10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 12, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2020
or
For the transition period from to
Commission File Number: 001-32312
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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(Address of principal executive offices) | (Zip Code) |
(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 ☒
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 ☒ 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 | ¨ |
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☒ | 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 ☒
As of August 11, 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)
Three Months Ended
June 30,
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in millions | 2020 | 2019 | |||||||||
Net sales | $ | $ | |||||||||
Cost of goods sold (exclusive of depreciation and amortization) | |||||||||||
Selling, general and administrative expenses | |||||||||||
Depreciation and amortization | |||||||||||
Interest expense and amortization of debt issuance costs | |||||||||||
Research and development expenses | |||||||||||
Restructuring and impairment, net | |||||||||||
Equity in net income of non-consolidated affiliates |
( |
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Business acquisition and other integration related costs | |||||||||||
Other expenses, net |
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$ | $ | ||||||||||
(Loss) income from continuing operations before income tax provision |
( |
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Income tax (benefit) provision |
( |
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Net (loss) income from continuing operations |
$ | ( |
$ | ||||||||
Loss from discontinued operations, net of tax |
( |
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Net (loss) income |
$ | ( |
$ | ||||||||
Net income attributable to noncontrolling interests |
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Net (loss) income attributable to our common shareholder |
$ | ( |
$ |
____________________
See accompanying notes to the condensed consolidated financial statements.
3
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended
June 30,
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in millions | 2020 | 2019 | |||||||||
Net (loss) income |
$ | ( |
$ | ||||||||
Other comprehensive income: | |||||||||||
Currency translation adjustment | |||||||||||
Net change in fair value of effective portion of cash flow hedges | ( |
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Net change in pension and other benefits | |||||||||||
Other comprehensive (loss) income before income tax effect | $ | ( |
$ | ||||||||
Income tax (benefit) provision related to items of other comprehensive income | ( |
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Other comprehensive income, net of tax | |||||||||||
Comprehensive (loss) income | $ | ( |
$ | ||||||||
Comprehensive income attributable to noncontrolling interest, net of tax | |||||||||||
Comprehensive (loss) income attributable to our common shareholder | $ | ( |
$ |
____________________
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, 2020 | March 31, 2020 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
— third parties (net of allowance for uncollectible accounts of $ |
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— related parties | |||||||||||
Inventories | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Fair value of derivative instruments | |||||||||||
Assets held for sale | |||||||||||
Current assets of discontinued operations | |||||||||||
Total current assets | $ | $ | |||||||||
Property, plant and equipment, net | |||||||||||
Goodwill | |||||||||||
Intangible assets, net | |||||||||||
Investment in and advances to non–consolidated affiliates | |||||||||||
Deferred income tax assets | |||||||||||
Other long–term assets | |||||||||||
Long–term assets of discontinued operations | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||||||
Current liabilities: | |||||||||||
Current portion of long–term debt | $ | $ | |||||||||
Short–term borrowings | |||||||||||
Accounts payable | |||||||||||
— third parties | |||||||||||
— related parties | |||||||||||
Fair value of derivative instruments | |||||||||||
Accrued expenses and other current liabilities | |||||||||||
Current liabilities of discontinued operations | |||||||||||
Total current liabilities | $ | $ | |||||||||
Long–term debt, net of current portion | |||||||||||
Deferred income tax liabilities | |||||||||||
Accrued postretirement benefits | |||||||||||
Other long–term liabilities | |||||||||||
Long–term liabilities of discontinued operations | |||||||||||
Total liabilities | $ | $ | |||||||||
Commitments and contingencies |
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Shareholder’s equity: | |||||||||||
Common stock, no par value; |
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Additional paid–in capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( |
( |
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Total equity of our common shareholder | $ | $ | |||||||||
Noncontrolling interests | ( |
( |
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Total equity | $ | $ | |||||||||
Total liabilities and equity | $ | $ |
____________________
See accompanying notes to the condensed consolidated financial statements. Refer to Note 7 – Consolidation for information on our consolidated variable interest entity (VIE).
5
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
June 30,
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in millions | 2020 | 2019 | |||||||||
OPERATING ACTIVITIES | |||||||||||
Net (loss) income from continuing operations | $ | ( |
$ | ||||||||
Adjustments to determine net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Loss (gain) on unrealized derivatives and other realized derivatives in investing activities, net |
( |
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Gain on sale of assets |
( |
( |
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Impairment charges | |||||||||||
Deferred income taxes, net | ( |
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Equity in net income of non-consolidated affiliates | ( |
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Amortization of debt issuance costs and carrying value adjustments | |||||||||||
Other, net | |||||||||||
Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures): | |||||||||||
Accounts receivable | ( |
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Inventories | ( |
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Accounts payable | ( |
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Other assets | ( |
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Other liabilities | ( |
( |
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Net cash (used in) provided by operating activities - continuing operations |
( |
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Net cash used in operating activities - discontinued operations |
( |
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Net cash (used in) provided by operating activities |
$ | ( |
$ | ||||||||
INVESTING ACTIVITIES | |||||||||||
Capital expenditures | ( |
( |
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Acquisition of business, net of cash and restricted cash acquired | ( |
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Proceeds from sales of assets, third party, net of transaction fees and hedging |
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Proceeds from investment in and advances to non-consolidated affiliates, net |
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Proceeds from the settlement of derivative instruments, net |
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Other | |||||||||||
Net cash used in investing activities - continuing operations |
( |
( |
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Net cash provided by investing activities - discontinued operations |
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Net cash used in investing activities |
$ | ( |
$ | ( |
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FINANCING ACTIVITIES | |||||||||||
Proceeds from issuance of long-term and short-term borrowings | |||||||||||
Principal payments of long-term and short-term borrowings | ( |
( |
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Revolving credit facilities and other, net | |||||||||||
Debt issuance costs | ( |
( |
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Net cash provided by financing activities - continuing operations |
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Net cash used in financing activities - discontinued operations |
( |
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Net cash provided by financing activities |
$ | $ | |||||||||
Net decrease in cash, cash equivalents and restricted cash |
( |
( |
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Effect of exchange rate changes on cash | ( |
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Cash, cash equivalents and restricted cash — beginning of period | |||||||||||
Cash, cash equivalents and restricted cash — end of period | $ | $ | |||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash (Included in "Other long–term assets") |
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Restricted cash (Included in "Prepaid expenses and other current assets") |
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Cash and cash equivalents of discontinued operations | |||||||||||
Cash, cash equivalents and restricted cash — end of period | $ | $ | |||||||||
Supplemental Disclosures: | |||||||||||
Accrued capital expenditures as of June 30 |
$ | $ | |||||||||
Accrued merger consideration as of June 30 |
____________________
See accompanying notes to the condensed consolidated financial statements.
6
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (unaudited)
Equity of our Common Shareholder | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital |
Retained Earnings | Accumulated Other Comprehensive Income (Loss) |
Non- controlling Interest |
Total Equity | ||||||||||||||||||||||||||||||||||||
in millions, except number of shares | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2019 |
$ | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||
Net income attributable to our common shareholder |
— | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment included in AOCI | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax provision of $ |
— | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Change in pension and other benefits, net of tax provision of $ |
— | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2019 |
$ | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||
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, 2020 |
$ | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||
Net loss attributable to our common shareholder |
— | — | — | ( |
— | — | ( |
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Currency translation adjustment included in AOCI | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $ |
— | — | — | — | ( |
— | ( |
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Change in pension and other benefits, net of tax provision of $ |
— | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of |
$ | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||
____________________
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, aerospace, 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, 2020, we had manufacturing operations in nine countries on four continents: North America, South America, Asia, and Europe, through 33 operating facilities, which may include any combination of hot or cold rolling, finishing, casting, or recycling capabilities. We have recycling operations in 18 of our operating facilities.
The March 31, 2020 condensed consolidated balance sheet data was derived from the March 31, 2020 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, 2020 filed with the United States Securities and Exchange Commission (SEC) on May 7, 2020. 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 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 have the ability to exercise significant influence over operating and financial policies. Consolidated "Net (loss) income attributable to our common shareholder" includes our share of net income (loss) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the condensed consolidated financial statements for consolidated entities, compared to a two-line presentation of "Investment in and advances to non–consolidated affiliates" and "Equity in net income of non-consolidated affiliates."
Use of Estimates and Assumptions
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities 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) impairment of goodwill; (2) impairment of long lived assets and other intangible assets; (3) impairment of equity investments; (4) actuarial assumptions related to pension and other postretirement benefit plans; (5) tax uncertainties and valuation allowances; (6) assessment of loss contingencies, including environmental and litigation liabilities; and (7) the fair value of derivative financial instruments. 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.
For more information regarding our use of estimates in the determination of fair values of assets acquired and liabilities assumed in the acquisition of Aleris Corporation (Aleris), see Note 2 – Business Combination.
Risks & Uncertainty resulting from COVID-19
Beginning late in the fourth quarter of fiscal year ended March 31, 2020 and carrying into the current fiscal year, a novel strain of the coronavirus, or COVID-19, affected production and sales across a range of industries, including the automotive industry. Since then, the spread of COVID-19 has developed into a global pandemic, significantly affecting the economies of most countries around the world.
8
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Our global operations, similar to those of many other large, multi-national corporations, have also been impacted. We have been required to partially shut down or temporarily close certain facilities in the United States and abroad to comply with state orders and governmental decrees and adjust schedules at certain of our facilities based on customer demand. The plant shut downs and adjusted schedules resulting from COVID-19 have resulted in disruptions to our supply chain, interruptions to our production, and delays of shipments to our customers.
As the COVID-19 pandemic continues to evolve, we believe the overall extent of the impact on our operating results, cash flows, liquidity, and financial condition will depend on certain developments, including the duration and spread of the outbreak and its impact on our customers, employees, and vendors. We believe this will be primarily driven by the severity and duration of the pandemic, the pandemic’s impact on the US and global economies and the timing, scope, and effectiveness of federal, state, and local governmental responses.
Our application of U.S. GAAP requires the pervasive use of estimates and assumptions in preparing the unaudited condensed consolidated financial statements. The global COVID-19 pandemic has required greater use of estimates and assumptions. More specifically, those estimates and assumptions that are utilized in our forecasted cash flows that form the basis in developing the fair values utilized in impairment assessments as well as annual effective tax rate. This has included assumptions as to the duration and severity of the pandemic, timing and amount of demand shifts amongst sales channels (primarily in the automotive industry), workforce availability, and supply chain continuity. We are experiencing short-term disruptions and anticipate such disruptions to continue for the foreseeable future, but anticipate an eventual return to normal demand. Although we have made our best estimates based upon current information, the effects of the COVID-19 pandemic on our business may result in future changes to our estimates and assumptions based on its duration. Actual results could materially differ from the estimates and assumptions developed by management. If so, we may be subject to future impairment charges as well as changes to recorded reserves and valuations.
Business Combinations
Occasionally, we may enter into business combinations. In accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations (ASC 805), we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration, and contingencies. Significant estimates and assumptions include subjective and/or complex judgements regarding items such as discount rates, customer attrition rates, economic lives and other factors, including estimating future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record future impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Reclassifications and Revisions of Previously Issued Financial Statements
Certain prior period amounts have been reclassified to conform with current period presentations or as a result of recently adopted accounting standards.
During the preparation of the consolidated financial statements for the fiscal year ended March 31, 2020, we identified a misstatement related to the sale of land within previously issued Form 10-Ks for the year ended March 31, 2019. The previously disclosed amounts for "Property, plant and equipment, net" and "Retained earnings" were understated by $5 million as of March 31, 2019.
9
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Recently Adopted Accounting Standards
Standard | Adoption | Description | Disclosure Impact | |||||||||||||||||
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(Issued March 2020)
|
April 1, 2020 | The standard provides transitional guidance and optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships which reference LIBOR or another reference rate expected to be discontinued. | The Company has evaluated the impact of this standard, noting that there is no impact to our current contracts or hedging relationships. The Company will monitor the impact on future transactions through December 31, 2022. | |||||||||||||||||
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (Issued December 2019)
|
April 1, 2020 |
The standard simplifies the accounting for income taxes by eliminating certain exceptions in ASC 740 related to the methodology for calculating income taxes in an interim period. It also clarifies and simplifies other aspects of the accounting for income taxes, improving the consistent application and simplification of U.S. GAAP.
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The Company elected to early adopt the standard on a prospective basis. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. The adoption of this standard removed the limit on the tax benefit recognized on pre-tax losses during an interim period, which allowed the Company to recognize a higher tax benefit this quarter than previously allowable. |
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ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (Issued October 2018)
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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 has evaluated the impact of this standard, noting that there is no impact to our current variable interests. We have updated our accounting policies to ensure appropriate treatment if these are entered into in the future. As such, the adoption of this standard did not have an impact on the condensed consolidated financial statements or disclosures. | |||||||||||||||||
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)
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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 has evaluated the impact of this standard, noting that we do not have these types of arrangements. We have updated our accounting policies to ensure appropriate treatment if these are entered into in the future. As such, the adoption of this standard did not have an impact on the condensed consolidated financial statements or disclosures. | |||||||||||||||||
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 expected to be recognized in net periodic benefit costs over the next fiscal year. | The Company has evaluated the impact of this standard. We have updated our pension and postretirement disclosure accordingly, which did not have a material impact on the condensed consolidated financial statements. | |||||||||||||||||
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 has evaluated the impact of this standard. We have updated our goodwill impairment assessment process accordingly, which did not have a material impact on the condensed consolidated financial statements. |
10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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. | We have updated our policies and processes for reserves against our financial instruments to factor in expected credit losses. This adoption did not have a material impact on the condensed consolidated financial statements. |
Recently Issued Accounting Standards (Not yet adopted)
Standard | Adoption | Description | Disclosure Impact | |||||||||||||||||
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. |
11
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. BUSINESS COMBINATION
On April 14, 2020, Novelis completed its acquisition of 100 % of the issued and outstanding shares of Aleris Corporation, a global supplier of rolled aluminum products. The closing purchase price of $2.8 billion consists of $775 million less transaction costs for the equity value, as well as approximately $2.0 billion for the extinguishment of Aleris’ current outstanding debt, and a $50 million earn-out payment. The $775 million base equity payment was reduced by $64 million of Aleris transaction costs, resulting in $711 million of estimated cash for equity consideration. As a result, the acquisition increases the Company’s footprint as an aluminum rolled products manufacturer by expanding the portfolio of services provided to its customers. Refer to Note 3 – Discontinued Operations for more details on the Duffel and Lewisport divestitures required as a condition of the acquisition. As a condition to the sale of the Duffel plant, we are required by the European Union (EU) to make a €55 million payment (approximately $60 million) to support capital improvements at the Duffel plant upon sale.
The total preliminary calculation of estimated Merger consideration paid to Aleris is as follows:
in millions | ||||||||
Preliminary calculation of estimated Merger consideration | Amount | |||||||
Estimated cash for equity consideration | (i) | $ | ||||||
Estimated repayment of Aleris' debt (including prepayment penalties and accrued interest) | (ii) | |||||||
Earn-out consideration | (iii) | |||||||
Liability associated with Duffel capital expenditures | (iv) | |||||||
Preliminary fair value of estimated Merger consideration | $ |
(i)Under the terms of the Merger Agreement, this represents the estimated cash consideration, which is the base consideration for the settlement of all shares of common stock outstanding, including shares issued in connection with the conversion of the 6% Senior Subordinated Exchangeable Notes due 2020 issued by Aleris International, Inc. (the “Exchangeable Notes”) into Aleris common shares, and the settlement of stock options and restricted stock units, less transaction costs of $64 million. The transaction costs are removed from the base consideration as these costs were incurred by Aleris prior to the closing date and were not reimbursed by Novelis. Additionally, under the terms of the Merger Agreement, there is a $9 million German tax indemnification included in the estimated cash for equity consideration that will be payable to the selling shareholders upon the condition that the existing Aleris German tax receivable is received from the German tax authorities.
(ii)On the closing date, all of the outstanding historical debt of Aleris, except for certain non-recourse multi-currency secured term loan facilities (collectively, the “Zhenjiang Term Loans”), was repaid in connection with the Merger. In addition, prepayment penalties and accrued interest of approximately $12 million and $16 million, respectively, associated with the Aleris debt were paid in connection with such repayment.
(iii)Under the terms of the Merger Agreement, represents the fair value of the earn-out consideration of $50 million which is based upon Aleris meeting specified commercial margin targets. On the closing date, Aleris had met all of the specified targets in the Merger Agreement and selling shareholders received the $50 million cash payment.
(iv)In connection with obtaining the regulatory antitrust approvals, the European Commission required Novelis to pay the buyer of Duffel an additional €55 million (approximately $60 million) to fund capital expenditures that would be required so that Duffel can operate as a standalone business. This amount has been accrued as a short-term liability and will be paid to Duffel’s buyer upon close of the sale.
The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is expected to be deductible for tax purposes. Goodwill is primarily attributed to synergies from future expected economic benefits, including enhanced revenue growth from expanded capabilities and geographic presence as well as cost savings from duplicative overhead, streamlined operations, and enhanced operational efficiency. The allocation of goodwill to reporting units has not been completed as of the date of this filing.
12
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The condensed consolidated balance sheet as of June 30, 2020 includes the assets and liabilities of Aleris, which have been measured at fair value as of the acquisition date. The discontinued operations financial statement line items in the table below relate to Duffel and Lewisport. The preliminary allocation of purchase price recorded for Aleris was as follows:
in millions |
Assets Acquired(1)
|
||||
Cash and cash equivalents | $ | ||||
Accounts receivable | |||||
Inventories | |||||
Prepaid expenses and other current assets(2)
|
|||||
Fair value of derivative instruments | |||||
Current assets of discontinued operations(3)
|
|||||
Property, plant and equipment | |||||
Goodwill | |||||
Intangible assets, net | |||||
Deferred income tax assets | |||||
Other long-term assets | |||||
Long–term assets of discontinued operations | |||||
Total assets | $ | ||||
Liabilities Assumed(1)
|
|||||
Current portion of long–term debt | $ | ||||
Accounts Payable | |||||
Fair value of derivative instruments | |||||
Accrued expenses and other current liabilities | |||||
Current liabilities of discontinued operations | |||||
Long–term debt, net of current portion | |||||
Deferred income tax liabilities | |||||
Accrued postretirement benefits | |||||
Other long–term liabilities | |||||
Long–term liabilities of discontinued operations | |||||
Total liabilities | $ | ||||
Net assets acquired | $ | ||||
Total purchase price | $ |
(1)In connection with the acquisition of Aleris, the Company acquired two businesses which are required to be sold. Therefore, such businesses were classified as held for sale and were included within the "Current assets of discontinued operations," "Long–term assets of discontinued operations," "Current liabilities of discontinued operations," and "Long–term liabilities of discontinued operations" line items in the above preliminary allocation of purchase price (see Note 3 – Discontinued Operations).
(2)Included in "Prepaid expenses and other current assets" is $9 million of restricted cash acquired related to cash deposits restricted for the payment of the Zhenjiang Term Loans.
13
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The above fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date. The preliminary fair values of the assets acquired and liabilities assumed were determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future expected cash flows, and other future events that are judgmental and subject to change. The fair value measurements are primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement in the fair value hierarchy as defined in ASC 820, Fair Value Measurements (ASC 820). Intangible assets consisting of customer relationships, technology, and trade names are valued using the multi-period excess earnings method (MPEEM), or the relief from royalty (RFR) method, both of which are forms of the income approach. A cost and market approach has been applied, as appropriate, for property and equipment, including land, and inventory.
•Customer relationship intangible assets are valued using the MPEEM method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue and profit attributable to the asset, retention rate, applicable tax rate, and contributory asset charges, among other factors), the discount rate, reflecting the risks inherent in the future cash flow stream, an assessment of the asset’s life cycle, and the tax amortization benefit, among other factors.
•Technology and trade name intangible assets are valued using the RFR method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue attributable to the asset, applicable tax rate, royalty rate, and other factors such as technology related obsolescence rates), the discount rate, reflecting the risks inherent in the future cash flow stream, and the tax amortization benefit, among other factors.
•Inventory has been valued using the replacement cost or market approach, as appropriate. The replacement cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, has been used to determine the estimated replacement cost of raw materials. The market approach has been used to determine the estimated selling price less costs to sale for work in progress and finished goods.
•Property and equipment, including land, are valued using the cost or market approach, as appropriate. For assets valued using the cost approach, the cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The market approach, which estimates value by leveraging comparable land sale data/listings and qualitatively comparing them to the in-scope properties, has been used to value the land.
•The assumed long term debt in China has been valued using an income approach. The significant assumptions used include the estimated annual cash flows and interest and credit spreads, among other factors.
•The assumed pension and postretirement liabilities have been valued using an income approach. The significant assumptions used include the estimated annual cash flows, the discount rate, the estimated return on asset rate, among other factors.
The fair value of the assets acquired includes current accounts receivables of $251 million related to continuing operations and $78 million related to discontinued operations. The gross amount due is $329 million, of which less than $1 million is expected to be uncollectible.
The fair value of the assets acquired includes $22 million and $7 million of operating lease right-of-use assets and finance lease assets, respectively. The fair value of liabilities assumed includes $9 million and $7 million of operating lease liabilities and finance lease liabilities, respectively, of which, $4 million and $3 million of operating lease liabilities and finance lease liabilities, respectively, are current liabilities.
The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on the Company’s continued review of matters related to the acquisition. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, finalizing third-party valuations and the determination of certain tax balances; therefore, the allocation of the purchase price is preliminary and subject to measurement period adjustments. The Company expects to complete the purchase price allocation no later than one year from the acquisition date.
14
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The amounts, based on preliminary valuations and subject to final adjustment, allocated to intangible assets are as follows:
in millions |
Gross Carrying Amount(1)
|
Weighted-Average Useful Life | |||||||||
Trade name | $ | ||||||||||
Technology | |||||||||||
Customer relationships | |||||||||||
Other intangibles | N/A | ||||||||||
Total | $ |
(1)In connection with the acquisition of Aleris, Novelis acquired two businesses which we are obligated to sell. As such, gross carrying amounts exclude amounts held for sale (see Note 3 – Discontinued Operations).
Since the acquisition date, the results of continuing operations for Aleris of $275 million of net sales and $40 million of net loss have been included within the accompanying condensed consolidated statements of operations for the three months ended June 30, 2020.
The following unaudited supplemental pro forma combined financial information presents the Company’s results of operations as of June 30, 2020 and 2019 as if the acquisition of Aleris had occurred on April 1, 2019. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the Company’s operating results that may have actually occurred had the acquisition of Aleris been completed on April 1, 2019. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may be associated with the acquisition, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of Aleris.
Three Months Ended June 30, | |||||||||||
in millions | 2020 | 2019 | |||||||||
Net sales | $ | $ | |||||||||
Net (loss) income | ( |
||||||||||
The unaudited pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the acquisition had occurred on April 1, 2019 to give effect to certain events the Company believes to be directly attributable to the acquisition. These pro forma adjustments primarily include:
•the elimination of Aleris historical depreciation and amortization expense and the recognition of new depreciation and amortization expense;
•an adjustment to interest expense to reflect (i) the additional borrowings of the Company in conjunction with the acquisition (ii) the repayment of Aleris’ historical debt in conjunction with the acquisition;
•a reversal of expenses for the periods presented for acquisition-related transaction costs and other one-time costs directly attributable to the acquisition; and
•the related income tax effects of the adjustments noted above.
15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. DISCONTINUED OPERATIONS
On April 14, 2020, we closed the acquisition of Aleris for $2.8 billion. See Note 2 – Business Combination for more details on the acquisition and related accounting treatment.
16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. 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 occasionally receive advance payments to secure product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as our performance obligations are satisfied throughout the term of the applicable contract.
The following table details the deferred revenue for which our performance obligations have not been satisfied:
Total Deferred Revenue | ||||||||
Deferred revenue at March 31, 2020(1)
|
$ | |||||||
Additions | ||||||||
Revenue recognized | ( |
|||||||
Amounts assumed through acquisition of Aleris | ||||||||
Effect of exchange rate and other | ||||||||
Deferred revenue at June 30, 2020(1)
|
$ |
____________________
(1)Deferred revenue is included in "Accrued expenses and other current liabilities" and "Other long–term liabilities" in our condensed consolidated balance sheet.
Certain of our contracts contain take-or-pay clauses which allow us to recover an agreed upon penalty if a buyer does not purchase contractual minimums as defined in the underlying contract within a set timeframe, generally within one fiscal year. Additionally, certain of our contracts may contain incentive payments to our customers which are deferred and amortized as a reduction to the amount of revenue recorded on a straight-line basis over the term of these contracts.
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 19 – Segment, Geographical Area, Major Customer and Major Supplier Information for further information about our segment revenue.
17
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. RESTRUCTURING AND IMPAIRMENT
"Restructuring and impairment, net" includes restructuring costs, impairments, and other related expenses. "Restructuring and impairment, net" for the three months ended June 30, 2020 and June 30, 2019 totaled $1 million.
As of June 30, 2020, the restructuring liability totaled $24 million with $16 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 June 30, 2020, the restructuring liability totaled $12 million for the Europe segment, $11 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(1)
|
Total restructuring charges |
Other impairments(2)
|
Total restructuring and impairments, net | ||||||||||||||||||||||||
Balance as of March 31, 2020 |
$ | ||||||||||||||||||||||||||||
Expenses | $ | $ | |||||||||||||||||||||||||||
Cash payments | ( |
||||||||||||||||||||||||||||
Foreign currency | ( |
||||||||||||||||||||||||||||
Balance as of |
$ |
____________________
(1)Other restructuring charges include restructuring related impairments and period expenses that were not recorded through the restructuring liability.
18
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. INVENTORIES
"Inventories" consists of the following.
in millions | June 30, 2020 | March 31, 2020 | |||||||||
Finished goods | $ | $ | |||||||||
Work in process | |||||||||||
Raw materials | |||||||||||
Supplies | |||||||||||
Inventories | $ | $ |