||||
Net change in fair value of effective portion of cash flow hedges |
(7 |
) |
60 |
(23 |
) |
3 |
|||||||||
Net change in pension and other benefits |
2 |
13 |
28 |
41 |
|||||||||||
Other comprehensive income (loss) before income tax effect |
$ |
74 |
$ |
47 |
$ |
3 |
$ |
(100 |
) |
||||||
Income tax provision (benefit) related to items of other comprehensive income (loss) |
(1 |
) |
19 |
2 |
10 |
||||||||||
Other comprehensive income (loss), net of tax |
75 |
28 |
1 |
(110 |
) |
||||||||||
Comprehensive income |
$ |
182 |
$ |
106 |
$ |
358 |
$ |
221 |
|||||||
Less: Comprehensive income attributable to noncontrolling interest, net of tax |
1 |
1 |
4 |
2 |
|||||||||||
Comprehensive income attributable to our common shareholder |
$ |
181 |
$ |
105 |
$ |
354 |
$ |
219 |
See accompanying notes to the condensed consolidated financial statements.
4
Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
December 31, 2019 |
March 31, 2019 |
||||||
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
1,031 |
$ |
950 |
|||
Accounts receivable, net |
|||||||
— third parties (net of allowance for uncollectible accounts of $9 and $7 as of December 31, 2019 and March 31, 2019, respectively) |
1,247 |
1,417 |
|||||
— related parties |
170 |
164 |
|||||
Inventories |
1,494 |
1,460 |
|||||
Prepaid expenses and other current assets |
116 |
121 |
|||||
Fair value of derivative instruments |
51 |
70 |
|||||
Assets held for sale |
5 |
3 |
|||||
Total current assets |
$ |
4,114 |
$ |
4,185 |
|||
Property, plant and equipment, net |
3,524 |
3,385 |
|||||
Goodwill |
607 |
607 |
|||||
Intangible assets, net |
311 |
351 |
|||||
Investment in and advances to non–consolidated affiliates |
794 |
792 |
|||||
Deferred income tax assets |
141 |
142 |
|||||
Other long–term assets |
215 |
101 |
|||||
Total assets |
$ |
9,706 |
$ |
9,563 |
|||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|||||||
Current liabilities |
|||||||
Current portion of long–term debt |
$ |
19 |
$ |
19 |
|||
Short–term borrowings |
51 |
39 |
|||||
Accounts payable |
|||||||
— third parties |
1,744 |
1,986 |
|||||
— related parties |
200 |
175 |
|||||
Fair value of derivative instruments |
59 |
87 |
|||||
Accrued expenses and other current liabilities |
541 |
616 |
|||||
Total current liabilities |
$ |
2,614 |
$ |
2,922 |
|||
Long–term debt, net of current portion |
4,355 |
4,328 |
|||||
Deferred income tax liabilities |
252 |
223 |
|||||
Accrued postretirement benefits |
821 |
844 |
|||||
Other long–term liabilities |
240 |
180 |
|||||
Total liabilities |
$ |
8,282 |
$ |
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 December 31, 2019 and March 31, 2019 |
— |
— |
|||||
Additional paid–in capital |
1,404 |
1,404 |
|||||
Retained earnings |
560 |
203 |
|||||
Accumulated other comprehensive income (loss) |
(509 |
) |
(506 |
) |
|||
Total equity of our common shareholder |
$ |
1,455 |
$ |
1,101 |
|||
Noncontrolling interest |
(31 |
) |
(35 |
) |
|||
Total equity |
$ |
1,424 |
$ |
1,066 |
|||
Total liabilities and equity |
$ |
9,706 |
$ |
9,563 |
See Note 6 — 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)
Nine Months Ended December 31, |
|||||||
2019 |
2018 |
||||||
OPERATING ACTIVITIES |
|||||||
Net income |
$ |
357 |
$ |
331 |
|||
Adjustments to determine net cash provided by operating activities: |
|||||||
Depreciation and amortization |
267 |
260 |
|||||
(Gain) loss on unrealized derivatives and other realized derivatives in investing activities, net |
(32 |
) |
(4 |
) |
|||
(Gain) loss on sale of assets |
(1 |
) |
4 |
||||
Impairment charges |
13 |
— |
|||||
Deferred income taxes, net |
30 |
38 |
|||||
Equity in net (income) loss of non-consolidated affiliates |
1 |
(2 |
) |
||||
Amortization of debt issuance costs and carrying value adjustments |
14 |
14 |
|||||
Other, net |
2 |
(1 |
) |
||||
Changes in operating assets and liabilities: |
|||||||
Accounts receivable |
143 |
— |
|||||
Inventories |
(42 |
) |
(214 |
) |
|||
Accounts payable |
(176 |
) |
(17 |
) |
|||
Other assets |
(3 |
) |
(30 |
) |
|||
Other liabilities |
(109 |
) |
(55 |
) |
|||
Net cash provided by (used in) operating activities |
$ |
464 |
$ |
324 |
|||
INVESTING ACTIVITIES |
|||||||
Capital expenditures |
(422 |
) |
(210 |
) |
|||
Acquisition of assets under a capital lease |
— |
(239 |
) |
||||
Proceeds from sales of assets, third party, net of transaction fees and hedging |
3 |
2 |
|||||
Proceeds from investment in and advances to non-consolidated affiliates, net |
6 |
1 |
|||||
Proceeds (outflows) from the settlement of derivative instruments, net |
3 |
2 |
|||||
Other |
10 |
10 |
|||||
Net cash provided by (used in) investing activities |
$ |
(400 |
) |
$ |
(434 |
) |
|
FINANCING ACTIVITIES |
|||||||
Proceeds from issuance of long-term and short-term borrowings |
79 |
— |
|||||
Principal payments of long-term and short-term borrowings |
(16 |
) |
(95 |
) |
|||
Revolving credit facilities and other, net |
(38 |
) |
109 |
||||
Debt issuance costs |
(3 |
) |
(2 |
) |
|||
Net cash provided by (used in) financing activities |
$ |
22 |
$ |
12 |
|||
Net increase (decrease) in cash, cash equivalents and restricted cash |
86 |
(98 |
) |
||||
Effect of exchange rate changes on cash |
(4 |
) |
(25 |
) |
|||
Cash, cash equivalents and restricted cash — beginning of period |
960 |
932 |
|||||
Cash, cash equivalents and restricted cash — end of period |
$ |
1,042 |
$ |
809 |
|||
Cash and cash equivalents |
$ |
1,031 |
$ |
797 |
|||
Restricted cash (Included in "Other long-term assets") |
11 |
12 |
|||||
Cash, cash equivalents and restricted cash — end of period |
$ |
1,042 |
$ |
809 |
|||
Supplemental Disclosures: |
|||||||
Accrued capital expenditures |
$ |
100 |
$ |
74 |
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) Retained Earnings |
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 |
— |
— |
— |
331 |
— |
— |
331 |
|||||||||||||||||||
Currency translation adjustment included in AOCI |
— |
— |
— |
— |
(144 |
) |
— |
(144 |
) |
|||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $2 million included in AOCI |
— |
— |
— |
— |
5 |
— |
5 |
|||||||||||||||||||
Change in pension and other benefits, net of tax provision of $12 million included in AOCI |
— |
— |
— |
— |
27 |
2 |
29 |
|||||||||||||||||||
Balance as of December 31, 2018 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
100 |
$ |
(389 |
) |
$ |
(35 |
) |
$ |
1,080 |
Equity of our Common Shareholder |
||||||||||||||||||||||||||
Common Stock |
Additional
Paid-in Capital
|
(Accumulated Deficit) 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 |
— |
— |
— |
357 |
— |
— |
357 |
|||||||||||||||||||
Currency translation adjustment included in AOCI |
— |
— |
— |
— |
(2 |
) |
— |
(2 |
) |
|||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $6 million included in AOCI |
— |
— |
— |
— |
(17 |
) |
— |
(17 |
) |
|||||||||||||||||
Change in pension and other benefits, net of tax provision of $8 million included in AOCI |
— |
— |
— |
— |
16 |
4 |
20 |
|||||||||||||||||||
Balance as of December 31, 2019 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
560 |
$ |
(509 |
) |
$ |
(31 |
) |
$ |
1,424 |
Equity of our Common Shareholder |
||||||||||||||||||||||||||
Common Stock |
Additional
Paid-in Capital
|
(Accumulated Deficit) Retained Earnings |
Accumulated
Other
Comprehensive Income (Loss)
|
Non-
controlling
Interest
|
Total Equity |
|||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||
Balance as of September 30, 2018 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
22 |
$ |
(416 |
) |
$ |
(36 |
) |
$ |
974 |
|||||||||||
Net income attributable to our common shareholder |
— |
— |
— |
78 |
— |
— |
78 |
|||||||||||||||||||
Currency translation adjustment included in AOCI |
— |
— |
— |
— |
(26 |
) |
— |
(26 |
) |
|||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax provision of $15 million included in AOCI |
— |
— |
— |
— |
45 |
— |
45 |
|||||||||||||||||||
Change in pension and other benefits, net of tax provision of $4 million included in AOCI |
— |
— |
— |
— |
8 |
1 |
9 |
|||||||||||||||||||
Balance as of December 31, 2018 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
100 |
$ |
(389 |
) |
$ |
(35 |
) |
$ |
1,080 |
Equity of our Common Shareholder |
||||||||||||||||||||||||||
Common Stock |
Additional
Paid-in Capital
|
(Accumulated Deficit) Retained Earnings |
Accumulated
Other
Comprehensive Income (Loss)
|
Non-
controlling
Interest
|
Total Equity |
|||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||
Balance as of September 30, 2019 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
453 |
$ |
(583 |
) |
$ |
(32 |
) |
$ |
1,242 |
|||||||||||
Net income attributable to our common shareholder |
— |
— |
— |
107 |
— |
— |
107 |
|||||||||||||||||||
Currency translation adjustment included in AOCI |
— |
— |
— |
— |
79 |
— |
79 |
|||||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $1 million included in AOCI |
— |
— |
— |
— |
(6 |
) |
— |
(6 |
) |
|||||||||||||||||
Change in pension and other benefits, net of tax provision of $0 million included in AOCI |
— |
— |
— |
— |
1 |
1 |
2 |
|||||||||||||||||||
Balance as of December 31, 2019 |
1,000 |
$ |
— |
$ |
1,404 |
$ |
560 |
$ |
(509 |
) |
$ |
(31 |
) |
$ |
1,424 |
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 December 31, 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 the March 31, 2019 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 fiscal 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 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
Restricted cash is comprised of cash deposits for employee benefits and is disclosed on the condensed consolidated statement of cash flows.
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)
Recently Adopted Accounting Standards
Standard |
Adoption |
Description |
Disclosure Impact |
|||
ASU 2019-07, Codification Updates to SEC Sections (Issued July 2019)
|
July 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. Our condensed consolidated statement of shareholder's equity now discloses current and prior period quarter-to-date activity as required by the ASU. |
|||
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 5 — 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)
Recently Issued Accounting Standards (Not yet adopted)
Standard |
Adoption |
Description |
Disclosure Impact |
|||
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes |
April 1, 2021 |
The standard simplifies the accounting for income taxes by removing certain exceptions and improving the consistent application and simplification of GAAP. |
The Company is currently evaluating the impact of this standard. |
|||
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments |
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. |
10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 18 — 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)
3. RESTRUCTURING AND IMPAIRMENT, NET
"Restructuring and impairment, net" includes restructuring costs, impairments, and other related expenses. "Restructuring and impairment, net" for the three and nine months ended December 31, 2019 totaled $3 million and $36 million, respectively. The restructuring and impairment expenses recognized during the three months ended December 31, 2019 primarily related to the impairment of certain long-lived assets in the Asia segment. The $36 million in restructuring and impairment expenses recognized during the nine months ended December 31, 2019 primarily related to the portfolio optimization plan to cease certain non-core operations in Europe that we announced during second quarter of the fiscal year ending March 31, 2020. We do not anticipate significant changes in relation to this restructuring plan between now and March 2020, the expected date that operations plan to cease, that would have a material impact on future results of operations, liquidity, and capital resources.
"Restructuring and impairment, net" for the three and nine months ended December 31, 2018 totaled $1 million and $2 million, respectively.
As of December 31, 2019, the restructuring liability totaled $36 million with $26 million included in "Accrued expenses and other current liabilities" and the remaining is within "Other long-term liabilities" on our accompanying condensed consolidated balance sheet. As of December 31, 2019, the restructuring liability totaled $22 million for the Europe segment, $13 million for South America segment, and $1 million for the North America segment.
The following table summarizes our restructuring liability activity and other impairment charges (in millions).
Total restructuring
liabilities
|
Other restructuring charges (A) |
Total restructuring charges |
Other impairments (B) |
Total
restructuring and impairments, net
|
||||||||||||||
Balance as of March 31, 2019 |
$ |
17 |
||||||||||||||||
Fiscal 2020 Activity: |
||||||||||||||||||
Expenses |
23 |
11 |
$ |
34 |
2 |
$ |
36 |
|||||||||||
Cash payments |
(4 |
) |
||||||||||||||||
Balance as of December 31, 2019 |
$ |
36 |
____________________
(A) |
Other restructuring charges include restructuring related impairments and period expenses that were not recorded through the restructuring liability. |
(B) |
Other impairment charges not related to restructuring activities. |
12
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. INVENTORIES
"Inventories" consists of the following (in millions).
December 31, 2019 |
March 31, 2019 |
||||||
Finished goods |
$ |
389 |
$ |
354 |
|||
Work in process |
703 |
684 |
|||||
Raw materials |
225 |
254 |
|||||
Supplies |
177 |
168 |
|||||
Inventories |
$ |
1,494 |
$ |
1,460 |
13
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. 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. Other variable lease payments include, but are not limited to, maintenance, service, and supply costs. These costs are disclosed as a component of total lease costs.
|
• |
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.
|
14
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The table below presents the classification of leasing assets and liabilities.
Leases |
Balance Sheet Classification |
December 31, 2019 |
||||
Assets |
||||||
Operating lease right-of-use assets |
Other long–term assets |
$ |
100 |
|||
Finance lease assets (A) |
Property, plant and equipment, net |
2 |
||||
Total lease assets |
$ |
102 |
||||
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 |
75 |
||||
Finance lease liabilities |
Long–term debt, net of current portion |
1 |
||||
Total lease liabilities |
$ |
100 |
____________________
(A) |
Finance lease assets are recorded net of accumulated depreciation of $6 million as of December 31, 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 and nine months ended December 31, 2019. Sublease income was less than $1 million during the three and nine months ended December 31, 2019.
Expense Type |
Income Statement Classification |
Three Months Ended December 31, 2019 |
Nine Months Ended December 31, 2019 |
|||||||
Operating lease costs (A) |
Selling, general and administrative expenses |
$ |
14 |
$ |
38 |
____________________
(A) |
Operating lease costs include short-term leases and variable lease costs. |
Future minimum lease payments as of December 31, 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).
Fiscal Year Ending March 31, |
Operating leases (A) |
Finance leases (B) |
Total |
|||||||||
2020 |
$ |
10 |
$ |
— |
$ |
10 |
||||||
2021 |
27 |
— |
27 |
|||||||||
2022 |
20 |
— |
20 |
|||||||||
2023 |
15 |
— |
15 |
|||||||||
2024 |
14 |
— |
14 |
|||||||||
Thereafter |
29 |
1 |
30 |
|||||||||
Total minimum lease payments |
$ |
115 |
$ |
1 |
$ |
116 |
||||||
Less: interest |
16 |
— |
16 |
|||||||||
Present value of lease liabilities |
$ |
99 |
$ |
1 |
$ |
100 |
____________________
(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 December 31, 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 December 31, 2019.
|
15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table presents the weighted-average remaining lease term and discount rates.
Weighted-average remaining lease term (years) |
As of December 31, 2019 |
|
Operating leases |
6.5 |
|
Finance leases |
6.4 |
|
Weighted-average discount rate |
||
Operating leases |
3.73% |
|
Finance leases |
3.18% |
The following table presents supplemental information on our operating leases for the nine months ended December 31, 2019 (in millions). Operating and financing cash flows from finance leases were immaterial for the nine months ended December 31, 2019. Leased assets obtained in exchange for new operating and financing lease liabilities were $17 million for the nine months ended December 31, 2019, individually and in the aggregate.
Supplemental information |
Nine Months Ended December 31, 2019 |
|||
Cash paid for amounts included in the measurement of lease liabilities |
||||
Operating cash flows from operating leases |
$ |
46 |
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).
Fiscal 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 |
16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. 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).
December 31, 2019 |
March 31, 2019 |
||||||
Assets |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
6 |
$ |
1 |
|||
Accounts receivable, net |
13 |
40 |
|||||
Inventories |
87 |
72 |
|||||
Prepaid expenses and other current assets |
2 |
1 |
|||||
Total current assets |
$ |
108 |
$ |
114 |
|||
Property, plant and equipment, net |
23 |
29 |
|||||
Goodwill |
12 |
12 |
|||||
Deferred income tax assets |
64 |
64 |
|||||
Other long–term assets |
39 |
27 |
|||||
Total assets |
$ |
246 |
$ |
246 |
|||
Liabilities |
|||||||
Current liabilities |
|||||||
Accounts payable |
$ |
41 |
$ |
43 |
|||
Accrued expenses and other current liabilities |
20 |
21 |
|||||
Total current liabilities |
$ |
61 |
$ |
64 |
|||
Accrued postretirement benefits |
241 |
245 |
|||||
Other long–term liabilities |
3 |
1 |
|||||
Total liabilities |
$ |
305 |
$ |
310 |
17
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. 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 18 — 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 currently produces flat rolled aluminum products exclusively for Novelis and Kobe. As of December 31, 2019, Novelis and Kobe both hold 50% interests in UAL. 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.
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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net sales |
$ |
285 |
$ |
288 |
$ |
893 |
$ |
938 |
|||||||
Costs and expenses related to net sales |
285 |
284 |
880 |
926 |
|||||||||||
Income tax provision |
— |
2 |
3 |
5 |
|||||||||||
Net income |
$ |
— |
$ |
2 |
$ |
10 |
$ |
7 |
|||||||
Purchases of tolling services from Alunorf (Novelis' share) |
$ |
59 |
$ |
60 |
$ |
186 |
$ |
189 |
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.
December 31, 2019 |
March 31, 2019 |
||||||
Accounts receivable, net — related parties |
$ |
170 |
$ |
164 |
|||
Accounts payable — related parties |
$ |
200 |
$ |
175 |
18
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Transactions with Hindalco
We occasionally have related party transactions with Hindalco. During the three and nine months ended December 31, 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 December 31, 2019 and March 31, 2019, there was $1 million and less than $1 million of outstanding "Accounts receivable, net — related parties" net of "Accounts payable — related parties" related to transactions with Hindalco, respectively. During each of the three and nine months ended December 31, 2019 and 2018, Novelis purchased less than $1 million in raw materials from Hindalco.
19
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. DEBT
Debt consisted of the following (in millions).
December 31, 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 |
2.74 |
% |
$ |
51 |
$ |
— |
$ |
51 |
$ |
39 |
$ |
— |
$ |
39 |
||||||||||||
Novelis Inc. |
||||||||||||||||||||||||||
Floating rate Term Loan Facility, due June 2022 |
3.79 |
% |
1,746 |
(25 |
) |
1,721 |
1,760 |
(33 |
) |
1,727 |
||||||||||||||||
Novelis Corporation |
||||||||||||||||||||||||||
5.875% Senior Notes, due September 2026 |
5.875 |
% |
1,500 |
(16 |
) |
1,484 |
1,500 |
(19 |
) |
1,481 |
||||||||||||||||
6.25% Senior Notes, due August 2024 |
6.25 |
% |
1,150 |
(11 |
) |
1,139 |
1,150 |
(14 |
) |
1,136 |
||||||||||||||||
Novelis China |
||||||||||||||||||||||||||
Bank loans, due through June 2027 (CNY 206 million) |
4.90 |
% |
29 |
— |
29 |
— |
— |
— |
||||||||||||||||||
Other |
||||||||||||||||||||||||||
Finance lease obligations and other debt, due through December 2026 |
4.75 |
% |
1 |
— |
1 |
3 |
— |
3 |
||||||||||||||||||
Total debt |
$ |
4,477 |
$ |
(52 |
) |
$ |
4,425 |
$ |
4,452 |
$ |
(66 |
) |
$ |
4,386 |
||||||||||||
Less: Short-term borrowings |
(51 |
) |
— |
(51 |
) |
(39 |
) |
— |
(39 |
) |
||||||||||||||||
Less: Current portion of long-term debt |
(19 |
) |
— |
(19 |
) |
(19 |
) |
— |
(19 |
) |
||||||||||||||||
Long-term debt, net of current portion |
$ |
4,407 |
$ |
(52 |
) |
$ |
4,355 |
$ |
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 December 31, 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 December 31, 2019 (for our debt denominated in foreign currencies) are as follows (in millions).
As of December 31, 2019 |
Amount |
||
Short-term borrowings and current portion of long-term debt due within one year |
$ |
70 |
|
2 years |
18 |
||
3 years |
1,712 |
||
4 years |
2 |
||
5 years |
1,155 |
||
Thereafter |
1,520 |
||
Total |
$ |
4,477 |
20
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Short Term Credit Facility
Our credit agreement (the “Short Term Credit Agreement”) governs the commitments of certain financial institutions to provide, subject to closing conditions (including the concurrent closing of our previously announced proposed acquisition of Aleris Corporation (Aleris)), 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 December 31, 2019, we were in compliance with the covenants of our Senior Notes.
Term Loan Facility
On December 18, 2018, we entered into an increase joinder amendment (the “Term Loan Increase Joinder Amendment”) to our existing secured term loan credit agreement (as amended by the Term Loan Increase Joinder Amendment, the “Amended Secured Term Loan Credit Agreement”). The Term Loan Increase Joinder Amendment governs the commitments of certain financial institutions to provide, subject to closing conditions (including the concurrent closing of the proposed acquisition of Aleris), up to $775 million of incremental term loans under our existing term loan credit agreement.
The proceeds of the incremental term loans may be used to pay a portion of the consideration payable in connection with the proposed acquisition of Aleris and fees and expenses related to the proposed acquisition, the incremental term loans and short term loans. The incremental term loans will mature on the fifth anniversary of the date on which they are borrowed, subject to 0.25% quarterly amortization payments. The incremental term loans will, once borrowed, accrue interest at LIBOR (as defined in the Amended Secured Term Loan Credit Agreement) plus 1.75%. The incremental term loans will be subject to the same voluntary and mandatory prepayment provisions, affirmative and negative covenants and events of default as those applicable to the existing term loans outstanding under the Amended Secured Term Loan Credit Agreement. The incremental term loans will be guaranteed by the same entities that have provided guarantees under our Term Loan Facility and secured on a pari passu basis with our existing term loans by security interests in substantially all of the assets of the Company and the guarantors, subject to our existing intercreditor agreement.
As of December 31, 2019, borrowings outstanding under the Term Loan Facility (excluding the incremental term loans) consisted of a $1.7 billion five-year secured term loan with $18 million due within one year. As of December 31, 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. Pursuant to the terms of the agreement, the commitments under the pre-existing $1 billion facility increased by $500 million on October 15, 2019. Aleris and certain of its subsidiaries will become borrowers under the ABL Revolver Facility upon closing of the proposed acquisition, and the Amendment includes additional changes to facilitate the proposed acquisition of Aleris (including permitting borrowings under the Short Term Credit Agreement) and the inclusion of certain Aleris assets in the borrowing base following the acquisition, if consummated. The Amendment also includes additional changes to increase our operating flexibility.
In December 2019, at the request of our lenders, we entered into another amendment to our ABL Revolver Facility to add contractual terms required under the United States regulation commonly known as "QFC Stay Rules" to be included in certain contracts entered into by systematically important banking organization.
As of December 31, 2019, the ABL Revolver consisted of a $1.5 billion facility. As of December 31, 2019, the revolver had a zero balance and $16 million was utilized for letters of credit. There was $734 million in remaining availability, including $109 million of remaining availability which can be utilized for letters of credit, and we were in compliance with the covenants of our ABL Revolver Facility.
Other Short-Term Borrowings
As of December 31, 2019, $50 million of the $51 million in short-term borrowings was related to Brazil loans (BRL 202 million). We had $104 million in availability under our Novelis Korea revolving facilities.
21
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
China Bank Loans
In September 2019, we entered into a credit agreement with the Bank of China to provide up to $75 million in unsecured loans to support previously announced capital expansion projects in China.
Refer to our Form 10-K for the fiscal 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.
22
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. SHARE-BASED COMPENSATION
During the nine months ended December 31, 2019, we granted 2,685,744 Hindalco phantom restricted stock units (RSUs) and 3,475,995 Hindalco Stock Appreciation Rights (Hindalco SARs). Total compensation expense was $5 million and $11 million for the three and nine months ended December 31, 2019, respectively. Total compensation expense was $2 million and $14 million for the three and nine months ended December 31, 2018, respectively. As of December 31, 2019, the outstanding liability related to share-based compensation was $20 million.
The cash payments made to settle all SAR liabilities were $3 million and $4 million in the nine months ended December 31, 2019 and 2018, respectively. Total cash payments made to settle RSUs were $9 million and $14 million in the nine months ended December 31, 2019 and 2018, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $4 million, which is expected to be recognized over a weighted average period of 1.4 years. Unrecognized compensation expense related to the RSUs was $7 million, which will be recognized over the remaining weighted average vesting period of 1.4 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 fiscal year ended March 31, 2019.
23
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. 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 December 31, |
Three Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Service cost |
$ |
10 |
$ |
10 |
$ |
2 |
$ |
2 |
|||||||
Interest cost |
15 |
15 |
2 |
2 |
|||||||||||
Expected return on assets |
(18 |
) |
(17 |
) |
— |
— |
|||||||||
Amortization — losses, net |
9 |
8 |
— |
— |
|||||||||||
Termination benefits / curtailments |
— |
2 |
— |
— |
|||||||||||
Net periodic benefit cost (A) |
$ |
16 |
$ |
18 |
$ |
4 |
$ |
4 |
Pension Benefit Plans |
Other Benefit Plans |
||||||||||||||
Nine Months Ended December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Service cost |
$ |
30 |
$ |
30 |
$ |
8 |
$ |
6 |
|||||||
Interest cost |
45 |
45 |
6 |
6 |
|||||||||||
Expected return on assets |
(54 |
) |
(49 |
) |
— |
— |
|||||||||
Amortization — losses, net |
26 |
24 |
— |
2 |
|||||||||||
Termination benefits / curtailments |
— |
2 |
— |
— |
|||||||||||
Net periodic benefit cost (A) |
$ |
47 |
$ |
52 |
$ |
14 |
$ |
14 |
____________________
(A) Service cost is included within "Cost of goods sold (exclusive of depreciation and amortization)" and "Selling, general and administrative expenses" while 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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Funded pension plans |
$ |
8 |
$ |
5 |
$ |
46 |
$ |
21 |
|||||||
Unfunded pension plans |
3 |
3 |
8 |
9 |
|||||||||||
Savings and defined contribution pension plans |
8 |
8 |
25 |
24 |
|||||||||||
Total contributions |
$ |
19 |
$ |
16 |
$ |
79 |
$ |
54 |
During the remainder of fiscal 2020, we expect to contribute an additional $8 million to our funded pension plans, $3 million to our unfunded pension plans and $8 million to our savings and defined contribution pension plans.
24
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. 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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
(Gain) loss on remeasurement of monetary assets and liabilities, net |
$ |
12 |
$ |
(1 |
) |
$ |
6 |
$ |
(7 |
) |
|||||
(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net |
(12 |
) |
1 |
(4 |
) |
7 |
|||||||||
Currency (gains) losses, net |
$ |
— |
$ |
— |
$ |
2 |
$ |
— |
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).
Nine Months Ended December 31, 2019 |
Fiscal Year Ended March 31, 2019 |
||||||
Cumulative currency translation adjustment — beginning of period |
$ |
(236 |
) |
$ |
(65 |
) |
|
Effect of changes in exchange rates |
(2 |
) |
(171 |
) |
|||
Cumulative currency translation adjustment — end of period |
$ |
(238 |
) |
$ |
(236 |
) |
25
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The following tables summarize the gross fair values of our financial instruments and commodity contracts as of the periods presented (in millions).
December 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 |
$ |
5 |
$ |
— |
$ |
(10 |
) |
$ |
— |
$ |
(5 |
) |
|||||||
Currency exchange contracts |
8 |
2 |
(12 |
) |
(3 |
) |
(5 |
) |
|||||||||||
Energy contracts |
— |
— |
(6 |
) |
(4 |
) |
(10 |
) |
|||||||||||
Total derivatives designated as hedging instruments |
$ |
13 |
$ |
2 |
$ |
(28 |
) |
$ |
(7 |
) |
$ |
(20 |
) |
||||||
Derivatives not designated as hedging instruments: |
|||||||||||||||||||
Metal contracts |
18 |
— |
(20 |
) |
— |
(2 |
) |
||||||||||||
Currency exchange contracts |
20 |
— |
(11 |
) |
— |
9 |
|||||||||||||
Total derivatives not designated as hedging instruments |
$ |
38 |
$ |
— |
$ |
(31 |
) |
$ |
— |
$ |
7 |
||||||||
Total derivative fair value |
$ |
51 |
$ |
2 |
$ |
(59 |
) |
$ |
(7 |
) |
$ |
(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. |
26
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 December 31, 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 December 31, 2019 and March 31, 2019, the fair value of these contracts represented 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.
December 31, 2019 |
March 31, 2019 |
||||
Hedge type |
|||||
Purchase (sale) |
|||||
Cash flow purchases |
34 |
— |
|||
Cash flow sales |
(409 |
) |
(353 |
) |
|
Not designated |
(28 |
) |
15 |
||
Total, net |
(403 |
) |
(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 $869 million and $703 million in outstanding foreign currency forwards designated as cash flow hedges as of December 31, 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 December 31, 2019 and March 31, 2019.
27
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of December 31, 2019 and March 31, 2019, we had outstanding foreign currency exchange contracts with a total notional amount of $721 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 fourth 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 December 31, 2019 and March 31, 2019, 1 million of notional megawatt hours was outstanding and the fair value of this swap was a liability of $5 million and $3 million, respectively. 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 11 million MMBTUs designated as cash flow hedges as of December 31, 2019, and the fair value was a liability of $5 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 December 31, 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 December 31, 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 5 million gallons designated as cash flow hedges as of December 31, 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 December 31, 2019 and March 31, 2019, we had no outstanding interest rate swaps.
28
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 December 31, |
Nine Months Ended December 31, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Derivative instruments not designated as hedges |
|||||||||||||||
Metal contracts |
$ |
2 |
$ |
(1 |
) |
$ |
(2 |
) |
$ |
(7 |
) |
||||
Currency exchange contracts |
14 |
1 |
6 |
(8 |
) |
||||||||||
Energy contracts (A) |
1 |
(2 |
) |
4 |
3 |
||||||||||
Gain (loss) recognized in "Other (income) expenses, net" |
$ |
17 |
$ |
(2 |
) |
$ |
8 |
$ |
(12 |
) |
|||||
Derivative instruments designated as hedges |
|||||||||||||||
Gain (loss) recognized in "Other (income) expenses, net" (B) |
$ |
— |
$ |
2 |
$ |
2 |
$ |
2 |
|||||||
Total gain (loss) recognized in "Other (income) expenses, net" |
$ |
17 |
$ |
— |
$ |
10 |
$ |
(10 |
) |
||||||
Balance sheet remeasurement currency exchange contract losses |
$ |
12 |
$ |
(1 |
) |
$ |
4 |
$ |
(7 |
) |
|||||
Realized gains (losses), net |
(1 |
) |
7 |
(9 |
) |
6 |
|||||||||
Unrealized gains (losses) on other derivative instruments, net |
6 |
(6 |
) |
15 |
(9 |
) |
|||||||||
Total gain (loss) recognized in "Other (income) expenses, net" |
$ |
17 |
$ |
— |
$ |
10 |
$ |
(10 |
) |
_________________________
(A) |
Includes amounts related to diesel swaps not designated as hedges, and electricity swap settlements. |
(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). Within the next twelve months, we expect to reclassify $20 million of losses from AOCI to earnings, before taxes.